Going For Mexican Gold
Scott Wright | Mar 01, 2015 03:35AM ET
Mexico’s massive precious-metals belts are some of the world’s finest. As global #1 in silver production they are obviously quite well known for the shiny-white metal. But these belts have also been flexing their gold muscles recently, placing Mexico among the world’s top-10 producers.
Mexico really has come a long way over the course of gold’s bull market. Back in 2003 there were actually 20 other countries producing more gold. But with prices trending higher after a long bear, this country’s favorable geology, generally-friendly geopolitics, and mild climate/physiography started attracting attention. And the exploration cycle that followed has yielded numerous discoveries.
The development of many of these discoveries has resulted in a greater than four-fold increase in production since 2003 to ~3m ounces annually. Major miners like Goldcorp Inc (NYSE:GG) and Agnico Eagle Mines Limited (NYSE:AEM) have built some big mines. Smaller miners the likes of Alamos Gold and Timmins Gold have also contributed several mines to the mix. And exploration companies like GoGold Resources are grooming the next generation of Mexican gold mines.
Despite a robust mining history that pre-dates the Spanish colonials, the modern-day miners are finding that the miners of yore had literally only scratched the surface. Mexico’s abundant high-grade surface deposits kept them busy over the centuries, but ultimately they didn’t have the knowledge, understanding, and technology to tackle the lower-grade ore or to go very deep to find the source deposits.
Today’s miners have had great success not only making fresh new discoveries, but using the historic workings as treasure maps to find quality deposits. And a treasure map is what GoGold used to zero in on its flagship gold deposit.
This asset is the Santa Gertrudis project located in northeastern Sonora, about 65km south of the Mexico-USA border. And it was historic mine workings that initially attracted the modern miners to the area back in the 1980s. These miners performed systematic exploration that identified several sedimentary-rock-hosted gold occurrences. And this led to a fantastic discovery that was eventually developed into a profitable mining operation.
Blast-from-the-past miners Phelps Dodge and Campbell Red Lake operated the Santa Gertrudis open-pit mine from 1991 to closure in 2000, over which time it produced an impressive 564k ounces. This deposit was far from depleted though upon shutdown, which was prompted by Campbell’s demise and ultimately bear-market-low metals prices. So really it would only be a matter of time before Santa Gertrudis got another look.
The first meaningful work occurred several years later, conducted by junior Animas Resources. And positive results from Animas’ field studies and drilling is what eventually captured GoGold’s attention. After due diligence and a bidding war with another potential suitor, GoGold was able to acquire Animas in a deal that closed in April 2014. And its work over the last year or so has been incredibly encouraging.
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Work completed by GoGold Resources Inc. (TO:GGD) includes an extensive data review, which incorporated assays from over 2500drill holes. It also created 3D models using 200,000+blast holes from dozens of pits on the property. And it performed confirmation and resource drilling of its own in order to feed an updated resource estimate and preliminary economic assessment.
This resource estimate showed Santa Gertrudis to be a high-quality million-ounce-pluscomplex of deposits, including 810k ounces in the indicated category and 255k ounces in the inferred category. These resources grade over 1.0 g/t, which is excellent for surface oxide ore. And since the majority of the ore is oxidized, it is amenable to heap leaching.
The PEA that was announced in September indeed outlined a conventional open-pit heap-leach operation to extract the ore, which would run at a rate of 7.5k metric tons per day. The pregnant solution from the cyanide leach would be fed into centrally-located carbon-in-leach and absorption-desorption-recovery plants for processing. And over a proposed 12-year mine life, Santa Gertrudis would produce an average of 56k ounces of gold per year.
And what’s really appealing about this prospective mine is its potential economics. It would only cost an estimated $32m to develop. And paying back this capital would be really quick with projected life-of-mine all-in sustaining costs of only $699/ounce. This allows for a staggering 58%after-tax internal rate of return at $1250 gold, and a still impressive 34% IRR at $1000 gold. Building this mine really is an economic no-brainer!
Santa Gertrudis also has huge upside potential with the mineralization in many of its resource zones still open in several directions. GoGold will however focus on mine development before throwing too much capital at exploration. And fortunately it has a managerial/technical team that is very adept at building mines.
CEO Terry Coughlan and Strategic Advisor Brad Langille had previously developed the Ocampo mine, one of Mexico’s largest gold/silver mines, while running Gammon Gold. And they hope to make a development decision at Santa Gertrudis by mid-year. If the decision is positive and permitting/financing fall into place in a timely manner, I suspect the Santa Gertrudis mine will pour its first gold in 2016.
Front running Santa Gertrudis’ highly-anticipated development decision is the ramping up of operations at GoGold’s fascinating Parral tailings project. Parral is located in the Chihuahua city of Hidalgo del Parral. And yes, this project literally resides in the city.
Hidalgo del Parral was founded as a mining town way back in the early 1600s. And centuries of successful silver mining grew it to become one of Chihuahua’s largest. Also large is a tailings pile from the region’s largest mine. And rather curiously, this pile resides near the center of the city. Needless to say this massive pile of rocks has grown to become a nuisance. And the city got creative in its effort to remove it.
