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How a new strategy put Stratex International on the road to production

02 October 2009

Bob Foster has got a habit of finding gold. As the chief executive of AIM listed exploration group Stratex International plc he is behind a string of discoveries in Turkey that have attracted the attention of some big-name mining players.

Since bringing the company to market five years ago, Foster and Stratex chairman David Hall have made a play on their geological expertise. But like many of their exploration compatriots, market volatility and junior mining malaise caught up with them last year.

Stratex International's CEO, Dr Bob Foster

In response, the team turned their attention towards making sure at least some of their discoveries actually make in into production. It was a strategy change that transformed a once fragile market presence into a stronger, more confident and altogether more attractive proposition.

With continued support from founding shareholder Teck Resources, a production deal with a strong local partner in Turkey and the backing of mining giant Centerra Gold on another of its projects, Stratex is looking increasingly well balanced. But with production deals starting to flow, the company isn’t shying away from its exploration roots. Indeed, an agreement with Plus-listed Sheba Exploration has recently opened up new horizons in Ethiopia.

It’s all a far cry from Foster’s years as a PhD student working in the gold mines of Rhodesia. His commitment to the science of exploration later saw him lead a research group of students from Southampton University before finally succumbing to front-line industry action.

“I always saw the value of applying good science to the industry and, vice versa, being able to recognise what the problems are in industry,” he said. “Half the problem in the first place is in identifying what needs to be done, and then applying the science.”

Turkish delight

It was the coming together of Foster and Hall in 2004 that marked the start of Stratex’s first exploration remit. Hall, a friend of the vice president of exploration of Teck, laid the foundation of a relationship that has blossomed despite the notorious vagaries of large mining corporations.

“Like a lot of mining groups, Teck was looking to develop good working relationships with junior companies which could move quickly and get out and find things without being tied too much to the corporate structure of a major company,” Foster said.

“The Teck people said that as long as we could raise some money to get the work done, they would put a project in front of us. They were active in Turkey and David and I knew Turkey was potentially a good place to be because of its geological setting. There had been some gold deposits found and we knew there were more to find. Since then we have got a good manager in the form of Bahri Yildiz and we have just kept moving.”

In the two years after Stratex’s 5p per share IPO, the company announced a collection of discoveries on its land holdings at Inlice, Altintepe and Konya. They were enough to force the share price as high as 12p and opened the door to a £7 million share placing in June 2007. Despite another gold discovery at Öksüt in mid-2008, the market nose-dive which followed left many explorers, including Stratex, looking increasingly exposed.

“We’d had some good discoveries in Turkey and we were flying,” Foster said. “But what we realised was that we needed to get a focus and instead of coasting on good discoveries we had to make sure that some of the resources we were finding would actually be put into production.”

In particular, the company was looking for a way to capitalise on the discoveries at Inlice and Altintepe, where there were known resources of 100,000 ounces and 450,000 ounces of gold respectively. What followed was an aborted deal with Australian small cap miner Syrah Resources, which eventually gave way to a provisional agreement with diversified Turkish engineering group NTF Insaat Ticaret.

“We knew the resources were not really going to attract a major company, but there are a number of groups in Turkey that would like to move into gold mining,” Foster said. “NTF were by far and away the best. They are a major earth moving company, so they have got the fleet, they have got a mining team devoted to damn construction and ground clearance and they are contract coal miners as well, so there is a lot of expertise and a lot of focus.”

NTF has already paid Stratex a $1m introducer fee and is funding $50,000 per month to develop Inlice and Altintepe ahead of a formal deal.

Stratex received similar interest in its discovery at Öksüt, which could promise even bigger rewards. Canadian mining giant Centerra Gold has picked up the tab there, injecting $0.5m as a commitment and promising to spend $2.5m for 50% and up to $6m for 70% if the project turns out to be as good as Stratex thinks it is.

“That deal took the risk out of the Öksüt project entirely,” Foster said. “The only risk now is that it turns out to be a really major deposit and we have only got 30% of it. If the drilling doesn’t firm up any more, Centerra can walk away but we will be able to spin the project into the JV with NTF. So it is a win/win in many ways.”

More recently, the company has agreed a similar deal with Teck over another discovery at Hasançelebi, which will see the Canadian group fund $2m to acquire a 51% stake in the project by the end of 2012.

That latest agreement comes just over month after Teck reined back its interest on other projects it shares with Stratex – a decision that Foster says was “undoubtedly a good thing”. Not only did it free Stratex to bring in new partners on some of those projects without the risk of Teck earning back in, but it also saw Teck increase its holding in the company. The move was also the precursor to Centerra’s agreement to start funding work at Öksüt. “Teck is still a 14% shareholder in Stratex and that keeps them a step ahead of anyone that might want to buy us out in the future,” Foster said.

Production plan

The frenzy of activity that was sparked by Stratex’s decision to push some of its projects into production has also given the company confidence to pursue new lines of exploration. With cash in the bank, the company moved to pay a small fee for a stake in Sheba Exploration in September.

That decision drives Stratex into Ethiopia, where relative political stability in recent times has attracted a string of other mining operators looking to capitalise on another geological gem. “It’s a low cost entry for us on a 60/40 deal on one of their better projects and in the meantime we are looking elsewhere in the country,” Foster said.

More immediately, he is relishing the prospect of becoming a miner. The comparatively small Inlice project could be in production very quickly, with plans then to get Altintepe – the larger but more straightforward project – underway within three years. At that stage, projects like Öksüt will also be in the frame.

“We intend to be a significant gold producer in Turkey in four to five years time with our partners,” Foster said. “I think all of us now realise the rationale for changing the strategy. We had this view for a while, but the recent downturn has got us focused and accelerated our intent. I’m very excited.”

Ben Hobson, SmallCapNews.co.uk