Teranga Gold Corporation: December Quarterly Report
TORONTO, ONTARIO -- (Marketwire) -- 02/14/11 -- Teranga Gold Corporation (TSX: TGZ)(ASX: TGZ) -
Highlights
-- On November 23, 2010, Teranga Gold Corporation ('Teranga' or the
'Company') completed the acquisition of the Sabodala gold mine and a
regional land package that together total 1,488 km(2)by way of a
demerger (the 'Demerger') from Mineral Deposits Limited ('MDL') and also
acquired 18,699,500 common shares of Oromin Explorations Ltd. held by
MDL (the 'Sabodala Gold Assets').
-- On December 7, 2010 Teranga completed an initial public offering in
Canada and Australia issuing 45.6 million common shares for total gross
proceeds of C$136.5 million.
-- A C$50 million loan, part of the consideration for the transfer of the
Sabodala Gold Assets to Teranga from MDL, was repaid as of December 31,
2010.
-- Cash and cash equivalents including restricted cash totalled $82.8
million at quarter end.
-- Gold production for the three months ended December 31, 2010 was 33,648
ounces at total cash costs of $775 per ounce.
-- Gold production for the period from November 23, 2010, the date of
demerger from MDL, to December 31, 2010 was 16,920 ounces at total cash
costs of $632 per ounce.
-- During the period ended December 31, 2010, 11,000 ounces were delivered
into gold hedge contracts leaving 235,500 ounces outstanding.
-- Revenue of $17.1 million represents a shipment of 16,592 ounces of gold
in the period from November 23, 2010 to December 31, 2010, out of which
11,000 were delivered into forward sales contracts at $846 per ounce and
5,992 ounces were sold into the spot market at an average price of
$1,388 per ounce.
-- Sabodala gold mine is on track to produce 130,000 ounces for the fiscal
year 2011 at expected total cash costs of between $800 to $825 per
ounce.
-- For calendar 2011, the Sabodala gold mine is expected to produce 130,000
ounces of gold at expected total cash costs of between $800 to $825 per
ounce.
-- Capital expenditures for the balance of fiscal 2011 are expected to
total approximately $35 million, while capital expenditures for calendar
2011 are expected to total approximately $60 million, primarily for the
mill expansion and capitalized mine site exploration costs.
-- Eight of the expected 12 drill rigs are now operating on the mine
license and regional land package, up from five during the December
quarter, with the balance expected before the end of March 2011.
-- The plant expansion from 2.0 Mtpa to approximately 4.0 Mtpa is underway.
'After just returning from site, I am very pleased that the mill expansion is underway and that the operation is running well,' said Alan R. Hill, Executive Chairman and Chief Executive Officer. 'I am excited with the exceptional opportunities we see on our extensive land package,' added Mr. Hill.
Demerger from Mineral Deposits Limited
On November 23, 2010, Teranga completed the indirect acquisition of the Sabodala gold mine and a regional exploration package by way of a demerger from MDL. As part of the Demerger, certain assets consisting of:
-- all of the issued and outstanding shares of Sabodala Gold (Mauritius)
Limited, which holds a 90% interest in the Sabodala Gold Operations SA
('SGO'), the holder of the Sabodala gold mine and a 100% interest in the
Sabodala Mining Company SARL, an exploration entity which holds the
regional land package;
-- all of the issued and outstanding shares of SGML (Capital) Limited; and
-- 18,699,500 common shares of Oromin Explorations Ltd., originally held by
MDL;
were transferred to Teranga in consideration for the issuance of 200,000,000 common shares of Teranga to MDL (approximately 160,000,000 of such common shares were then in specie distributed to MDL's shareholders) and the assumption of a C$50 million promissory note owing to MDL. Following the completion of the Demerger, the C$50 million promissory note owing to MDL was repaid by Teranga from the IPO proceeds.
Financial Performance
-- For the three months ended December 31, 2010, the consolidated net loss
of the Company was $4.4 million. The net loss for the quarter was
largely due to unrealized losses on gold hedge contracts of $6.3
million, stock based compensation expense of $1.7 million, expensed
exploration expenditures of $1.3 million and administration expenses of
$1.0 million, partially offset by oil hedge unrealized gains of $1.3
million and gross profit of $4.7 million.
-- During the quarter 11,000 ounces were delivered into gold hedge
contracts at $846 per ounce and 5,592 ounces of gold were sold into the
spot market at an average price of $1,388 per ounce resulting in an
average realized price for the quarter of $1,028 per ounce.
-- From the date of the demerger to December 31, 2010 the unrealised loss
on the gold hedge contracts totalled $6.3 million resulting from the
non-cash impact of the mark-to-market of 235,500 ounces of gold at a
quarter end spot price of $1,408 per ounce. The total mark-to-market
loss increased to $138 million as the average forward price of the
remaining contracts is $834 per ounce.
-- Exploration and evaluation expenditures totalled $1.3 million for the
quarter ended December 31, 2010 reflecting regional exploration costs
incurred during the quarter related to three drill programs as well as
target identification work underway.
Liquidity and Capital Resources
-- During the quarter ended December 31, 2010, the Company invested $2.1
million in capital expenditures, mine development and mine site
exploration. The majority of the projected capital expenditures in
calendar 2011 and 2012 are in respect of the mill expansion and mine
site exploration.
-- At December 31, 2010, the Company had cash and cash equivalents
including restricted cash of $82.8 million.
-- The Company's total planned capital expenditures for fiscal 2011, with a
focus on the plant expansion at the Sabodala mine site and mine site
exploration, is expected to total $35 million.
-- During the quarter, before the date of the demerger, SGO deferred gold
hedge contracts that were due for delivery by November 2010 at a forward
price of $846 per ounce to 2013, to sell all gold production at the
higher spot price of gold.
