In conversation with: Mark Jones: waiting for the deal to be done

In conversation with: Mark Jones: waiting for the deal to be done

Mark Jones, CEO of Alecto Mining, explains to Leon Louw the reasons behind the company’s decision to change strategy from being an exploration company focusing on West Africa to becoming a development company in southern Africa.

Mark, a lot has been happening at Alecto over the past few years. Last year when we spoke at Indaba the company was still doing serious exploration work in West Africa. Has Alecto’s focus and strategy changed?

M: Just a couple of years ago, Alecto was still primarily a junior exploration company focused on West Africa. Our biggest projects were in Mali and although we drilled, made great discoveries and raised funds, we were not able to sustain a steady share price, which is of course necessary to continue funding exploration work.

Alecto is certainly not unique. In today’s economic climate it is extremely difficult to raise funds for exploration. Despite great assets, we realised that, strategically, we had to move up the value curve from exploration to survive. We started looking at development projects instead of exploration, and we moved our attention towards southern Africa, although we retained all our interests in West Africa.

What was your strategy with the West African assets? Would it make sense to put such high value prospects up for sale?

M: We have never intended to sell Alecto’s West African investments. These assets hold significant value which we want our shareholders to retain exposure to. Accordingly, we identified an opportunity to introduce a joint venture (JV) model, so that we can maintain exposure without having the burden of exploration costs. In line with this, last year we consolidated certain licences and entered into three JVs.Mark Jones

We announced the first JV with Randgold at Kossanto West in Mali during the 2016 Mining Indaba. After that we entered another JV with Kola Gold at Karan, also in Mali. In November we announced the completion of a third JV with Ashanti Gold Corp for the Kossanto East project on which Alecto announced its maiden JORC-code compliant mineral resource (247 000 ounces of gold). Alecto still owns the Kerboulé gold project in Burkina Faso with discussions continuing for a JV partner there. If we are not able to find a JV partner, the company must look at alternative solutions. We have decided that Alecto will not focus its operational activity in West Africa for the moment.

Our current focus is the development and operation of producing mines in southern Africa. In November 2015, we announced the Zambia deal (the historic Matala and Dunrobin gold mines). Our objective in 2016 was to finance this combined operation. One of the steps to get the financiers on board was to carry out a new feasibility study and we believed that it would have been possible to start the development work before the end of the year.

Has it all gone smoothly?

M: It did go smoothly to a certain extent. We completed the feasibility study and identified PenMin as our consulting partner. With Penmin’s assistance we quickly identified an ideal partner in China and negotiated a vendor financing agreement with Yantai Xhinai Machinery Company. However, the financing had to be approved by China Export and Credit Insurance Corporation (Sinosure), a state owned Chinese company. Everything went well until we faced the challenge that Sinosure, as the final approver, were not happy to recognise the type of security that we were offering for the loan. With a market cap of only USD5-million and predominantly intangible assets on our balance sheet it proved difficult to find an immediate solution.

Our strategy has been to work with a financial institution in Zambia to provide a third-party guarantee. However, the process is taking longer than anticipated. We did expect the deal to be completed in September last year, but it still hasn’t been finalised for numerous reasons external to our own efforts. While we remain positive that financing will be secured, we recognise that the delay is frustrating for shareholders, and it’s unfortunate that it was at this point that Alecto’s shares were suspended pending the reverse-takeover (RTO) process for the Botswana acquisition. However, with Botswana offering significant development opportunities, I believe our value proposition has been greatly enhanced since this point.

Tell us more about the opportunities in Botswana.

M: In March last year we identified a great opportunity for the acquisition of the Mowana copper mine in Botswana. The mining business that was responsible for the asset was put into liquidation in November 2015. PenMin, who had by this point firmly established themselves as excellent technical partners to Alecto, had previous knowledge and experience of the Mowana copper mine; they had completed work on a proposed dense medium separation (DMS) upgrade, which was necessary to keep Mowana in business. However, without Penmin’s proposed upgrade the operation couldn’t sustain profitability when copper prices took a plunge and the business was forced into liquidation.

Alecto and Penmin then embarked on a joint process to evaluate the strengths and opportunities of the existing resource, plant and infrastructure, which ultimately led to Penmin putting in a bid for the mine in July last year. The assets were secured in a brand new local company, thus avoiding any of the legacy operating issues, and Alecto agreed to buy the assets of this new company, Leboam, in December 2016.

Has Alecto got the necessary capital to bring the mine back into production?

M: There is still a lot to do. We raised a million dollars in January 2017 and are working with a Cape Town based company that did the financing for us. They contributed a million dollars for a two-million-dollar fund to bring the mine back into production. We set extremely tight timelines to achieve this but so far, I am pleased to report that we have exceeded expectations in getting the mining fleet, production drilling and process plant into test production.

Our deal is that we acquire the mine for USD 20-million, which is being financed as an advance payment from our off-takers. Then we complete a plant upgrade (the pre-concentration DMS) through vendor financing by Northern Heavy Industries (NHI) through the Chinese Sinosure system that we are now familiar with. The plant upgrade will happen towards the end of the year. Once the DMS has been introduced it will double output and retain all the high-grade material, and more effectively discard waste. The plant is currently in operation, there is absolutely nothing wrong with it, and our task has been to bring it out of care and maintenance. We have tested it and we have the original plant engineers (Senet Engineering) standing by our side in this process – it’s a great plant.

Where is Mowana located?

