‘Hugely profitable' Modder East tailored in Aussie/NAmerican style - Aflease Gold

3rd February 2009 By: Martin Creamer - Creamer Media Editor

JOHANNESBURG (miningweekly.com) – The "hugely profitable" Modder East gold project had been deliberately tailored to meet the investment criteria of Australian and North American markets and was breaking South Africa's traditional ‘deep, dark and dangerous' gold mould, Aflease Gold/Gold One CEO Neal Froneman said on Tuesday.

Froneman told Mining Weekly Online that Modder East's shallow, low-technical risk orebody was "very similar" to what was mined in Australia and North America and would have a low cash cost of $250/oz, which, Froneman told incredulous visiting fund managers and analysts, had been confirmed by recent independent assessments.

He said that even if the company was slightly out on its low $250/oz cost calculation, which he was sure it was not and was willing to share independent assessments with the market, Modder East would still be "hugely profitable".

The successful conclusion of the company's deal with Australian gold company BMA – for which one remaining change-of-control-waiver condition had still to be agreed by Aflease bondholders – would open the way for a reverse listing of Aflease Gold/Gold One on the Australian Stock Exchange.

"We have been building Aflease Gold that is focused on shallow, low-technical risk orebodies, which are very similar to what you find in Australia and North America with a view, going back to 2003, that we would eventually externalise the company.

"So, we have to look like an Australian company or a North American company in order to attract funding.

"Firstly, we cannot create a gold mine that will appeal to Australian investors if the project doesn't lend itself to that, but Modder East does, we can do development in a mechanised way, so all of that lends itself to looking like an Australian or a North American mine.

"While our stoping is a little bit different, we have a tabular orebody, which has it own benefits as well. I don't believe that trackless or mechanised mining is appropriate in narrow stopes, but the wide reef channels, which we announced yesterday, are ideally suited to mechanised mining.

"The mine could eventually look very much like a typical Australian mine, and we have the right basis to do it," he said.

The company was strategising a listing on the Australian Stock Exchange because it believed that it was "a good place to raise capital; those markets are open, the company gets a higher rating than it would on the JSE".

It would be wrong to list in Australia as a typical South African gold-mining company that failed to meet the benchmarks of Australian and North American gold companies.

The company would thus have to become a company to which Australian and North American investors could relate, and that was part of Aflease's decision-making process going back to October, when the deal with BMA was struck.

Froneman said that all the transactional conditions for that deal had been met, bar the waiving by Aflease bondholders of the change-of-control right, which would be voted on February 20.

"The bondholders are situated in North American and Europe. We are in discussion with them. We are providing them with information. They buy into our rationale of why this technical change of control has to take place."

Going to Australia was different. That was about marketing the company to Australian investors, showing them that the company had quality resources and near-term cash flow "and that we are undervalued, and therefore it's a great investment opportunity for Australians".

"We are going to be very opportunistic about raising capital. What is clear to me is that in the last few days, there has been very significant capital-raising for gold companies, which bodes very well for us.

"We are not yet a producer, but the market will look to us and see that we are not a long-term investment from a ‘wait' point of view. We make money from the end of the year," he added.

Approaching the markets as a near-production gold company at a time of global gold bullishness and at a time of gold's return as a safe haven in troubled times, would be opportune.

The company had cash of R288-million and required R370-million to reach commercial gold production, which left a shortfall of R82-million.

Froneman had no doubt that Aflease/Gold One would be able to raise the money that it required.

"Modder East is going to be very, very profitable. I know there is a lot of scepticism around $250/oz cash costs, but we have had a number of independent assessments recently.

"We have just put out a new competent person's report where that's been signed off by the consultants who did it.

"I just find it so difficult to raise that $250/oz based on, well, maybe it's not, because no one can show us why it shouldn't be," he said.

Aflease had invested more than R500-million in Modder East at this stage. It had R300-million still to invest to reach its R800-million construction capital total.

"And then there is ongoing capital investment, which people don't generally disclose, but over the life-of-mine, we will invest about R1,2-billion in capital, which is a very significant commitment to this region.

"In addition, we will be employing 1 600 people at Modder East, Sub Nigel will employ another 120 to 130 people in its initial stages, so it's a great boost for mining and a great boost for this area, and we are just happy to be part of it.

"I think that the gold bull market is just starting; $1 000/oz is around the corner, and that's only the start.

"There have been no major gold discoveries. I read a lot about people talking about ‘peak gold', just like ‘peak oil', so the supply is not there, people are returning to gold because of the credit and the liquidity crisis, and there's only one way for gold and that's up," he said.

Modder East's water issues were, he added, largely behind the company.

"We've had to develop through a water-bearing layer, which we are now through. We are into the quartzite, which is an impermeable layer below the dolomites, so that risk is largely behind us.

"There are always mining risks because it's just not possible to manage and deal with every single risk because they are not known.

"I think the closer we get towards pouring gold in the fourth quarter, the less the risk is. These risks are being uncovered and dealt with as we develop," he said.

The JSE-listed company said that its Modder East project, which would pour its first gold in the last quarter of 2009, was the first new gold mine in South Africa's East Rand gold basin in the last 28 years and that the East Rand goldfields had yielded a quarter of the gold on the prolific Witwatersrand.