-- As of the end of the quarter December 31, 2010, the Company delivered
11,000 ounces into forward sales contracts. A further 7,000 ounces are
due by February 17th, 2011, as per the forward sales contract schedule.
The Company does not anticipate any further deferrals of hedge contracts
in 2011.
-- Looking beyond 2011, Teranga's cash flows from operations are expected
to increase with the expansion of the Sabodala mill and are expected to
be sufficient to support currently planned expansion and growth.
Review of Operations
-- Gold production for the quarter ended December 31, 2010 was 33,648
ounces at total cash costs of $775 per ounce. Gold production for the
period from November 23, 2010, the date of demerger from MDL to quarter
end, was 16,920 ounces at total cash costs of $632 per ounce.
Plant Expansion
-- The Sabodala gold plant expansion is underway to increase capacity from
2 million tonnes per annum to approximately 4 million tonnes per annum.
Once expanded, the mine is expected to produce approximately 200,000
ounces of gold per annum up from the expected 130,000 ounces of gold in
fiscal 2011.
-- The plant expansion is expected to be completed early in the first
quarter of calendar 2012. The completion was pushed back from December
31, 2011 due to a 4 week delay in the delivery of the new ball mill from
the manufacturer. The estimated capital costs for the plant expansion
totals approximately $55.9 million.
Mine Lease Exploration
-- A total of ten target areas have been selected for drill testing on the
Sabodala mining concession. These need to be systematically drilled to
sufficient depth and density to evaluate the extent of mineralization
available.
-- During the quarter, the focus was on the Sambaya Hill prospect, located
between the Masato deposit of Oromin and the Sabodala deposit, and 'the
Corridor', the northerly extension of the structural system that defines
the limits of the Sabodala gold deposit.
-- There were two drill rigs operating, one RC and one diamond on the
mining lease during the quarter and the plan calls for two more drill
rigs, one RC and one diamond, to be added in which the quarter ending
March 31, 2011. A third rig is now on site and the fourth rig is
expected before the end of the quarter ending March 31, 2011. A $5.5
million program is budgeted for the mine lease, with a total of 41,000m
of drilling expected to be completed by the end of June 2011.
Regional Exploration
-- During the quarter, the Company received approval for its 3 exploration
permits which were under application.
-- The Company will need to spend approximately $3.5 million over the next
three years to increase its joint venture position to 80% on three of
its exploration concessions with Axmin Inc. after Axmin gave notice in
the quarter that it would not participate.
-- The Company has committed to significantly increase its exploration
program by spending approximately $13.5 million on its regional
concessions. The program will include over 100,000m of RAB, 60,000m of
RC and over 10,000m of diamond drilling. Five drill rigs are now active
on the regional concessions up from three at quarter end. Three
additional drill rigs are scheduled to arrive before the end of the
March quarter to complete this program by the end of September 2011.
About TERANGA
Teranga Gold Corporation is a Canadian-based gold company listed on the Toronto Stock Exchange (TSX: TGZ) and Australian Securities Exchange (ASX: TGZ). Teranga is principally engaged in the production and sale of gold, as well as related activities such as exploration and mine development.
Teranga was created to acquire indirectly the Sabodala gold mine and a large regional exploration land package, located in Senegal, West Africa, from Mineral Deposits Limited. Management believes the mine operation, together with the Company's prospective 1,488 km2 land package, provides the basis for growth in reserves, production, earnings and cash flow as new discoveries are made and processed through the Company's existing mill.
The Sabodala Gold Operation, which came into operation in 2009, is located 650 kilometres east of the capital Dakar within the West African Birimian geological belt in Senegal, and about 90 kilometres from major gold mines and discoveries in Mali.
The Company's mission is to create value for all of its stakeholders through responsible mining. Its vision is to explore, discover and develop gold mines in West Africa, in accordance with the highest international standards, and to be a catalyst for sustainable economic, environmental and community development. All of its actions from exploration, through development, operations and closure will be based on the best available techniques.
Forward Looking Statements
Certain information included in this press release, including any information as to the Company's strategy, projects, exploration programs, joint venture ownership positions, plans, future financial or operating performance and other statements that express management's expectations or estimates of future performance, constitute 'forward-looking statements'. The words 'believe', 'expect', 'will', 'intend', 'anticipate', 'project', 'plan', 'estimate', 'on track' and similar expressions identify forward looking statements. Such forward-looking statements are necessarily based upon a number of estimates, assumptions, opinions and analysis made by management in light of its experience that, while considered reasonable, may turn out to be incorrect and involve known and unknown risks, uncertainties and other factors, in each case that may cause the actual financial results, performance or achievements of the Company to be materially different from the Company's estimated future results, performance or achievements expressed or implied by those forward-looking statements. Such forward-looking statements are not guarantees of future performance.
These assumptions, risks, uncertainties and other factors include, but are not limited to: assumptions regarding general business and economic conditions; conditions in financial markets and the future financial performance of the company; the impact of global liquidity and credit availability on the timing of cash flows and the values of assets and liabilities based on projected future cash flows; the supply and demand for, deliveries of, and the level and volatility of the worldwide price of gold or certain other commodities (such as silver, fuel and electricity); fluctuations in currency markets, including changes in U.S. dollar and CFA Franc interest rates; risks arising from holding derivative instruments; adverse changes in our credit rating; level of indebtedness and liquidity; ability to successfully complete announced transactions and integrate acquired assets; legislative, political or economic developments in the jurisdictions in which the Company carries on business; operating or technical difficulties in connection with mining or development activities; employee relations; availability and costs associated with mining inputs and labor; the speculative nature of exploration and development, including the risks of obtaining necessary licenses and permits and diminishing quantities or grades of reserves; changes in costs and estimates associated with our projects; the accuracy of our reserve estimates (including with respect to size, grade and recoverability) and the geological, operational and price assumptions on which these are based; contests over title to properties, particularly title to undeveloped properties; the risks involved in the exploration, development and mining business, as well as other risks and uncertainties which are more fully described in the Company's prospectus dated November 11, 2010 and in other Company filings with securities and regulatory authorities which are available at www.sedar.com. Accordingly, readers should not place undue reliance on such forward looking statements. Teranga expressly disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise, except in accordance with applicable securities laws.
MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE MONTHS ENDED DECEMBER 31, 2010
This Management's Discussion and Analysis ('MD&A') provides a discussion and analysis of the financial condition and results of operations to enable a reader to assess material changes in the financial condition and results of operations as at and for the three months ended December 31, 2010. The MD&A should be read in conjunction with the unaudited consolidated financial statements and notes thereto ('Statements') of Teranga Gold Corporation ('Teranga' or the 'Company') as at and for the three months ended December 31, 2010. The Company's Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards ('IFRS').
All amounts included in this MD&A are in United States dollars, unless otherwise specified. This report is dated as of February 9, 2011, and the Company's public filings can be reviewed on the SEDAR website (www.sedar.com).
The MD&A contains references to Teranga using the words 'we', 'us', 'our' and similar words and the reader is referred to using the words 'you', 'your' and similar words.
OVERVIEW OF THE BUSINESS
Teranga is a Canadian-based gold company which was created to indirectly acquire the Sabodala gold mine and a large regional exploration land package, located in Senegal, West Africa, and the shares held in Oromin Explorations Ltd. ('Oromin') from Mineral Deposits Limited ('MDL'), collectively referred to as the Sabodala Gold Assets. Management believes the mine operation, together with the Company's prospective 1,488 km(2)land package, provides the basis for growth in reserves, production, earnings and cash flow as new discoveries are made and processed through the Company's existing mill.
The Sabodala gold mine, which came into operation in 2009, is located 650 kilometres east of the capital of Senegal, Dakar within the West African Birimian geological belt in Senegal, and about 90 kilometres from major gold mines in Mali. As of June 30, 2010, the Sabodala gold mine had mineral reserves of 1.46 million ounces of gold included in measured and indicated resources of 2.25 million ounces of gold and inferred mineral resources of 0.77 million ounces of gold. In addition, the Company holds one of the largest exploration land positions in south eastern Senegal consisting of ten exploration permits comprising 1,455 km(2).
The Company's mission is to create value for all of its stakeholders through responsible mining. Its vision is to explore, discover and develop gold mines in West Africa, in accordance with the highest international standards, and to be a catalyst for sustainable economic, environmental and community development. All of its actions from exploration, through development, operations and closure will be based on the best available techniques.
GROWTH STRATEGY
The Company's goal is to grow both through internal exploration and strategic acquisitions. The Company's first priority is to devote significant resources to explore its land package with a view to leveraging the existing infrastructure and processing plant which is in the process of being expanded from a nominal capacity of 2.0 Mtpa to approximately 4.0 Mtpa. Once expanded, the mine is expected to produce approximately 200,000 ounces of gold per annum.
In addition to the exploration program on the Company's 33km(2)Sabodala mining concession, the Company has active drill programs underway on targets located on the Company's exploration permits that management believes have strong potential. There are 27 targets that have been identified on the Company's 1,455 km(2)regional land package that are expected to be drill tested by September 2011.
Management believes that the regional land package has significant prospective potential and therefore intends to pursue an extensive multi-year exploration program designed to test a number of targets that have already been identified as requiring additional analysis, as well as identify new targets for testing.
Beyond the current regional land package, the Company expects to focus on acquiring additional exploration licenses in Senegal. The Company also expects to augment its internal growth by strategic acquisitions of companies or assets including operating assets that have growth potential or attractive exploration packages in West Africa.
Management believes the operating team at Sabodala has created the template for developing and operating modern mines in Africa by focusing on creating value for all stakeholders through: job creation; the advancement and integration of the local workforce into the management and operations of the Company; and, working with all levels of government to assist in community development initiatives that are driven by a bottom up approach to both community and sustainable development initiatives.
QUARTER HIGHLIGHTS
-- On November 23, 2010, Teranga completed the acquisition of the 33km2
Sabodala gold mine and a 1,455 km2 land package by a way of demerger
from MDL and acquired 18,699,500 common shares of Oromin Explorations
Ltd. from MDL.
-- On December 7, 2010 Teranga completed an initial public offering in
Canada and Australia issuing 45.6 million common shares for total gross
proceeds of C$136.5 million.
-- A C$50 million loan, part of the consideration for the transfer of the
Sabodala Gold Assets to Teranga from MDL, was repaid as of December 31,
2010.
-- Cash and cash equivalents including restricted cash totalled $82.8
million at quarter end.
-- Gold production for the three months ended December 31, 2010 was 33,648
ounces at total cash costs of $775 per ounce.
-- Gold production for the period from November 23, 2010, the date of
demerger from MDL, to December 31, 2010 was 16,920 ounces at total cash
costs of $632 per ounce.
-- During the period ended December 31, 2010, 11,000 ounces were delivered
into gold hedge contracts leaving 235,500 ounces outstanding.
-- Revenue of $17.1 million represents a shipment of 16,592 ounces of gold
in the period from November 23, 2010 to December 31, 2010, out of which
11,000 were delivered into forward sales contracts at $846 per ounce and
5,992 ounces were sold into the spot market at an average price of
$1,388 per ounce.
-- Sabodala gold mine is on track to produce 130,000 ounces for the fiscal
2011 year at total cash costs of $800 to $825 per ounce.
-- For calendar 2011, the Sabodala gold mine is expected to produce 130,000
ounces of gold at total cash costs of $800 to $825 per ounce.
-- Capital expenditures for the balance of fiscal 2011 are expected to
total $35 million, while capital expenditures for calendar 2011 are
expected to total $60 million, primarily for the mill expansion and
capitalized mine site exploration costs.
