Steppe Gold building Mongolia's premier precious metals group as it presses go on expansion plans

Building Mongolia's premier precious metals company Flagship mine already generating strong cashflow Has started Phase 2 expansion plans What Steppe Gold does: Mining is nothing new in Mongolia but it was not until the 1990s, and the transition of the country to a free-market democracy, that the industry was opened up to foreign investment. The famous Oyu Tolgoi property in the country, operated by London-listed major Rio Tinto (LON:RIO), is one of the largest copper and gold mines in the world, in which the Mongolian government also owns a 34% stake. The Mongolian economy is growing rapidly and the government knows that mining is a key to sustaining growth. The country's mineral riches are valued at between US$1 trillion and US$3 trillion across coal, copper and gold. Against this backdrop, Steppe Gold Ltd (TSE:STGO) (OTCMKTS:STPGF) (FRA:2J9) began producing gold at its flagship Altan Tsaagan Ovoo (ATO) mine in the country in March 2020. The ATO mine was built in just 14 months with under US$20million of capex and is now ramping up output. Steppe also has the Uudam Khundii (UK) gold project, which is an 80:20 joint venture between Steppe and the Bayankhongor provincial government. At ATO, Steppe is targeting annual production in 2021 and 2022 of between 50,000 and 60,000 ounces. It is also now bidding to expand production via a Phase 2 sulphide project, which will see it mine fresh rock ores to generate 150,000 ounces equivalent a year from 2023. How is it doing: It has been a busy 2021 for the miner so far. Steppe hit a key milestone at its ATO operation in February with the release of an updated resource estimate that nearly doubled the ounces in the deposit. According to the report, measured and indicated (M&I) resources increased to 41.6 million tons or 2.2 million ounces at an average grade of 1.7 grams per ton (g/t) gold equivalent ounces – 1.4 million gold ounces and 20.5 million silver ounces. That doubled the amount of resources represented at the ATO Gold Mine to 2.45 million ounces of gold equivalent, up from 1.2 million ounces in the previous resource statement. According to the company, the increase in the M&I resource was due primarily to significant expansion through drilling at the ATO 4 Deposit and incorporation of a maiden resource at the Mungu deposit. The ATO 4 Deposit, where mining recently started, shows an M&I resource of 15.7 million tons at 1.6 g/t for a total of 819,000 gold equivalent ounces, while the maiden resource at the Mungu discovery shows an M&I resource of 7.6 million tons at 1.7 g/t for 424,000 gold equivalent ounces. Then on March 24, the group said it had begun procuring major long lead items and was continuing talks on a multi-tranche project debt facility for its Phase 2 expansion project into fresh rock. The aim is to lift output from the ATO mine to 150,000 ounces of gold equivalent a year in 2023. The company said it had bought a new crushing plant from a leading international supplier for US$5 million, including its installation and construction, which has a capacity of 1,000 tonnes per hour (t/hr), more than three times' the current capacity. Construction of the foundation of the new plant is set to begin in early April this year, and it is scheduled to be operational by July. Alongside the procurement of capital items, the company said it was continuing discussions with Mongolian and international lenders on a multi-tranche project debt facility to finance this Phase 2 expansion, which is expected to include a grinding circuit, a leach/CIP plant, and a flotation circuit. Metallurgical testing is also progressing well with encouraging results and the bankable feasibility study is on track to be completed this summer, Steppe added. On the financial front, the company ended its third quarter to September 30, 2020, with cash flow of US$12.7 million and cash reserves of more than US$37 million.  Revenue for the quarter came in at US$19.4 million with All in Sustaining Costs (AISC) of US$794 per gold ounce sold, while adjusted EBITDA for the period was US$9.9 million. Inflection points: Crusher plant arrival and installation Completion of bankable feasibility and project financing for expansion at ATO Uplift in output from ATO What the broker says: Following the new crushing plant announcement, analysts at broker Stifel GMP said they took the news to be a "definite signal" that Steppe was moving forward with construction of the Phase 2 sulphide expansion at ATO. However, the analysts noted that the miner's current share price only reflects around 40% of the value that the broker sees for the deeper orebody. "The value of the sulphides is far from fully reflected in the stock price," said the broker, with shares trading at a spot price to net asset value (P/NAV) of just 0.50 times'. Looking forward to 2023-2025, the Stifel analysts said they expected the company to mint an average of $52 million per year in free cashflow (FCF), or 40% of the company’s current market capital. They repeated a 'Buy' rating on the stock and a C$4 price target, noting that Stifel continues to have Steppe Gold as one of its 'Top Picks'. What the boss says: In the statement on the Phase 2 expansion, Steppe's CEO Bataa Tumur-Ochir told investors: "We have prioritised the expansion of crushing capacity as it will also significantly accelerate stacking rates at the heap leach phase of the project and this is expected to support increased gold production in late 2021 and 2022. "We have also started design work to expand the camp capacity and plans are advancing for value-added power solutions. With a strong balance sheet and encouraging demand from lenders, we expect to accelerate capital works on our Phase 2 expansion through the second half of 2021 as we target fresh rock production of 150,000 ounces gold equivalent starting in 2023." Contact the author at giles@proactiveinvestors.com