Not surprisingly historical recoveries were low, leaving this pile with quite a bit of metals remaining. The city thus partnered with a mining company, GoGold Resources, to reprocess it. To do so GoGold built a heap-leach operation about 10km outside of the city, which just recently achieved commercial production. So not only does Hidalgo del Parral get its tailings pile relocated for free, it gets a 12% net-profits interest on whatever is recovered!
GoGold of course gets a sweet deal out of this too. After operating costs and paying out the city’s NPI, it gets whatever profits remain. And with silver cash costs expected to be in the range of $6/ounce, there should be some good profits on anticipated production of 1.2m ounces of silver and 11k ounces of gold per year.
The Parral tailings-recovery operation was originally expected to have a 12-year mining life. But it gained even more longevity with the recent addition of a second tailings pile (~1km away) that has resources of 9.1m ounces of silver and 49k ounces of gold, bringing the project total to 36m/263k ounces respectively.
GoGold was able to construct Parral 7% under budget, which shows its acumen in mine development and ultimately provides confidence in Santa Gertrudis’ capex estimate. And it will use Parral’s cash flow to help fund the development of its gold mine as well as to pay off some upcoming debt obligations.
Overall a newly-producing low-cost operation, a prospective low-cost development, and a strong exploration portfolio makes GoGold Resources a very attractive junior mining stock. It has performed very well since its 2010 IPO. And based on its recent price action, I suspect it’ll be one of the leaders when precious-metals prices recover.
Like all precious-metals companies, GGD’s fortunes are ultimately slaved to gold. Its profits and the value of its projects directly fluctuate with the price activity of the yellow metal. So naturally its stock (in blue) is generally going to respond to gold’s (in red) daily movements. And also as is the case for all precious-metals companies, GGD’s 4-year chart isn’t very pretty.
It’s been an incredibly tough season for PM-stock investors, there’s no sugar-coating it. But when the PMs finally run higher, these stocks will fly. And I want to be in on the companies with the highest probability for success. Fundamentals are of course the most important factor to a stock’s future. But when I consider buying one, I do like to take a look at its chart to see how it’s done in the past. And for a gold stock, how it’s responded to its underlying metal.
One way to evaluate a stock in a down environment is to see how it responds to spells of upward momentum. Since its 2011 all-time high, gold’s had five meaningful uplegs. And an initial glance at GGD’s leverage numbers (in yellow) are certainly cause for a head-scratcher. But as you’ll find, there’s more than meets the eye.
In gold’s first upleg in early 2012 GGD positively leveraged gold nearly 2 to 1, which is good but not great. I’d like to see at least 3 to 1, but interestingly GGD’s performance was pandemic of the sector. Gold stocks in general didn’t exhibit the outstanding positive leverage expected during this upleg.
In 2012’s second upleg GGD didn’t leverage gold at all. Normally this would be very concerning, but you’ll notice GGD’s flatline over the entire quarter leading up to and into the first part of that upleg. The reason for this flatline is the stock was halted due to its acquisition of the company that owned Parral.
At the time GGD was listed on the TSX Venture Exchange (it now lists on the larger Toronto Stock Exchange), and the TSXV requires trading in stocks of GGD’s tier level to be halted until the acquisition is accepted by the exchange. If GGD had been trading over that period, I suspect its stock would have fallen way lower along with the entire sector. It thus would have had a lower base going into upleg #2, which ultimately would have led to a much higher gain.
In upleg #3 in 2013 GGD again didn’t positively leverage gold much. This also would normally be very concerning given the big run most gold stocks had during this time. But again, there’s an explanation for GGD’s underperformance. First is it was right at the beginning of this upleg, in July, that GGD announced a major financing agreement to fund Parral’s construction. The markets never like financings.
Second, and perhaps more important, was GGD’s price action prior to this upleg. Provocatively from its upleg #2 high to the base where upleg #3 began, GGD onlyfell 41%. This is still painful, but far less so than the rest of the sector. Most junior gold stocks fell twice as hard over this period! It was a brutal soul-sucking stretch for investors as they watched their juniors lose in the neighborhood of 80%of their value. If you can believe it, GGD actually had relative strength amidst 2013’s epic blood bath.
In upleg #4 GGD was an all-star, gaining 88%to gold’s 16% (5.4x leverage). But in the latest upleg GGD has yet again seemingly underperformed the metal. Again this would normally be very concerning, but take a look at the trend channels over the last year or so. Unfortunately gold has trended lower on balance, hitting a new bear low in Q4. GGD on the other hand has moved countertrend to the metal en route to achieving a new multi-year high!
Putting these trend channels into perspective, from their late-2013 lows GGD is up a whopping 73%while gold is up only 1% to this week. If GGD can deliver this kind of strength in a very weak gold market, imagine what it can do when the metal gets some legs. GGD’s fundamentals are solid, and despite its mixed leverage in gold uplegs the chart shows that this stock is capable of great things.
The bottom line is GoGold Resources is going for gold in Mexico. Its excellent Santa Gertrudis project has one of the most attractive development profiles you’ll see anywhere. And when it pulls the trigger on construction, it should be able to fast-track to production.
In the meantime GoGold is working to ramp up and fine tune its fascinating tailings-recovery project. Once firing on all cylinders, its Parral operation will be a spectacular low-cost silver/gold producer that ought to provide solid cash flow even at lower metals prices. And judging by its performance, GGD is already a stock that investors fancy. It ought to soar once gold finally turns the corner.
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