-- Five of the expected 12 drill rigs were operating on the mine license
and regional land package during the quarter with the balance expected
before the end of March 2011, to complete the mine site and regional
exploration programs, which are expected to total $25 million for
calendar 2011.
-- The plant expansion from 2.0 Mtpa to approximately 4.0 Mtpa is underway.
DEMERGER FROM MINERAL DEPOSITS LIMITED ('Demerger')
On November 23, 2010, Teranga completed the indirect acquisition of the Sabodala gold mine and a regional exploration package by a way of demerger from MDL. As part of the demerger, all of the issued and outstanding shares of Sabodala Gold (Mauritius) Limited, which holds a 90% interest in the Sabodala Gold Operations SA ('SGO'), the holder of the Sabodala gold mine, and a 100% interest in the Sabodala Mining Company SARL, an exploration entity, all of the issued and outstanding shares of SGML (Capital) Limited and 18,699,500 common shares of Oromin, originally held by MDL, were transferred to Teranga in consideration for the issuance of 200,000,000 common shares to MDL and C$50 million in satisfaction of a promissory note owing to MDL.
Basis of presentation
The transfer of the Sabodala Gold Assets into the Company is considered a transaction between entities under common control. As such, the Company has presented its financial results on a continuity-of-interests basis whereby the carrying amounts of the Sabodala Gold Assets reflect those previously reported in the financial statements of MDL. Accordingly, the consolidated statement of comprehensive income reflects the corporate activities since incorporation of Teranga on October 1, 2010 and the operations of the Company from November 23, 2010. The comparable period for 2009 is not presented. The production statistics in this MD&A reflect operations results for the full three-month period ended December 31, 2010 as well as operations results from November 23, 2010, the date the demerger was completed, to the end of the reporting period.
CONSOLIDATED RESULTS
Management's Discussion and Analysis Three months ended December 31, 2010
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For the three months ended December 31: 2010
U.S.$'000
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Revenue 17,139
Cost of sales (12,388)
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Gross profit 4,751
Other income 31
Administration expenses (1,017)
Stock-based compensation (1,707)
Finance costs (148)
Exploration and evaluation expenditures (1,266)
Net foreign exchange losses (305)
Gold hedge unrealized losess (6,297)
Oil hedge unrealized gains 1,313
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Loss before tax (4,645)
Income tax benefit 231
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Loss for the period (4,414)
Loss atributable to non-controlling interest (259)
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Loss attributable to owners to the parent (4,155)
Review of Financial Results
Net Loss for the Period
For the three months ended December 31, 2010, the consolidated net loss of the Company was $4.4 million. The net loss for quarter was largely due to unrealized losses on gold hedge contracts of $6.3 million, stock based compensation expense of $1.7 million, expensed exploration expenditures of $1.3 million and administration expense of $1.0 million, partially offset by oil hedge unrealized gains of $1.3 million and gross profit of $4.7 million.
Revenue
During the quarter 11,000 ounces were delivered into gold hedge contracts at $846 per ounce and 5,592 ounces of gold was sold into the spot market at an average price of $1,388 per ounce resulting in an average realized price for the quarter of $1,028 per ounce.
Cost of Sales
Cost of sales for the period ended December 31, 2010 totalled $12.4 million, consisting of mine production costs, realized gains on energy swap contracts, depreciation and amortization, royalties, rehabilitation costs and inventory costs.
Mine production costs totalled $10.2 million for the period ended December 31, 2010.
Depreciation and amortization totalled $3.6 million.
The realized gain on energy swap contracts totalled $0.3 million for the period as oil prices increased to $85 per barrel at the date of delivery, which was $15 above our oil hedge contract price of $70 per barrel. The Company has hedged 20,000 barrels per quarter through June 30, 2012 representing approximately half of quarterly consumption.
Royalties totalled $0.7 million, which was 0.4 million higher than budget due to higher gold sales and higher spot gold price than planned for the period as gold prices averaged $1,388 per ounce.
Administrative Expense
Administration expenses of $1.0 million comprise $0.1 million for corporate employee costs and $0.9 million for overheads. Administration expenses represent costs from the beginning of quarter. Corporate administration expenses are expected to average about $2 million per quarter as the Company fills out its management team and opens an office in Dakar, Senegal.
Stock Based Compensation
During the quarter ended December 31, 2010 a total of 13,805,000 common share stock options were granted and held by directors, officers, employees and consultants. No stock options were exercised, forfeited or cancelled during the three-month period ended December 31, 2010.
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For the three months ended December 31, 2010
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U.S.$'000
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Stock option compensation - expensed 1,707
The estimated fair value of stock options is amortized over the period in which the options vest which is normally three years.
All of the options granted during the quarter ended December 31, 2010 vest over a three-year period.
Net Foreign Exchange Loss
Foreign exchange losses for the quarter ended December 31, 2010 totalled $0.3 million related mostly to realized losses from Sabodala gold mine operating costs recorded in the local currency and translated into a US dollar functional currency.
Gold Hedging Unrealized Loss
From the date of the demerger to December 31, 2010 the unrealized loss on the gold hedge contracts totalled $6.3 million resulting from the non-cash impact of the mark-to-market of 235,500 ounces of gold to a spot price of $1,408 per ounce. As a result, the total mark-to-market loss increased to $138 million as the average forward price of the remaining contracts of $834 per ounce is marked to the period end spot price of $1,408.
Oil Hedging Unrealized Gain
Unrealized oil hedge gains totalled $1.3 million for the December quarter from the non-cash impact of the mark-to- market of 180,000 barrels of fuel oil outstanding at a hedge price of $70 per barrel compared to a $91 per barrel spot price at quarter end.
Finance costs
Finance costs for the three months ended December 31, 2010 of $0.1 million reflect interest costs related to the equipment loan outstanding, amortization of capitalized borrowing costs and bank charges.
