I've spent so much time in South America in the last year you'd think I could speak better Spanish than I do. But, by way of defense, my last visit (in May) was to what are likely the continent's most obscure countries, Guayana and Surinam. Neither of them speak Spanish - English and Dutch, respectively. I was there for two weeks to get familiar with the operations of Golden Star Resources (GSC.T, C$2.95), which recently merged with South American Goldfields (one new share for each 6.5 old), a company previously mentioned in these papers.
It was a natural marriage, since both companies' properties are in these two countries.
Over the years, I've taken dozens of mine tours; this one was by far both the most intensive and impressive I've had. Let me give you the bottom line in the first paragraph: Golden Star has the potential to become a world-class mining company, in the growth mold of American Barrick.
I want to spend a little time on the background and political situation in these places, as well as discussing the merits of Golden Star's properties, because you may have a certain understandable reluctance about it, in effect, sending you money to such an exotic locale. But that's precisely why these are the places to go. Very little money, so far, has flowed there to drive up prices. Very few investors and prospectors have picked over the available properties. The extremely desperate economic state of the economy in these countries means that there will be none of the obstructionism that makes mining a nightmare in North America.
Remember that a good speculation is not a function of what something is, but what price it sells for. Guyana and Surinam offer some of the best prospects in the world, but at bargain rates. Golden Star's emphasis, rightly, is on Guyana at the moment, for reasons covered below. But the countries are near identical geologically, even is the politics are somewhat different.
Guana (the old British Guiana) and even more so Surinam (the old Dutch Guiana), are places that you "can't get there from here".
Since virtually nobody goes there, flights are few, far between, and likely to part you from your luggage (at least if you fly BWIA through Port of Spain).
Even if you can make flight connections, it takes political connections to get a visa (the drill includes a letter of invitation from within the country, two photos, and a week's wait while they fill a page of your passport with impressive stamps - for each country. These are, far more than even Paraguay and Bolivia, the most isolated countries in the hemisphere; both were veritable People's Republics, including close ties with Cuba, until quite recently. The results were perfectly predictable: total economic collapse.
Guyana
As a place to go mining, the country has several advantages.
First is the widespread use of English, and a cultural environment that contracts favorably with that of Latin countries, at least if you're a North American mining company. Culturally, Guyana is actually part of the West Indies, not South America. Part of the package is a tradition of Common Law. Even through the People's Republic stage, the judiciary remained independent, and continues to show integrity. The way I see it. Guyana is now less likely than most countries in the Third World to shoot itself in the foot. A lot less likely than either the U.S.., or Canada, actually, because Guyana has already learned firsthand what socialism will do.
Second is the location. Although this factor becomes less important almost daily as communications and transport improve, it's a lot easier to monitor projects in the Caribbean than in the far reaches of Asia and Africa. One big plus is that 90% of the population lives along the coast, leaving the interior almost uninhabited. It means you don't have to worry about locals holding hearings and filing suits because they don't want a gold mine next door.
Third are the advantages of being in the Third World generally. Only there can miners get important tax holidays, ultra cheap labor, workable environmental policies, and freedom from constant legal harassment. This is the most important single success factor in the business today. Political risk was a real factor in the 50s, 60s, and 70s, but that was then. This is now. It bears reemphasis that there's less risk in most of these countries than in the U.S., for reasons I covered in some detail in February, when Chile was highlighted.
Sure, there are disadvantages. Telephones are generally few and unreliable. Planes fly sporadically. Medical facilities are unsophisticated. If you need a tool more complicated than a screwdriver, you'll have to import it. But these countries are privatizing rapidly, and conditions are improving apace.
The properties
I spent my weeks basically living with the company's geologists in Georgetown, Paramaribo, and on site in the bush. Although large portions of both countries, mainly the areas away from a river, are still unexplored, the rest of the interior has been heavily prospected by "porknockers", the local version of Brazil's garimperos. In a country where a good wage is $50 a month, an enterprising man will beg, borrow, or steal a shovel, a pan, and enough food to keep himself going for a few weeks, and make his way upriver in hopes of striking it rich. These rivers have huge amounts of free placer gold in them, concentrated in pockets. The situation is exactly like it was in the Klondike 100 years ago, transported to the tropics.
The garimperos mining camps of Brazil are notably dangerous. If someone finds gold on your property, you can plan on an invasion by thousands of them, and there's nothing you can do about it. In Venezuela the army keeps them under control. But in Guyana, the porknockers are actually quite civil.
