Digging in the right direction

Benj Gallander, Ben Stadelmann, and Philip MacKellar
Monday June 5, 2017

For Alacer Gold, the old saying “There is gold in them thar hills” rings true. The mid-sized miner is headquartered in Colorado and owns 80 percent of the Çöpler open-pit mine in eastern Turkey, with local Turkish company Lidya Mining owning the remaining 20 percent. (The company, which trades on the Toronto Stock Exchange, is incorporated in Yukon.)

Currently, Çöpler is undergoing an expansion project designed to mine and mill all them thar hills have to offer. To showcase their efforts, management recently invited investors and analysts — including Contra the Heard — to the site.

The goal of the expansion is to turn Çöpler from a mine that can only process oxide ore to one that can handle sulphide ore too.

In layman’s terms, extracting gold from sulphide deposits is more complex than from oxide deposits. It requires additional steps to speed up the natural process and extract the gold. To get there, they need to build something akin to a chemical plant. Construction commenced in 2016, is expected to conclude in the third quarter of 2018 and is both on time and on budget.

The project should extend the mine’s life by 20 years, during which time it will generate an estimated $1.6 billion (US) in free cash flow and produce roughly four million ounces of gold at a low all-in-sustaining cost of approximately $650 an ounce.

There is some risk, of course. The price tag is $744 million, of which $511 million was outstanding as of March 31. In many ways, the linchpins of the project are a pair of horizontal autoclaves, which use a chemical mix at high temperatures and pressures to liberate the gold from the ore.

The autoclave, along with an oxygen plant, poses significant technical challenges. Uncertainty over their success may help explain why Alacer shares are trading near their 52-week low. In addition, this company until recently had about $300 million in the till with no debt and soon will likely be deep into their line of credit, sullying the company’s pristine balance sheet.

Still, Alacer’s team appears confident and competent. This view is shared by their lenders; they recently confirmed no cost overrun reserve was required, which allows management to say the project is fully funded.

In addition to the sulphide opportunity, there’s an oxide deposit called Çakmaktepe a few kilometres away from Çöpler. Exploration of the site has unearthed encouraging results. The corporate brass wants to have Çakmaktepe running in 2018, which should add some timely cash flow. One potential problem once Çakmaktepe is operational relates to the complex ownership structure with Lidya Mining.

Finally, the enterprise has its eyes on a deposit called Gediktepe in western Turkey that holds gold, silver, copper and zinc. A prefeasibility study done last year suggests a mine life of at least a dozen years.

A definitive feasibility is expected in June 2018. If its findings are also positive, management can develop the site, which would make Alacer a multimine operation. Longer term, a smattering of exploration targets and land auctions in Turkey are on the horizon.

Çöpler is far from Kurdish territories, the refugee crisis and from the cities affected by terrorism and political unrest. Behind the headlines, President Recep Tayyip Erdoğan appears to be economically pragmatic and interested in increasing his country’s economic growth. He also seems acutely aware of Turkey’s need for foreign direct investment. This should bode well for companies such as Alacer.

Turkey has significant benefits. The labour force is hard-working, skilled and low-cost. Roads lead to the mine, and a nearby hydroelectric facility delivers power at a cheap six cents a kilowatt-hour. The local community is engaged, entrepreneurial and receptive to development. And best of all, the country is mineral-rich but underexplored. CEO Rod Antal stresses that the company has been in Turkey for two decades, making it a first mover.

Between 2014 and 2016, delays in obtaining land use permits held up the Çöpler expansion by over a year. Since then, a large pastoral permit for exploration drilling took 16 months to secure. Fortunately, the company continues to receive permits, and regulatory delays are simply the unfortunate norm in life.

Beyond its growth profile, the enterprise is making money while trading under book value. Insiders have been buying shares lately, though it would be nice to see more. We picked up ours around $2.00, on average, starting in 2014. At the moment, that means we’re in break-even territory, but the feeling here is that the stock can do better than a triple.