Exploration and Evaluation Expenditures
Exploration and evaluation expenditures totalled $1.3 million for the quarter ended December 31, 2010 reflecting regional exploration costs incurred during the quarter related to three drill programs as well as target identification work underway.
Outlook
The Sabodala mine is on track to meet its production target of 130,000 ounces of gold for fiscal 2011 at an estimated total cash cost of $800 to $825 per ounce. Gold production for the 2011 calendar year is expected to also total 130,000 ounces of gold at total cash cost of $800 to $825 per ounce. Capital expenditures for the balance of fiscal 2011 are expected to total approximately $35 million, including $5.5 million of capitalized mine site exploration costs. For calendar 2011, capital expenditures are expected to total approximately $60 million, primarily for the plant expansion and capitalized mine site exploration costs of $8.5 million. The regional exploration budget through the end of fiscal 2011 is expected to total approximately $9 million, while the budget for calendar 2011 is expected to total $16.5 million. In total, between capitalized mine site exploration and regional exploration expenditures, the Company expects to spend approximately $25 million in calendar 2011.The mine site and regional exploration budgets could be increased if results warrant additional activities. The corporate budget for the Toronto head office is expected to total approximately $5.0 million for fiscal 2011. For calendar 2011, corporate overheads, including setting up a Dakar, Senegal office are expected to total $8 million.
Review of Operations
Gold production for the quarter ended December 31, 2010 was 33,648 ounces at total cash costs of $775 per ounce. Gold production for the period from November 23, 2010, the date of demerger from MDL, was 16,920 ounces at total cash costs of $632 per ounce.
2010 Production Statistics
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For the three months
ended
Period from November
Quarter ended 23, 2010 to December
December 31, 2010 31, 2010
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Ore mined ('000t) 966 547
Waste mined ('000t) 4,158 2,058
Total mined ('000t) 5,124 2,605
Strip ratio waste/ore 4.30 3.76
Ore processed ('000t) 587 222
Head grade (g/t) 2.09 2.47
Gold recovery (%) 91 92
Gold produced (1) (oz) 33,648 16,920
Gold sold (oz) 33,456 16,592
Average price received $/oz 1,184 1,028
Total cash cost (incl.
royalties) $/oz 775 632
Notes:
(1) Gold produced is gold poured and does not include gold-in-circuit at
period end.
Mining
Total tonnes mined was 9 % lower than budget for the quarter due to a 16 % decrease in waste tonnes mined as compared to budget. The lower mining rate was partially offset by a 53 % increase in ore tonnes mined, as mining in a higher grade ore zone of phase 2 deferred from the September 2010 quarter was mined during the December quarter. The mining rate increased through the quarter as the rainy season came to an end, two new drills were put in place to overcome previous drilling issues and additional mobile equipment was commissioned as part of the overall mine/mill expansion. As a result of the high ore mining rate and low waste tonnes mined, the strip ratio was 4.3:1 (62%) lower than budgeted for the quarter.
Milling
Mill throughput for the quarter contained a higher portion of harder ore than was planned resulting in marginally below budget (3%) throughput but above name plate capacity. The grade of the hard ore mined from the high grade area of the pit increased the mill feed grade above budget (11%). The recovery rate was marginally ahead of plan.
Gold Production
Gold production for the three months ended December 31, 2010 was 4 %t higher than plan due to higher ore grades processed during the quarter, but was partially offset by lower than planned throughput. Gold production for the period from November 23, 2010, the date of demerger from MDL, was 16,920 ounces of gold.
Realized Gold Price
During the quarter 11,000 ounces were delivered into hedge contracts at $846 per ounce while 5,592 ounces of gold were sold into the spot market at an average price of $1,388 per ounce resulting in an average realized price for the quarter of $1,028 per ounce.
Total Cash Costs
Total cash costs (including royalties) of $775 per ounce were (5 %) lower than budget due to lower mining costs as fewer waste tonnes were mined than planned. Total cash costs (including royalties) for the period from November 23, 2010, the date of demerger from MDL, was $632 per ounce. The lower total cash costs for the period after the demerger reflect a 33% increase in grade processed during the period, as mining was focused in a higher grade area of the pit.
Plant Expansion
The Sabodala gold plant expansion is underway to increase capacity from 2 Mtpa approximately 4 Mtpa. Once expanded, the mine is expected to produce approximately 200,000 ounces of gold per annum up from the expected 130,000 ounces in fiscal 2011.
Additions to the processing plant will include a partial secondary crushing facility and new stockpile/reclaim facilities to debottleneck the semi-autogenous mill, a second ball mill and additional carbon-in-leach capacity. The Sabodala power station will be expanded to 36 Mw capacity with the addition of one new 6 Mw unit. The requirements include cooling and exhaust pipe work, fuel delivery pipe work and a step-down transformer.
The plant expansion is expected to be completed early in the first quarter of calendar 2012. The completion was pushed back from December 31, 2011 due to a four week delay in the delivery of the ball mill from the manufacturer. The estimated capital costs for the plant expansion total $55.9 million.
During the quarter ended December 31, 2010, the Company increased its mining capacity ahead of the proposed expansion of the Sabodala gold plant. The additional mining equipment arrived at site early in the quarter and most of the equipment was operational by the end of November 2010. This equipment, costing approximately $15 million, was financed by an increase in the fleet lease facility with Societe Generale.
Mine Lease Exploration
A total of ten target areas have been selected for drill testing on the 33km(2)Sabodala mining concession. These need to be systematically drilled to sufficient depth and density to evaluate the extent of mineralization available.
During the quarter, the focus was on the Sambaya Hill prospect, located between the Masato deposit of Oromin and the Sabodala deposit, and 'the Corridor', the northerly extension of the structural system that defines the limits of the Sabodala gold deposit.
