A Member of Pat McKeough’s Inner Circle recently asked for his advice on a junior mining development company currently advancing its 100%-owned, past-producing project that hosts two significant gold deposits.
Pat likes the large and growing gold resource, positive early-stage project economics, and the benefit of existing infrastructure that supports efficient future development. However, Pat notes the stock carries significant risks typical of early-stage exploration companies: it’s highly speculative and has yet to actually build a mine.
Omai Gold Mines Corp. (Symbol OMG on TSX Venture; www.omaigoldmines.com), owns 100% of the past producing Omai gold mine in Guyana. The company currently does not generate revenue from the mine.
The history of the Omai gold mines dates back to March 1993. That’s when Cambior Inc. (with a 65% stake in the mine), Golden Star Resources (30%), and the Government of Guyana (5%) officially opened the mine, located within the Guiana Shield of Guyana. That nation covers 83,000 square miles of the northeastern coast of South America. The mine is located about 165 kilometres southwest of Georgetown, the country’s capital city.
Cambior operated the mine for 13 years. It then closed the mine in September 2005 due to low gold prices (the average gold price then was less than $400 U.S. per ounce), the depletion of its gold reserves, and Cambior’s own struggling financial position.
In those 13 years, the mine produced over 3.7 million ounces, peaking at 354,300 ounces in 2001. The property produced 99,500 ounces in its final year at an operating cost of $366 per ounce.
The Guyana Geology & Mines Commission granted Avalon Gold Exploration Inc. a three-year prospecting licence on April 26, 2019. The company renewed the licence for an additional year through to April 2023.
On October 1, 2020, Anconia Resources Corp. completed its reverse takeover of Avalon Investment Holdings Inc., which held its stake in the Omai gold project through Avalon Gold Exploration. At the same time, Anconia changed its name to Omai Gold Mines Corp.
Omai shares were trading at around $0.06 each in early February 2024—before the company released the results of its updated Mineral Resource Estimate on the mine’s gold reserves. The estimate included an expansion to the Wenot deposit and incorporated the previously disclosed Gilt Creek deposit. All told, it revealed that the two deposits held as much as 4.3 million ounces of gold.
Project economics are positive, but not by much
Meantime, in early April 2024, the company released positive results from its first Preliminary Economic Assessment (PEA) for the Wenot project, one of the two gold deposits at the Omai gold mine.
The PEA estimates the deposit has a 13-year mine life capable of producing 142,000 ounces of gold annually at a cost of $1,009 U.S. per ounce, with peak annual production of 184,000 ounces. Total production over the 13 years at Wenot is estimated at 1.84 million ounces. The net present value of the future profits is $777 million U.S.
(The idea behind the net present value, NPV, is that one dollar today is worth more than one dollar in the future, because money available today can be invested and grown. NPV is a calculation technique used to estimate the value or net benefit over the lifetime of a particular project, often for long-term investments such as a dam or a mining project. It allows the decision-maker to compare different alternatives on a similar time scale by converting all options to current monetary figures. A project is considered acceptable if the NPV is positive over the expected lifetime of the project.)
The net present value of $777 million sounds impressive, but the total market value of Omai Gold is just $389.7 million.
The reason for that, apart from the uncertainties of bringing a mine and processing plant into production, is the cost of building the mine and plant is projected at a whopping $546.8 million. With a forecast value of $777 million, that leaves little room for profit—even if the building of the mine goes smoothly.
The fact that the Omai mine is a former producing property is a plus. It gives the company access to lots of previous drilling data, and there’s lots of room to explore for new reserves, especially in extensions of former productive mining zones.
At the same time, Omai’s property is still in the development stage, and it’s a long way away from commercial production. Even then, the economics of the project may make it very difficult to raise funds to proceed with the mine.
As a mining jurisdiction, Guyana is relatively safe for investors. Until recently, about 32% of the country’s exports were related to mining—and mining was a political priority for the government.
However, Guyana now is in the midst of an offshore oil boom. While that isn’t likely to change the country’s mining-friendly reputation, it will raise costs. Guyana was already an expensive operating environment for miners, but the demands of the oil industry have further pushed up costs for labour, transportation, equipment, and so on.
Recommendation in Pat’s Inner Circle: The company’s shares may move up and down as investor interest in gold fluctuates. We don’t recommend the stock, but it’s OK to hold for highly aggressive investors.
