LONDON () -- At present Malaysia does not feature among the world's top thirty gold producers; it was just 39th on the list in 2004 according to the United States Geological Survey.
However gold explorers and producers operating in Malaysia can benefit from a number of significant advantages; including favourable and proven geology, a strong mining culture, cheap labour and power, good infrastructure, a skilled workforce, a supportive government, a stable economy and currency and, importantly, the underpinning of a strong legal system with security of tenure.
Currently there is just one significant producer in Malaysia, London-based Avocet Mining [AIM:AVM] which operates the Penjom mine in Peninsular Malaysia.
However Avocet's new neighbour, just half an hour's drive away, is the aptly-named Peninsular Gold Ltd [AIM:PGL] which holds 210 square kilometres of exploration and mining rights in a historic gold mining area, and which aims to become Malaysia's largest gold producer.
PGL expects to be pouring its first gold next year when the proposed construction of a plant to process the tailings from a historic mine at Raub is targeted for completion. Cash flow from production will be used to advance the exploration programmes already in place at Raub and nearby Tersang. PGL have a near term target of proving 1 million ounces of reserves from each of the two areas, and a longer term target of 5 million ounces.
When production commences PGL will be the first significant Malaysian owned gold mining company, and so may attract a lot of local interest. Here founder and CEO Andrew Kam talks to Resource Investor.
RESOURCE INVESTOR: Firstly could you give some background about the geology of the project areas?
ANDREW KAM: Peninsular Gold's exploration and mining rights are in the Pacific Rim of Fire - a prolific zone for gold deposits. They lie within the Central Gold Belt of Malaysia, which runs up the spine of the Malaysian peninsula into Thailand and which hosts a number of structurally controlled quartz veins in a sequence of old and folded slates. The deposits share similar characteristics with the Bendigo-Ballarat district in Australia, the Mother Lode area of California and the Meguma district in Canada, all of which are deep with high grade ore shoots and have supported many long life mines.
There has been gold mining activity in the area for hundreds of years. In fact the Mon Khmers came to Raub on elephant back some 700 years ago to obtain gold for the adornment of the temples at Angkor Wat.
If you walk on the ground you can see outcrops of gold mineralisation. The area is named Raub, the Malay word for scoop, from an old folk tale which recounts that in the early 19th century an old man and his two sons struck gold every time they scooped up the earth.
There is no doubt that the Raub area has a gold mining pedigree!
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RESOURCE INVESTOR: What are the main projects for Peninsular Gold right now?
ANDREW KAM: Our priority and immediate objective is to construct a Carbon in Leach (CIL) gold extraction plant to process the tailings left over at Raub from earlier mining activity there. These tailings have proven reserves of approximately 183,000 ounces, and amount to around 8 million tonnes of material.
We are almost ready to commence construction and have all the necessary approvals in place, but following the recent discovery of significant amounts of surface and near surface oxide mineralisation at Raub we have decided to modify the design of the plant. Construction will start as soon as the design modifications are complete, which should be soon. If all goes well, we are targeting our first gold pour before the end of 2007.
The plant is likely to have the capacity to process around 1.1 million tonnes of material per annum and should generate significant cash flow for the company. Simple arithmetic shows that assuming cash costs of gold production from the tailings of approximately $163/oz and a gold price currently well above $600 this would be a very robust project, and one which would provide a firm basis for funding future exploration and expansion of the company's activities.
Meanwhile our exploration activities are focused on two areas; Raub and Tersang, though we have also applied for permits in other neighbouring areas.
The latest set of drill results released to the market showed that the inferred resource estimate at Raub has increased by 26% from 107,000 ounces to 135,000 ounces. The mineralization drill tested to date extends to the surface at the Malacca South and Ward Hill prospects. The surface rocks are oxidized and free digging to about 30 metres depth, and this bodes well for a low cost mining and treatment operation.
Tersang, which is located some 20km north of Raub, presently has an inferred resource of just over half a million ounces. It is relatively low grade but the stripping ratio is also likely to be low. So any mining operation could be open pit and high tonnage, enabling mining costs to be low.
Right now we are continuing to drill resource definition holes using reverse circulation equipment, and our first target for Tersang is to drill the resource up to around 1 million ounces as soon as possible. If we achieve this target then we will look at the feasibility of building a second processing plant to service the deposit.
RESOURCE INVESTOR: Could you give a brief history of the mines?
ANDREW KAM: Gold has been mined at Raub since ancient times. The mine was worked by Raub Australian Gold Mines Limited from 1889 to 1961 but was then shut as it was not economic with gold trading at $35/ounce. From 1978 to 1995 it was worked in a fairly low tech way by local miners. In total 1 million ounces were mined here in just over a century.
My family have been involved in gold mining at Raub since 1961 and I became interested in the area from 1996. The gold price was not then attractive, but I acquired a lot of permit areas, believing in the prospectivity of the area and the future of gold. New technology and the higher gold price have now made these areas of great commercial interest.
RESOURCE INVESTOR: Whom do you consider to be in your peer group? And how do you anticipate that your costs will compare?
ANDREW KAM: Avocet Mining is probably the closest peer to PGL as it is the only significant gold producer in Malaysia, though Avocet also has gold mines in other countries (Indonesia and Tajikistan).
PGL's cash operating costs are expected to be low. For example, power for our project areas is relatively cheap and easily accessible. Labour is relatively cheap also, with likely average costs of around $375 per head per month. As mentioned already, the cash costs for the processing of the tailings are likely to come in at approximately $163/oz, compared with an industry average of $200-300/oz.