Sambaya Hill
A portion of the drill program to define the structural framework of the Sambaya target was completed. This target is defined by a 1km long geochemical anomaly that coincides with an interpreted structural complexity along the Niakafiri structure.
'The Corridor'
Drilling continued in the structural corridor north of the Sabodala open pit. It produced positive near surface results along Ayoub's Thrust, a feature that defines the western limit of the Corridor.
There were two drill rigs operating, one RC and one diamond on the mining lease during the quarter and the plan calls for two more drill rigs, one RC and one diamond, to be added in this quarter. A $5.5 million program is budgeted for the mine lease, with a total of 41,000m of drilling expected to be completed by the end of June 2011.
Regional Exploration Interests
The Company has interests (ranging from 70% joint venture interests to 100% interests) in ten exploration permits that together equate to a regional land package in south eastern Senegal around Sabodala of 1,455 km(2).
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Teranga Anniversary
Exploration permit interest Area (km2) date
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Dembala Berola (1) 100% 244 Jan 2012
Massakounda (1) 100% 186 Jan 2012
Bransan 70% 261 Oct 2012
Makana 80% 125 Nov 2010
Sabodala NW earning 80% 120 May 2012
Heremakono earning 80% 215 Oct 2011
Sounkounkou earning 80% 213 Sep 2012
Bransan Sud 100% 7 Nov 2013
Sabodala Ouest 100% 3 Nov 2013
Saiansoutou 100% 81 Nov 2013
Note (1) 2% royalty is payable to Rokamco SA.
Historically, only routine early stage exploration work has been undertaken across the exploration land package. Work done has included geochemical soil sampling, termite mound sampling, rock chip surveys, airborne magnetic and radiometric surveys, geological mapping, trenching, RAB drilling, and some RC and diamond drilling.
From 2007 until late 2009, no significant drilling was undertaken on the permits as the Company focused its resources on the delination of the Sabodala ore body and development of the mine and mill facility. Exploration programs on certain permits generally ramped up during the second half of the 2010 financial year.
Many geochemical anomalies have been identified within the laterites and work programs are intended to evaluate if these various targets are reflective of actual mineralization within the bedrock or are just transported gold in the laterites or similar. A detailed aeromagnetic survey has also identified many structurally controlled areas to be followed up with geochemistry and drilling.
Gold anomalies in laterites are not considered material until they have been confirmed by drilling into the underlying bedrock. Accordingly, a significant proportion of the current work focuses on extensive RAB drilling programs and trenching to identify bedrock targets which will then be followed up by RC drilling where appropriate.
Initial assaying of drill samples is undertaken at the on-site SGS facility using atomic absorption spectroscopy and acid leach extraction methods. Waste bounded mineralized interval pulps are then sent to Kayes in Mali for fire assay as a cross-check. To date the results are comparable.
Regional Exploration
During the quarter, the Company received approval for its 3 exploration permits which were under application. As such, the regional land package consists of 10 exploration permits comprising 1,455km(2).
The company will need to spend approximately $3.5 million over the next three years to increase its joint venture position to 80% on three of its exploration concessions with Axmin Inc. after Axmin gave notice in the quarter that it would not participate.
Exploration drilling on the regional land holding commenced during the December quarter. Three drill rigs were utilized in the start up phase of this program:
-- A RAB program commenced with one rig over the extensive Tourokhoto
surface gold geochemical anomaly. This program will define the bedrock
gold bearing zones responsible for the wide geochemical gold anomalies
and provide targets for additional follow up diamond and RC drilling.
-- A diamond rig commenced with a program of holes over the key structural
positions on the Tourokhoto prospect area.
-- An RC program is underway at Goundamekho and Dembala Hill.
The Company has committed to significantly increase its exploration program by spending $13.5 million on its regional concessions. The program will include over 100,000m of RAB, 60,000m of RC and over 10,000m of diamond drilling. Five additional drill rigs are scheduled to arrive during the next quarter to complete this program by the end of September 2011.
CASH FLOW
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For the three months ended December 31, 2010
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U.S.$'000
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Cash flow
Operating activities (224)
Investing activities (41,765)
Financing activities 117,488
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Change in cash and cash equivalents during period 75,499
Cash and cash equivalents - beginning of period -
Effect of exchange rates on holdings 334
Cash and cash equivalents - end of period 75,833
Net cash used in operating activities during the three months ended December 31, 2010 of $0.2 million represents $13 million received from gold sales which was offset by production costs of $10 million, $1 million of administration expenses and $1 million of inventory purchases.
Net cash used in investing activities for the three month period ended December 31, 2010 was $41.8 which is mostly due to repayment of a promissory note to MDL of C$50 million, partially offset by cash acquired.
Net cash provided by financing activities for the three months ended December 31, 2010 was $118 million resulting from the issuance of 45.6 million shares for gross proceeds of $136.5 million through IPO completed on December 7, 2010 partially offset by $1.7 million repayment of the Mining Fleet Lease facility. The share issuance costs related to the public offerings were $15.8 million.
LIQUIDITY AND CAPITAL RESOURCES
During the period ended December 31, 2010, the Company invested $2.1 million in capital expenditures, mine development and exploration. The majority of the projected capital expenditures in 2011 and 2012 are in respect of the mill expansion and exploration.
At December 31, 2010, the Company had cash and cash equivalents including restricted cash of $82.8 million. In the opinion of management, the cash and cash equivalents at December 31, 2010, together with future cash flows from operations is sufficient to support the Company's commitments. The Company's total planned capital expenditures for fiscal 2011, with a focus on the plant expansion at the Sabodala mine site, is expected to total at least $35 million.
