Toronto Stock Exchange (TSX) Symbol: DSM
American Stock Exchange Symbol: DEZ
Desert Sun is a Canadian mining company that has just put the Jacobina mine in Brazil back into production. The first gold poured was in March 2005. Commercial production began on July 1, 2005 and the mine will reach its full production rate of 100,000 ounces per year by the end of the third quarter of 2005.
Desert Sun owns 100% of its property in the Bahia Gold Belt, which contains the mine, located near the town of Jacobina. The mine ceased operations in 1998 as the price of gold fell below $ 250 an ounce. Desert Sun bought it and has spent US$ 37 million refurbishing it. It will initially produce 100,000 ounces a year, rising to 250,000 ounces by the end of 2009 with the addition of three other properties near the mine currently in the exploration/development stage. The Bahia Gold Belt property is 155 km long and a US$ 5 million exploration program is also underway for 2005 to increase gold reserves and resources.
Desert Sun has no debt, it had US$ 13 million in cash and short term investments as at June 30, 2005, and has US $ 45 million in tax losses from the previous owner to shield future income. Total assets as of June 30, 2005 were Cdn. $ 94 million.
With gold at US$ 471 per troy ounce currently and with production costs estimated to be US$ 200 per oz. (plus the cost of Brazilian currency appreciation and inflation), the mine is expected to be highly profitable, producing an estimated 100,000 ounces of gold per year (which would realise approximately US $ 47 million in annual revenues, at current prices). Production from this mine and others in the immediate area would grow annually, reaching 250,000 ounces of gold by the end of 2009.
Future production is unhedged (i.e. not already sold in forward price contracts). So, if the price of gold rises in the future, the increase in the gold prices will increase revenues and, as most costs are fixed in the production of that amount of gold, will substantially enhance the net income of the Company.
In the chart below, the share price performance of Desert Sun (DSM) is compared to a widely used mining index (XAU), which comprises 12 of the largest gold and silver mining companies in the world. Desert Sun (shown in green) is up 90% from its price a year ago, while the Index is up about 18% in the same period.
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The Jacobina mine has had US $ 110 million invested in it by previous owners/operators and contains a 1 million tonne per year processing plant. It produced 700,000 ounces of gold between 1983-1998, before the low price of gold at that time made production unprofitable and the property was mothballed.
Desert Sun acquired the property in 2002, and has spent money to refurnish and modernised the mine, as the pictures below show:
The cost of the project has been low due to the mining infrastructure around the mine, including roads and a water dam. The State of Bahia has been supportive of the project, paying for the repaving of the mining road and the construction of a new electrical substation connected to the national power grid.
From March 2005 to the end of June 2005 (the trial production period), the Jacobina Mine produced 11,935 ounces of gold, of which 9,889 ounces were sold for US$ 4.2 million.
Based on current data, it is expected that the cash cost of production will be in the range of US$ 200 (adjusted for Brazilian currency appreciation and inflation), which is close to the $189 cost projected in the feasibility done by SNC-Lavalin in 2003.
In the chart above, production is planned to grow substantially as more and more sections of the property are mined. In the next phase, the Company will look to begin mining at Morro do Vento in 2007. The capital cost of a mine there is expected to be $ 17.2 million, producing 50,000 ounces at a cash cost of US$ 250. The expected mine life is 5.5 years, with an expected Internal Rate of Return of 20%.
Currently, Desert Sun and independent consultants have determined that the Proven and Probable Reserves (P&P) are 1.2 million ounces of goldM at an average grade of 2.11 g/t. This translates into a mine life of about 10 years.
To extend mine life Desert Sun has been aggressively exploring its existing properties for additional deposits. When I last reported on Desert Sun (Jan 2005), it had total Measured and Indicated (M&I) resources of 1.65 million ounces of gold.
It has since increased both reserves (P&P) and resources (M&I) by 22% and 24% respectively!
Total Measured and Indicated resources at now 2.05 million ounces, while Inferred resources at 1.9 million ounces.
The Company has achieved good drilling results at Pindobaçu, with gold grades well above the mining grade at Jacobina, including 5.5 grams per tonne over 21.9 meters, 7.2 grams per tonne over 2 meters, and 6.6 grams per tonne over 1.9 meters.
Stan Bharti (Chairman and Director): Stan Bharti brings over 25 years of experience in operations, public markets and finance to Desert Sun Mining Corp, having raised over $200 million in public markets over the last decade. His experience in public markets includes acquisitions of companies in Europe, Australia and North America. He is a Professional Mining Engineer, has a Bachelors degree from Moscow, Russia and holds a Masters Degree in Engineering from the Royal School of Mines, University of London, England.
Gerald P. McCarvill (Vice Chairman & Director): Mr. McCarvill has more than 20 years experience in the financial sector holding senior positions with major investment firms including as a member of the executive committee of Wood Gundy. Most recently, Mr. McCarvill was CEO of McCarvill Corporation, a diversified financial services company and previously was CEO of Repadre Capital Corporation, a mining royalty company.
