The Controversy Surrounding Continental Gold Inc. (TSX:CNL) Worsens

There are growing fears that Continental Gold Inc. (TSX:CNL) may never successfully commence commercial production.

| More on:
Bad apple with good apples

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Gold miner Continental Gold (TSX:CNL) has been mired in controversy since three of its employees were murdered in September 2018, leading to media claims that management was derelict in caring for their well-being. This — along with an armed attack on two engineers near its flagship Buritica project, changes to financial projections, including projected operating costs and the need for an additional US$100 million to complete the mine — has weighed heavily on its stock. There are also concerns that mine completion and commissioning will be delayed.

The disquiet created by these and other incidents have caused the market to heavily mark down Continental Gold’s stock; it’s lost 38% over the last year, despite gold declining by roughly 1%.

Will mine completion be delayed?

The attacks on the miner’s employees in 2018 only served to heighten fears that the development of Buritica would be disrupted, causing cost blowouts and delaying the mine’s commissioning. Based on the latest investor presentation, many key developmental milestones, including engineering as well as plant construction and infrastructure development, have been extended. Continental Gold has left the schedule for the first gold pour and start of commercial operations unchanged; those events will occur during the first and second halves of 2020, respectively.

It is difficult to believe the extension of such critical objectives, such as the completion of engineering work and the construction of key plant infrastructure, will not impact the commencement of operations. It is feasible to expect delays in the commissioning of the mine.

Nonetheless, engineering work is 94% complete, and underground development is at 55%, indicating that, unless there are major disruptions, those milestones can be achieved. The extension of those deadlines, like the up to US$126 million increase in the capital required to complete construction, relate primarily to meeting stricter government regulations and increased contingency costs rather than major cost blowouts or delays.

These appear unlikely to have any lasting material impact on the Buritica project. The backing of senior gold miner Newmont Mining, which acquired an almost 20% interest in Continental Gold for US$109 million, further mitigates this risk.

Operating costs are higher

Another crucial concern is that projected all-in sustaining costs (AISCs) for Buritica have risen from US$492 per gold ounce produced to around US$600. While that is a disappointing outcome, reducing the mine’s profitability, they are still among the lowest AISCs in the industry; such alterations are common when developing a gold mine. The notable ore grade of 8.4 grams of gold per tonne of ore means that AISCs could fall once commercial operations commence and are bedded down.

Heightened geopolitical risk

A deteriorating internal security situation within Colombia and its ability to disrupt construction as well as mine operations is certainly a cause for significant concern, especially given the state’s long battle against leftist rebels and narcotrafficking. The volume of FARC dissidents to emerge from the 2016 peace process, which brought what was arguably the world’s longest-running civil war to a close, has caught many, including the Colombian government and state security forces, off guard.

The tragic incident that occurred within the boundaries of Continental Gold’s Berlin property, according to local authorities, was an exception and not indicative of an overall breakdown in law and order. It also did not affect activities at Buritica, which is located a considerable distance to the south of Berlin. The occurrence of such incidents in Colombia has decreased significantly over the last two decades because of the drug cartels being dismantled and, more recently, the demobilization of FARC.

Bogota has also aggressively extended its degree of control within the Andean nation. In fact, by 2015 the volume of murders in Colombia had fallen to a multi-decade low. After that and similar events in eastern and southern Colombia, which were attributed to FARC dissidents, along with ongoing attacks on oil infrastructure by the last remaining leftist rebels, the ELN, President Duque has stepped up security efforts.

Is it time to buy Continental Gold?

The raft of bad news regarding Continental Gold has done little to instill confidence in a risky junior miner already weighed down by the adverse publicity associated with Chief Executive Ari Sussman, who was involved in the failed and controversial Colossus Minerals venture. While these events have triggered considerable uncertainty, Continental Gold’s fundamentals remain intact. It provides investors the opportunity to access potential oversized returns by investing in one of the largest high-grade gold ore bodies currently under development globally. The sharp decline in the miner’s stock provides a handy entry point into a highly levered play on higher gold.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any of the stocks mentioned.

More on Metals and Mining Stocks

gold stocks gold mining
Metals and Mining Stocks

Agnico Eagle Mines: The Best Gold Stock of the Batch Right Now?

Agnico Eagle Mines (TSX:AEM)(NYSE:AEM) stock looks cheap ahead of a potential relief rally in the price of various precious metals,…

Read more »

TSX Today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Tuesday, August 9

The ongoing corporate earnings season and the U.S. Energy Information Administration’s latest short-term energy outlook report could keep TSX stocks…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Dividend Stocks

These 3 TSX Stocks Have Doubled Over 3 Years: Can They Do It Again?

Three TSX stocks whose share prices have doubled in three years are well-positioned to repeat history and reward investors with…

Read more »

TSX Today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Monday, August 8

Continued strength in metals prices could help mining stocks on the TSX open slightly higher today.

Read more »

Gold bars
Metals and Mining Stocks

This Imploded Gold Stock Has a Shining Dividend!

Barrick Gold (TSX:ABX)(NYSE:GOLD) is down around 50% from its high, making it a top contrarian pick for those lacking precious…

Read more »

question marks written reminders tickets
Metals and Mining Stocks

Nutrien (TSX:NTR) Stock: Should You Buy Now?

Nutrien just reported record results for the first half of 2022. Is the stock undervalued after the recent selloff?

Read more »

A tractor harvests lentils.
Metals and Mining Stocks

Nutrien (TSX:NTR): All You Need to Know About its Q2 2022 Earnings

NTR stock has been up nearly 15% this year but has dropped 30% since April.

Read more »

Super sized rock trucks take a load of platinum rich rock into the crusher.
Metals and Mining Stocks

Why Is Barrick Gold (TSX:ABX) Stock Down 40% in 5 Months?  

The gold price is falling, even though inflation has peaked at a 40-year high. Is it a good time to…

Read more »