The Company strengthened its balance sheet during the quarter with the IPO in Canada and Australia completed on December 7, 2010. In Canada, after the exercise of the over-allotment option, a total of 36,617,900 common shares were issued for gross proceeds of C$109.9 million. In Australia, 9,000,000 common shares were issued for gross proceeds of A$26.7 million. The Company then used C$50 million from the net proceeds of the IPO to repay a loan to MDL, which was part of the consideration for the transfer of the Sabodala Gold Assets to Teranga from MDL.
During the quarter, gold hedge contracts that were due for delivery by November 17, 2010 at a forward price of $846 per ounce were deferred to 2013, allowing Sabodala Gold Operations ('SGO') to sell all of its gold production into the higher spot market. The deferral of hedge contracts was necessary to ensure that SGO had sufficient resources to fund its operations, mill expansion and the exploration program. The proceeds received on the completion of the IPO were at the top end of the offering range previously announced by the Company in its prospectus, therefore providing sufficient liquidity to fund these activities and therefore no longer requiring any further gold hedge contract deferrals. As a result, as of the end of the quarter ended December 31, 2010, the Company delivered 11,000 ounces into the gold hedge contract dated February 17th, 2011. The Company does not anticipate any further deferrals of hedge contracts in 2011.
Looking beyond 2011, Teranga's cash flows from operations are expected to increase with the expansion of the Saboldala mill and are expected to be sufficient to support the currently planned expansion and growth.
Off-Balance Sheet Arrangement
The Company has no off balance sheet arrangements.
FINANCIAL INSTRUMENTS
The Company manages its exposure to financial risks - including liquidity risk, credit risk, currency risk, market risk, interest rate risk and price risk - through a risk mitigation strategy. The Company has entered into financial instruments including gold sales and oil hedge contracts. All of the transactions undertaken are to support the Company's ongoing business. Teranga does not acquire or issue derivative financial instruments for trading or speculation.
A condition of the Project Finance Facility provided by Macquarie Bank Limited was the establishment of gold forward sales contracts and oil energy swaps to manage exposure to commodity price risk.
Following a restructure late in 2008, a total of 399,000 ounces of gold was committed forward for delivery between May 2009 and August 2013 at an average delivery price of $834 per ounce. Deliveries into the hedge position to date of 163,500 ounces have reduced the hedge balance to 235,500 ounces at December 31, 2010. The mark-to-market at the reporting date spot price of $1,408 was negative $138 million.
The Company has a hedge agreement with respect to the oil price in order to manage its exposure to commodity risk. The Company hedged 80,000 barrels per annum for four years commencing April 1, 2009 at a flat forward price of $70 per barrel. At December 31, 2010, the remaining 180,000 barrels were hedged with a mark-to-market gain of $4.2 million at the reporting date spot price of $91 per barrel.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company prepares detailed budgets and forecasts to determine the funding requirements for operations, capital expenditure programs and expansion programs. The Company believes that its expected cash flow from operations, along with its cash holdings are sufficient to meet its 2011 obligations including the mill expansion.
As at December 31, 2010, the Company had $82.8 million in cash and cash equivalents including restricted cash.
Working capital requirements
The Company's working capital requirements primarily relate to the mining costs of extracting ore from the Sabodala gold mine and then the costs involved in processing the ore to remove the gold, before the gold itself is sold.
As at December 31, 2010, the Company had the following payments due on contractual obligations and commitments:
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Payments Due By Period (U.S.$Millions)
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greater
Contractual Obligation and less than than 5
Commitments Total 1 year 1-3 years 4-5 years years
Mining Fleet Lease
Facility(1) 23.6 9.1 14.5 - -
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Exploration commitments 8.1 2.0 6.1 - -
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Government of Senegal
payments(2) 4.6 2.6 2.0 - -
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Other long term
obligations(3) 55.9 45.1 10.8 - -
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Total 92.2 58.8 33.4 - -
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Notes:
(1) In July 2010, an amended facility was concluded with a new limit of
$27.8 million to provide for the acquisition of additional mining
equipment associated with the Sabodala expansion ($15.1 million) and
the re-gearing of existing equipment ($2.2 million). The facility
contains a quarterly repayment schedule concluding with the final
payment on June 30, 2013. The facility is currently drawn down to $23.6
million.
(2) Comprises $4.1 million in four equal instalments over the first four
years of production to which an annual interest rate of 6.0% applies on
a reducing balance basis. The interest totals $0.5 million.
(3) Primarily includes the cost of expanding the Sabodala processing plant
from a nominal capacity of 2.0 Mtpa to approximately 4.0 Mtpa.
Sabodala Operating Commitments
The Company faces the following operating commitments in respect of the Sabodala gold operation:
-- Pursuant to the Company's Mining Concession, a royalty of 3% is payable
to the Government of Senegal based on the value of gold shipments,
evaluated at the spot price on the shipment date.
-- $425,000 per annum on social development of local authorities in the
surrounding Tambacounda region during the term of the Mining Convention.
-- $30,000 per year for logistical support of the territorial
administration of the region from date of notification of the Mining
Concession.
-- $200,000 per year of production on training of Directorate of Mines and
Geology officers and Mines Ministry.
-- $4.1 million payable to Government of Senegal over the first four years
of production.
Credit risk
Credit risk is the risk that the counterparty to a financial instrument will cause a financial loss for the Company by failing to discharge its obligations. Credit risk is primarily associated with its forward gold sales, trade receivables, and oil hedge contracts; however, it also arises on cash and cash equivalents. To mitigate exposure to credit risk on financial assets, the Company ensures that counterparties demonstrate minimum acceptable creditworthiness and to ensure liquidity of available funds.
Teranga monitors its financial assets. Gold sales are to made to large international financial institutions including those deliveries into the Company's forward sales contracts to Macquarie Bank Limited. Payment is received normally within approximately ten days of shipment. The historical level of defaults is negligible, and as a result, the credit risk associated with trade receivables at December 31, 2010 is considered minimal. The oil hedge contracts are also with large institutions. The Company invests its cash and cash equivalents with major financial institutions, and the credit risk associated with its investments is considered low.