A man will dig and pan in hopes of finding a deposit. If he does, he'll stake a claim, and either work it by hand, or return with a dredge to generate some real volume. The rivers of Guyana support about 700 motorized dredges, each moving up several score cubic yards of gravel per day through their sluice boxes. The porknockers are important to Golden Star (and the few other companies down here) because they've identified most of the gold occurrences, and are the major source of labor.
I'll cover Golden Star's current properties, roughly in order of significance.
Omai - This is the centerpiece of Golden Star's portfolio. They picked up the property from Anaconda in l985 (when nobody would touch this country with a l0-foot pole), structured their deal with the government in early l987, and after extensive drilling coventured it with Cambior (CBJ.T, C$7.75) in May of l990. Cambior is the operator, and owns 60^ in return for financing the entire US$163 million needed for mine construction and working capital: the government of Guayana retains the remaining 5%. I visited the square mile property, located on a river in the middle of the jungle, by flying about 100 miles south of Georgetown.
Construction of the roads, mill, and living facilities for the 560 workers was over 75% complete; production was originally scheduled to commence early next year, but it's all ahead of schedule, and it seems likely gold will start pouring this November - a good sign.
This is a gigantic god mine, and will be one of the two or three largest in South America. Omai's 45 million tons of reserves, grading an excellent average of 0.047 ounces per ton, will last 9.3 years, averaging 214,000 ounces per year at an operating cost of US$199 - although production will be higher (255,000 ounces) and costs lower ($185) for the first three years. Let's crunch some numbers.
With gold at $350, operating earnings will run $42 million per year for the first three years, of which Golden Star will receive $14.7 million; the next six years will show respective numbers of $30.6 million and $10.7 million. With gold at $500, the operating profits run $80.3 million for each of the first three years, and $61.3 million thereafter.
Projected over Golden Star's 12 million shares. Omai's earnings along (worst case) equal over US$1.15 (C$1.35) each. That's about half what the stock is trading for. I haven't adjusted these earnings for the amortization of capital costs because, as you'll see below, it's quite possible its facilities will be used on neighboring deposits. No for taxes (at 33.75% probably the lowest in the hemisphere), because that will actually be paid depends in part on how the money is spent. This mine alone more than justifies the current stock price. But there's much more.
Mahdia - This is a large placer deposit, about eight kilometers long, 300 meters wide, and roughly five meters deep, running along an old river channel. It will be mined by literally running every one of the 13 million meters of gravel therein through a couple of large floating dredges. Because it's free gold, having been laid down by water, it's hard to tell either the size or grade of a placer deposit without very extensive drilling, and this lack of predictability usually makes them a poor choice for a public company. This one, however, has been subjected to over 700 Banka holes, something that's only feasible because of the low labor costs.
The Banka drill is like the mechanical rotary drills used in North America, except it's powered by up to eight porknockers, some turning it, others lifting it up and down. Do that, making six-inch diameter holes up to 30 meters deep, for 12 hours a day and you can tell Schwarzenegger a few things about fitness.
In any event, the project is ready to go into production pending financing.
Mahdia is owned 91.5% by GSC, 8.5% by the government, and will produce something over 29,000 ounces per year for six years and a half years. Operating costs will vary from $131 per ounce if they buy the dredges to $226 if they lease them. Say they're leased (so there's no capital amortization). If gold stays around $350, this project will net the company about US$3.3 million per year pretax, or another C$.30 per share. It's a good, solid project.
Gros Rosebel - This project in Surinam is third in line timewise, but has the potential to be bigger than Omai. I endeavored to visit the deposit, conveniently located about two hours by road from Paramaribo, but our progress was blocked by the "Mandelas", one of the three major Bush Negro insurgent groups. The others are the "Angolas" and the "jungle Commandos"; they all have great names, and after the war they should use them for some kind of singing group. The boys, who were unarmed at the time, had felled a three-foot diameter tree across a bridge along the way and weren't about to let anyone across until the government fixed the generator of a nearby village. (Golden Star fixed the generator and has actually been hiring some of the rebels as low-cost labor.)
To all appearances, I could have been in Africa. The trucks, the red soil, the heat and humidity, the jungle just off the road, the mob of barefoot people wearing "Hard Rock Cafe" and "I Love NY" T-shirts standing around playing Top 40 cassettes in boom boxes - this is the stuff of which the Third World is made.