Bruce Humphrey (President & CEO): Mr. Humphrey is a mining engineer with 30 years experience in the mining industry. He has worked for several major mining companies in operational and executive management positions. In his most recent position, Mr. Humphrey was Senior Vice President and Chief Operating Officer of Goldcorp Inc., (TSX:G) (NYSE:GG). His responsibilities included the re-development, start-up and operation of the high grade Red Lake Mine as well as the Exploration Group and Goldcorp's operations in South Dakota and Saskatchewan.
Stephen Woodhead (Chief Financial Officer): Mr Woodhead has worked for the Department of Finance in South Africa and as the corporate financial manager for Trans Hex Group Limited, a South African diamond producer and exploration company listed on the Johannesburg Stock Exchange. Mr. Woodhead relocated from Cape Town to Toronto in 1997 to establish and manage the Canadian corporate headquarters of Trans Hex International Ltd. He holds a Bachelor of Commerce from the University of Cape Town, South Africa and is a member of the South African Institute of Chartered Accountants.
Peter Tagliamonti (Vice President Operations & COO): Mr. Tagliamonti has worked with such mining companies as Falconbridge, Noranda, Newmont, Inco and Inmet. Mr. Tagliamonti has been based in Brazil for the past 6 years, where he has been responsible for major cost and productivity improvements and a large expansion program at the Sao Belo Mine. In addition, he is proficient in Portugese and French. Peter Tagliamonti is a graduate mining engineer and an Ontario registered Professional Engineer with 20 years of mining experience. A graduate of Laurentian University in Ontario, he also has an MBA from the Richard Ivey School of Business at the University of Western Ontario.
Bill Pearson (Vice President Exploration): Bill Pearson is an Economic geologist with over 28 years experience in the national and international mining industry. He received a B.Sc. in Geology Honours from UBC and M.Sc. and Ph.D. degrees from Queen's University. He has experience in all phases of mining from grassroots exploration through to advanced exploration, mine development and underground/open pit production in a wide variety of geological environments for precious metals, base metals and industrial minerals. Projects have been completed across Canada and in thirteen countries in South America, Europe, Australia and Africa.
Mike Hoffman (Vice President, Strategic Development): Mr. Hoffman is a registered Professional Engineer in Ontario with 25 years' experience in the mining industry. Following his graduation from Queens University with an Honours Bachelor of Science Degree in Mining Engineering, Mr. Hoffman worked for several major mining companies and mining consultants in North America, Central America, South America and Africa. Some of these include Rio Algom, MRDI, the BLM Service Group and Royal Oak Mines Inc. In his most recent position, Mr. Hoffman was Vice President, Projects for Goldcorp Inc, where he was responsible for expansion planning for Goldcorp's flagship Red Lake Mine in northern Ontario. Mr. Hoffman has been very active in several professional mining associations and technical organizations.
Ken Taylor (Director): A former member of Canada's Foreign Service, Mr. Taylor's experience have ranged from trade development in Gautemala and London to foreign aid matters in Pakistan to crisis management in Iran. He is a recipient of the United States Congressional Gold Medal and is an Officer of the Order of Canada. Currently Chancellor of Victoria University of Toronto, he serves as a Director on the Boards of Skylink Aviation Ltd., Devine Entertainment Corp., Jaffre Incorp., and Hydro One. He has previously worked as a Senior Vice President of Nabisco Brands/RJR Nabisco and has worked with Ottawa consulting firm, Global Public Affairs, counseling clients on issues of political risk, international marketing and strategic accommodation with Government.
Peter Bojtos (Director): Over his career Mr. Bojtos has visited and evaluated properties in about 80 countries and has been involved with operations in about 30 of them. He has carried out 17 significant corporate acquisitions, mergers or sales that involved 24 mines. Mr. Bojtos has participated in the development, building or reopening of 19 mines and has had a hand in the operation of 24 producing mines. He is a Professional Engineer and a graduate of University of Leicester, England.
Nancy E. McInerney-Lacombe (Director): Ms McInerney-Lacombe is a senior executive with close to 30 years of domestic and international experience in the financial sector. Ms McInerney-Lacombe's previous roles included Senior Vice President, Royal Bank of Canada; Director, Deposit Taking Institutions, The Office of the Superintendent of Financial Institutions; Financial Sector Specialist for the World Bank and consultant to the Central Bank of Trinidad & Tobago. Her educational background includes an MBA from The University of Western Ontario, Richard Ivy School of Business (1980).
The Company has initiated production at its Jacobina mine. The economics of the investment in the mine look very attractive, with further upside potential if existing resources are converted to reserve status.
The mine has produced substantial amounts of gold in the past, ameliorating the risks associated with new ventures and the normal operating risks relating to cost overruns, delays, etc. are cushioned by the price of gold which is well in excess of the price assumed for the Feasibility Study (US$ 350).
With a capable management team (Bruce Humphrey left his position as Chief Operating Officer at Goldcorp Inc. {market capital: US$ 6.4 billion}) and adequate funding in place, Desert Sun Mining offers investors a promising opportunity to participate in a business with strong cash flow potential and growth prospects.
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