RESOURCE INVESTOR: The exchange rate is a major factor for a number of gold producers. The Malaysian Ringgit was pegged to the dollar for almost 8 years after the currency crisis in 1997 at RM 3.8/$. The peg was ended in July 2005 and it has been operating in a managed float against several major currencies since then trading in the range 3.65 - 3.80. What are the implications of the exchange rate for Peninsular Gold?
ANDREW KAM: The exchange rate has not been an issue to date for Peninsular Gold as the currency has been very stable for the last 9 years. The currency has been well managed. Although we do not expect major fluctuations, we will be keeping a close watch, as is prudent for any company.
RESOURCE INVESTOR: More generally, what are the key benefits and the key issues facing mining companies operating in Malaysia? Is there a big environmental lobby?
ANDREW KAM: I have already alluded to a number of the benefits of operating in Malaysia. The economy is healthy; it is growing rapidly and steadily. The government is stable and pro-mining, and a number of rebates and subsidies are available to the right enterprises. For example PGL has been awarded 'Pioneer Status', a tax incentive scheme to support investments in Malaysia which entitles it to an 85% tax holiday for five years.
There is an established mining culture as Malaysia was the world's largest tin producer for many years. Skilled labour is therefore available, yet labour costs are low. Importantly there is a strong and fair legal system derived from the British system so investments and tenure are secure.
The infrastructure is good. Power is readily available and cheap; there are power lines directly to the project areas. Road and rail connections are good and there is a dual carriageway from Kuala Lumpur most of the way to Raub. It takes just one hour and twenty minutes to get there and there is no need for either helicopters or camels! It feels as though our gold mine is just on the doorstep. Our neighbour, Avocet Mining, which is almost a decade older than Peninsular Gold, is doing very well.
In short Malaysia is still undiscovered and has great potential to be a leading gold producer in the future.
Environmental lobbies and environmentalists exist everywhere. We have obtained the necessary approvals from the Department of Environment of Malaysia for the development of the CIL plant. PGL will continuously strive to develop a strong and sustainable environmental system and will ensure compliance with all the applicable rules and regulations, which are strict in Malaysia.
RESOURCE INVESTOR: Where do PGL stand on hedging?
ANDREW KAM: Currently we are more interested in put options which are essentially a form of insurance against a falling gold price.
RESOURCE INVESTOR: Looking to the long term what are your plans for Peninsular Gold?
ANDREW KAM: We want to make Peninsular Gold the number one gold mining company in Malaysia. Our longer term target is to define resources and reserves of 5 million ounces and we will of course consider any interesting additional projects. However we intend to proceed step by step to ensure that we build a strong company with experienced management and good cash flow along the way. We believe in steady growth; Rome was not built in a day!
RESOURCE INVESTOR: To date trading in PGL shares has quite thin. When do you think this will change? And why?
ANDREW KAM: Peninsular Gold is still relatively new; it is just over one year old. As discussed above it takes time to develop a company. That said, we are taking steps to broaden the investor base and to increase the liquidity of the shares, and we believe that it will not take too long. There is currently a lot of local interest but it is not so practical for locals to trade. We are looking at ways to make this process easier and more convenient. When the CIL plant is complete this is likely to generate further interest in the company and liquidity in its shares.
RESOURCE INVESTOR: And finally please could you summarise the case as to why you think investors should buy shares in PGL?
ANDREW KAM: I would not presume to tell investors that they should buy shares in PGL. But I would certainly recommend that the company merits further study. It offers the advantages of a substantial portfolio of assets in a proven gold mining area. The company is near the production stage, which will generate cash flow to fund further exploration. The infrastructure in Malaysia is good, costs are low, the government is supportive and the sovereign risk is low. I hope that the results will speak for themselves. Investors could benefit from studying the announcements of our company and forming their own judgement.
Conclusion
The house broker, Hichens Harrison and Co, commissioned a report in June 2006 from independent consultant, Michael Coulson, who has long experience of the mining sector, was recently the Chairman of the Association of Mining Analysts in London and has written a book, "An Insider's Guide to the Mining Sector."
Coulson concluded in his report that:
- PGL has the strategy, management and the quality of properties required to achieve its ambitions and to become Malaysia's largest gold miner.
- It has adequate cash resources to begin the CIL project and the planned drilling programme.
- The CIL plant will enable it to quickly become a gold producer and generate cash flow of $7.5 million per annum if gold is at $500/oz, $10 million per annum at $600/oz and $12.5million at $700/oz.
- On the basis that the easiest place to find a new mine is at an old mine PGL has an excellent chance of proving up exploitable resources. Its tenements are highly prospective and have long term promise beyond the 3 year drilling programme.
At the current share price of 50 pence PGL has a market capitalisation just south of lb22 million ($40 million). Coulson calculates that at a gold price of $600/oz PGL justifies its current valuation just on the basis of the CIL plant alone (which has an NPV of 53 pence per share). However if PGL are successful in achieving their exploration aims the shares could be worth at least three times their current level if not more.
Although Andrew Kam did not directly answer his own question about what the value is of an ounce of gold reserves in Malaysia his interview, his comments together with Michael Coulson's analyses suggest that there should be a premium on an ounce of reserves in Malaysia to reflect the many advantages of operating in the country. For the moment this has not been recognised by the market; the shares of Peninsular Gold seem cheap.
As Kam suggests, this company is certainly one to watch.