What I would have seen if we'd gotten through wre many hundreds of meters of trenching, and the remains of scores of drill holes put in by earlier prospecting teams. It's a huge property, 54 square miles, surrounded by another 773 square miles in which the company has exclusive rights of exploration. This is important because it encompasses most of Surinam's known gold deposits. Golden Star's geologists are planning on redrilling most of the property, since the natives just couldn't resist vandalizing the core shack, making it impossible to reassay samples and compare them with written records. But indications are that, just in the saprolites (a generic term referring to highly weathered soil-like rock typical of tropical environments), and just in the central area of the deposit, there are at least 10 million tons of .06 or better material, meaning 600,000 ounces of easily minable gold, richer in grade than Omai.
Mazaruni Diamond Project - I must admit an innate suspicion when it comes to anything related to diamonds. What comes to mind are scamsters hyping overpriced merchandise to the unwary back in l980, when prices were five to 10 times higher than they now are. That plus the fact I know next to nothing about diamond mining. But flying to the 100-man bushcamp about 170 miles southwest of the capital proved educational.
The interest of most investors is gold, partly because of the romance, partly because it's a unique hedge against monetary conditions, and partly out of ignorance of what mining's all about. The fact is whether you're mining gold, copper, kaolin, granite, diamonds, or guano the only thing that counts is the cost of processing a ton of material versus how much you can sell it for. This leads to a purely economic case of diamonds, of which there are about 100 million carats mined each year, 85% industrial grade, l5% gem grade. So far Golden Star has spent about US$3.3 million on this property, and it appears about 60% and 70% of the diamonds are gem grade; their stones average US$120 and US$140 per carat.
The problem with this type of diamond mining is pretty much that with placer gold mining; sampling the size and grade of the deposits. Bana drilling is valuable mainly to determine if the gravel is likely to host the stones; to sample grade, however, it's necessary to use a large backhoe, capable of making a pit three meters across and 10 meters deep. The material is then transported to a washing plant, almost identical to that used for placer gold, where vibration and gravity yield the raw diamonds. It's a little tougher than recovering gold, since the specific gravity of diamond is only slightly higher than that of quartz, which diamonds visually resemble.
in any event, the crew is digging holes throughout a 50-square kilometer area, and will be doing so for another year. The geologists I spoke with were diamond specialists, who's spent most of their working lives in places like Sierra Leone and Indonesia questing after the crystalline carbon stones. Their opinion is that it's too early to say for sure, but they speculate that they'll prove up over 50 million cubic meters of diamondiferous gravel, grading perhaps a tenth of a carat per meter. That's well over $600 million, not counting considerable gold values - about the same value and tonnage as Omai, but minable much more cheaply. Golden Star won't need a partner.
It's clear that this has to be considered as "blue sky", but the way the company's priced, it's free. Everything in Golden Star is "free", including half of Omai, the way the shares are currently priced. The big risk? Only that something very big and very unexpected goes wrong at Omai.
Other properties - I class these together in this manner only because less work has been done on them. But less is a relative term. The Akai Wong property appears to have a deposit similar in nature, and potentially larger in size, than Omai. The nearby Aurora contains an old mine which produced 100,000 tons of 0.6 to 0.8 ounce ore (very rich) during the 40s; subsequent drilling shows at least another 450,000 tons of 0.35 ore. The Quartz Hill property of only three kilometers west of Omai, and appears to be a continuation of the deposit. The Five Stars property was selected based on a search of the literature, showing it contained the largest nugget k(333 ounces) every discovered in Guyana; the initial reconnaissance indicates at least five anomalies. The Peters Mine produced 40,000 ounces, at an average grade of one ounce per ton, around the turn of the century. The list goes on.
The stock, finances and management
Golden Star has 12.3 million shares currently out, 15.1 million if all options and warrants (most are above market) are exercised. About 40$ are owned by insiders of one type or another. My guess is that over 50% of the stock is in the hands of close friends of the company, which is good. People that have big positions tend to work hard to ensure value.
The guiding light behind Golden Star is its founder. Dave Fennell. Fennell has the ability to sit down with the guys in charge of little countries, and get them to come across with the goods. The CEO is Dave Fagin, who was the president of Homestake from 1986 to last July, when Fennell hired him away; he'll ensure that everything happens that's supposed to, and he's quite capable of doing just that. The founder and principal behind South American, and consequently the largest shareholder in GSC, is our old friend Robert Friedland.
Robert was responsible for taking Galactic Resources from less than $1 to $18 while he ran it, before it became a casualty of low gold prices, high production costs, loads of debt and onerous environmental regs. I'm always a buyer of Friedland companies, if I can get in before the promotion starts.
The company's book value is about C$2.55 per share. The independent fairness opinion done when the merger was completed last month appraised the current net value of the company's assets as between C$3.59 and C$5.18 per share. Not bad, considering gold properties are now worth less than at any time in the last 13 years.