M: It is north west of Francistown on the Maun road in north east Botswana – about 120km from Francistown and about 350km south of Maun.

Are all the southern African assets 100% owned by Alecto?

M: Yes, they are at this stage. Part of the deal was a USD20-million acquisition price. This means the liquidator is paid USD20-million and he distributes it to creditors as he sees fit. As you would expect, there are several creditors in line. One of them is ZCI, the former owners of the mine. ZCI has a USD117-million debt secured over the mining assets and so when they receive their portion of the cash distributed by the liquidator, they will then remove the security and capitalise most of that debt for 40% of Leboam. The company that we are now acquiring owns 100% of Leboam, so when the entire process is completed, which we are aiming for in May 2017, Alecto will own 60% of the mine and ZCI will hold 40% leaving the mine considerably less encumbered by debt.

What about the gold assets in Zambia?

M: Matala and Dunrobin are 100% owned by Alecto. The mines are located about 120km west from Lusaka on the Great West Road. They were the first gold mines in Zambia and were established in the early 1950’s. Matala was mined as a small underground operation with a very high gold cut-off grade of around 9 grams per tonne of gold (g/t Au).

There is about 100 000 tonnes of tailing and historical dumps - all with good gold in them. But that’s not the story. Originally Dunrobin was the target. Dunrobin had an operating heap leach in the early 2000’s. With the gold price at USD260 to USD280 per ounce, and without a proper understanding of the metallurgy, it was difficult to operate successfully and recoveries on the heap leach were very poor due to acid consuming copper minerals in the ore.

Subsequently, an ASX listed company completed a full bankable feasibility study with the independent work done by Coffee Mining on Dunrobin, but this was during the period that gold was at record high levels. The challenge of the operation was the cyanide consuming copper minerals in it, which made it a potentially costly process.

When we acquired the whole project in Zambia we did it with a view to simplify the process and make it a low risk venture. When you’re a junior you must play the game that gives you the best opportunity for success. For us the main opportunity in the near term was Matala – and it was to keep it very simple and tight, with a low capex and low execution risk. That means concentrating on mining and processing the oxides only and not complicating things with expensive operating plants. We modeled a simple gravity circuit with carbon in leach (CIL) treatment of the gravity tails and a plant with a capex of about USD15-million.

The challenge before was that we didn’t have the balance sheet to support even this small amount of debt. The good news is that once we have completed the Botswana transaction our balance sheet will be big enough to provide the security required by our funding partners in China so that we can unlock the funds and build the Matala project as planned.

So Mowana in Botswana is now your number one priority?

M: Yes. We only seriously looked at this project very recently. The plan was that Zambia happens before Mowana. However, by the end of last year we realised that the copper mine was running ahead of the gold mine. That’s the way the business rolls out and you must manage those challenges and maximise opportunities.

What sort of infrastructure is in place at the gold mines in Zambia?

M: Fully tarred roads and power is available. We have been working with the Zambian power utility Zesco. The process plant is not there but we have been conducting pre-development activities including ground preparation for the process plant, re-settling families and putting the necessary resources in place to support the development phase of operations.

What are your timelines?

M: We have targeted re-commissioning of Mowana at the end of March 2017. That’s happened. The pit has already been significantly tidied up to mitigate previous selective mining issues and although recent very heavy rains resulted in a lot of water at the bottom of the pit, we have been successfully dewatered to gain access to excellent mining blocks as well as considerable blasted material that is lying on the pit floor.

Mowana currently has an 11-year life of mine with considerable exploration upside. If the copper price increases to more than three dollars a pound, then the mine life increases dramatically. There are potential satellite operations and part of the acquisition includes an open pit called Thakadu that reached the end of its life of mine as an open pit in 2015 but has underground potential. In addition, there is a separate ore body that is accessible from the bottom of the Thakadu pit called Makala, and it already has a scoping study completed by the previous owners. This is an excellent opportunity with extremely good grades. Due to recent mine closures in Botswana, there is a lot of energy from the Botswana government to get people in and get things going again. The government has been really accommodating, in fact they are pushing us as opposed to other countries where you must push the government.

In Zambia – on the initial resources (measured and indicated) – we have a three-year oxide play at the Matala open pit with the pay-back less than three years. A little bit of drilling will increase that to five years LOM with the existing known pit resources. In addition, there are satellite deposits which will give us another couple of years at least, depending on the gold price of course. The aim is to process 400 000 tonnes a year of ore to produce about 23 000 ounces of gold per year.

Do you find it easier to work in southern Africa than in West Africa?

M: It’s different. I’m a big fan of the mining code in Botswana. In some parts of West Africa there can be more challenges in understanding the intent of the mining codes, not least of which is the fact that we have been operating exclusively in French speaking West Africa. The Botswana mining code on the other hand is clear and thorough and is a valuable aid for guiding mining companies. However, none of the jurisdictions in which we operate are ones that I would regard as being tough and we have the advantage of having operated extremely successfully in environments that some consider to be the most difficult in the world.

We are very excited about the next few months. First and foremost, we look forward to completing the RTO process and our shares resuming trading on AIM. Alongside this we are excited to become a cash producing company and having the ability to inject what is needed into our pre-development projects going forward. We hope the development of our mining operations will be beneficial not only for us and our shareholders but the countries in which we operate; in Botswana our mine will provide tremendous and much needed employment opportunities. We look forward to the future..

Click below to read the May/June 2017 issue of African Mining.

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