As a result of the global financial crisis, many financial institutions have gone into bankruptcy or have been rescued by government agencies. As such, the Company is subject to the risk of loss on its deposits with financial institutions that hold the Company's cash. As at December 31, 2010, the Company's cash and cash equivalents were held by three major financial institutions as well as invested in Canadian government bonds.
Market risk
Market risk represents the potential loss that can be caused by a change in the market value of financial instruments. The Company's exposure to market risk is determined by a number of factors, including foreign exchange rates and commodity prices. The Company is exposed to movements in the gold price. As part of the risk management policy the Company has entered into gold forward sales contracts, and oil energy swaps to reduce exposure to unpredictable market fluctuations. The hedging program undertaken is structured with the objective of retaining as much upside to the gold and oil price as possible pursuant to the terms under the Company's Project Finance Facility. The Company has elected not to hedge account these instruments.
Currency risk
Currency risk is the risk that the fair values or future cash flows of the Company's financial instruments will fluctuate because of changes in foreign exchange rates. Exchange rate fluctuations may affect the costs that Teranga incurs in its operations. Gold is sold in U.S. dollars and the Company's costs are incurred principally in U.S. dollars and the CFA Franc, the national currency of Senegal. The Company also incurs Canadian dollar and Euro costs. The appreciation of non-U.S. dollar currencies against the U.S. dollar can increase the cost of gold production and capital expenditures in U.S. dollar terms. The Company also holds cash and cash equivalents that are denominated in non-U.S. dollar currencies that are subject to currency risk. Accounts receivable and other current and long-term assets are denominated in non-U.S. dollars.
The Company is exposed to currency risk through financial assets and liabilities denominated in currencies other than U.S. dollars at December 31, 2010. See Note 32(d) to the Unaudited Interim Consolidated Financial Statements of Teranga.
Teranga currently does not hedge to reduce risks associated with currency fluctuation.
Interest rate risk
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate due to changes in market interest rates. The Company has interest rate risk relating to its bank balances and external borrowings. See Note 32(e) to the Unaudited Interim Consolidated Financial Statements of Teranga.
The Company has elected not to actively manage its exposure to interest rate risk at this time.
Macquarie Bank Limited debt
The Company maintains an ongoing relationship with Macquarie Bank Limited resulting from its outstanding forward sales contracts with the bank. The financing is secured by, among other things, a fixed and floating charge over substantially all of SGO's assets, with the facility and security remaining in place until the hedge position is extinguished.
Societe Generale Mining Equipment Lease Facility
On July 9, 2010, SGML (Capital) Limited entered into an amended agreement with Societe Generale London to expand the facility to allow for the purchase of additional mining equipment. An amended facility was concluded with a new limit of $27.8 million. This facility contains a quarterly repayment schedule concluding with the final repayment on June 30, 2013. Interest is calculated using LIBOR plus a margin. The lease facility is secured by, among other things, the assets financed and currently has a balance of $23.6 million.
Price risk
Price risk is the risk that the fair value or future cash flows of the Company's financial instruments will fluctuate because of changes in market prices. Teranga's profitability depends on the price of gold, which is affected by numerous factors, such as the sale or purchase of gold by various central banks and financial institutions, interest rates, exchange rates, inflation or deflations in the value of the U.S. dollar and foreign currencies, global and regional supply and demand, and the political and economic conditions of the world's major gold-producing countries. A 10% increase or decrease in the price of gold would result in approximately a $9.6 million increase or decrease in revenue based on the expectations and assumptions it used in the 2011 outlook.
At present, the Company has 235,500 ounces of gold forward sales deliverable through August 2013 at an average price of $834 per ounce. The mark-to-market at the reporting date spot price of $1,408 was negative $138 million. A 10% increase or decrease in the price of gold would result in approximately a $33.7 million increase or decrease in gold hedge unrealized gains or losses.
The costs in relation to Teranga's production, development and exploration activities vary depending on the market prices of certain mining consumables, including heavy fuel oil. The Company's oil hedging program mitigates the increase or decrease to heavy fuel oil price fluctuations. Electricity is supplied by way of a power station on site, which increases the Company's reliance and dependence on heavy fuel oil.
CONTINGENT LIABILITIES
(a) The Company confirmed directly or via its holding subsidiaries that it
will continue to provide financial support to its subsidiaries to
enable them to meet their obligations as they fall due for a period of
not less than 12 months.
(b) There are no outstanding native title claims against the company which
could or would have a financial impact.
The directors are not aware of any other contingent liabilities at December 31, 2010.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following are critical judgments that management has made in the process of applying accounting policies that have the most significant effect on the amounts recognized in the financial statements:
Fair value of derivative financial instruments
Management assesses the fair value of the Company's financial derivatives in accordance with the accounting policy stated in Note 3 to the Unaudited Interim Consolidated Financial Statements. Fair values have been determined based on well-established valuation models and market conditions existing at the reporting date. These calculations require the use of estimates and assumptions. Changes in assumptions concerning interest rates, gold prices and volatilities could have significant impact on comprehensive income due to the change in the fair value attributed to the Company's financial derivatives. When these assumptions change or become known in the future, such differences will impact asset and liability carrying values in the period in which they change or become known.
Ore reserves
Management estimates the Company's ore reserves based upon information compiled by Competent Persons as defined in accordance with the Australasian Code for Reporting Mineral Resources and Ore Reserves and Qualified Persons as defined in Canadian Securities Administrators National Instrument 43-101('NI 43-101'). The estimated quantities of economically recoverable reserves are based upon interpretations of geological models and require assumptions to be made regarding factors such as estimates of short and long-term exchange rates, estimates of short and long-term commodity prices, future capital requirements and future operating performance. Changes in reported reserve estimates can i