My main concern for the financial position of the company is that they have limited cash in the face of spending about US$200,000 per month in exploration and development. At least until Omai comes on stream. But it's unlikely they'll do it near present levels. I have a lot of confidence in the ability of this team to get the word out, and the stock price up, entirely apart from the fundamentals, which are the reason I like it, and own it personally.
The bottom line
Golden Star is completely "wired" politically in these two countries, and has the pick of the best properties in what is certainly one of the best regions in the world. I urge you to add a good position of GSC to your portfolio, as the way to play several factors at once: 1) an almost certain resurgence in the totally devastated economies of these two countries; 2) what will likely become a mining boom in this part of the world; 3) the extraordinarily depressed prices that have been bouncing along the bottom for the last four years.
The same thing goes for companies like Bema (BGO.T, C$1.35) and Arizona Star (AZS.V, C$0.72), which represent a similar play for Chile (see the February issue).
Over the next year I'll draw your attention to just a few more companies, offering similar prospects for countries like Venezuela, Argentina, or Bolivia, as well as possibly a few in Africa. All have clear ten-for-one upside potential over the next few years combined with minimum levels of risk. I'm sticking my neck out with strong recommendations on companies like this, despite the fact any one of them could "crap out". But I'm willing to do so at this point because I've been in this market for over a dozen years, have learned a lot, and have got to believe I know a good thing when I see it.
The brokers most familiar with Golden Star are Ben Johnson (800-547-4898) and Rick Rule (800-688-8679 or (619) 259-9921). If you use your own broker, including the usual discounters, check and compare commissions carefully. Many will really bag you on Canadian-traded stocks, especially after the currency conversion factor.
Call or write Golden Star to get their annual reports and news releases: Suite 2302, Royal Trust Tower, Edmonton Centre, Edmonton, Alberta, Canada T5J 2Z2, (403) 429-9034).
A Postscript of Surinam
Although this was my first visit to Guyana, it was my third visit to Surinam in the last couple of years; I've spent a total of about six weeks there, and probably know everybody who is anybody in the country, from the president on down. The place has been a veritable hot bed of intrigue and dissension, and the situation is only aggravated by the fact that the country's 400,000 citizens are divided among seven population groups - the Creoles, East Indians, Indonesians, Bush Negroes, Amerindians, Chinese, and Dutch. They all have different religions, languages, cultures, skin colors, and dominate different spheres in life.
Surinam became independent in l975, but the military basically called the shots since l982. Military influence is now waning, and the civil war has largely faded as well.
Rumor has it Surinam is the major transshipment point for cocaine from Colombia to Europe; when the U.S. military took out the government of Grenada in l983, it came within a hair's breadth of doing the same in Surinam. It's that kind of place, but I've always had a great time there.
Surinam's standard of living fell from about that of Holland at independence to the point where an excellent job pays about US$50 per month, but since 40% of the population is unemployed, most people survive with gifts from the approximately 400,000 Surinamers who are Dutch citizens and live in Europe. Things are changing for the better - although a lot more slowly than in Guyana. The government hired Coopers & Lybrand to make free-market recommendations - which, in some measure, have been put into practice. Although there's been almost no mining exploration in Surinam for decades (due to a combination of socialism and several guerrilla groups in the interior), the government has always honored its obligation to Alcoa, which has had a huge bauxite/aluminum operation there. No altruism is involved; it's just easier to collect a cash royalty every month (amounting to over half the government's total income) than meddle and kill the golden goose.
In fact, aluminum is about the only export Surinam has. I remember the first time I was there, two years ago, looking for something to take home as a souvenir. I went to the largest bookstore in Paramaribo, and found a total of about 50 different titles. The reason is there's no foreign exchange to buy books, or anything else. So I would up with a couple of large stuffed piranha, at a dollar each.
What do people do for entertainment? Mostly talk politics. One of my favorite anecdotes arises from the coup back in l982, when elements of the military under MSgt. Desi Bouterse overthrew the government, which was backed mainly by the police. Some of Bouterse's allies in the Navy (consisting of a patrol boat with a 40-mm Bofors cannon) drove it up to the main police station on the waterfront, and leveled the building. At that point it was all over but the shouting, and bit of rioting. Bouterse (who's personally very charismatic and intelligent, although he suffers from bad press internationally) promoted himself to Commander, and has controlled the country since then.
But that's another story. Let's just say the situation in Surinam is more fluid than in Guyana.
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