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Millions
of years ago tectonic events created significant gold and silver
mineralization in the Guerrero Gold Belt in Mexico. Today, two gold companies
have reported 16 Moz of gold there, and other
discoveries are sure to follow. In this exclusive Gold Report
interview, Merrill McHenry, an independent analyst and geologist, explains
the region's geology and its hot prospects.
The Gold Report: Merrill,
speaking as a geologist, what makes the Guerrero Gold Belt in Mexico so
highly prospective for gold and silver mineralization?
Merrill McHenry: Two words: plate tectonics. Two
tectonic events in that area of sufficient scale to create an entire region
filled with gold mineralization.
In more detailed terms, the Chortis plate,
which was about the size of Colorado, impacted the western side of southern
Mexico. The first event, about 140 million years ago, created "laramide" north-south extensional faults. That was
followed, about 70 million years later, by a strike-slip to the southeast. As
the strike-slip slipped and subducted under the
southern portion—what is today Guerrero State—it rotated many of
those north-south transitional faults and shear zones into roughly 40-degree
and other angles, creating a chimney effect, which brought the
mineralization, in liquid form, much closer to the surface. In geological
terms, this is called a metasomatic transfer. The
strike-slip also created various low-angle extensional faulting allowing
laterally displaced mineralization and improving strike-length potential.
TGR: How does the creation and
mineralization of the Guerrero Gold Belt compare to the Carlin Trend in
Nevada?
MMcH: Both had
tectonic events that liquefied the subterranean minerals and resulted in
events that could transport the minerals to the surface. The Carlin Trend,
which is older, was formed underwater. On Carlin, hydrothermal channels were
created and bubbled up for long periods. In the Guerrero Gold Belt, the
minerals were liquefied and brought up as structurally controlled magmatic
events along various intrusive zones.
"Two
tectonic events in that area of sufficient scale to create an entire region
filled with gold mineralization."
Typically, economic mineralization is highest along these intrusion
zones. (The structural control is a key to creating and allowing for
higher-grade mineralization.) These systems are most fully developed either
at (e.g., El Limon-Guajes) or below (e.g., Los Filos-Bermejal) the contact of the local Mezcala formation (shales and
sandstones) with the underlying Morelos formation (carbonates).
In addition, the strike-slip and subduction
that created the Guerrero Gold Belt arguably covered a larger area. To date
the Carlin Trend is roughly 40–60 kilometers (km) long; mineralization
in the Guerrero Gold Belt has been found along a 60km-plus range.
Another difference is that the Carlin Trend has been mined and
prospected for well over 100 years, with the first large
mine—Carlin—opening nearly 50 years ago. The first major mine in
the Guerrero Gold Belt went into production in 2008 and most of the
exploration remains to be done. So far, two companies—Goldcorp Inc. (G:TSX;
GG:NYSE) and Torex
Gold Resources Inc. (TXG:TSX)—have
reported 16 million ounces (Moz) of NI 43-101 gold
resources in the Guerrero Gold Belt. I expect Newstrike
Capital Inc.'s (NES:TSX.V) Ana Paula
project will report near 3 Moz of
NI-43-101-compliant in-pit gold mineralization, and roughly 4.5 Moz in global resources, mostly to be included in
subsequent pits, by the end of 2012. Ana Paula has some breccia pipe areas of
spectacular grade and width.
TGR: What can you tell us about the kind of
precious metals deposits discovered in the Guerrero Gold Belt so far?
MMcH: Because it
is a long, intrusion-hosted system, much of the gold mineralization is at or
near the surface. You can find the intrusions—an orange-red oxidized
ore (retrograded calc-silicate skarn)—at
the surface. Gold mineralization in the district tends to be in the most
oxidized alkaline significantly reduced iron and magnesium host rock that
conversely hosts increasingly higher gold values.
Essentially, you want heavily magnetite/hematite (iron) initial fluid
flows, but later during the retrograde (cooling) phase, you want the
magnetite to precipitate out and become more oxidized Calc-alkaline
potasically altered and biotite
rich. That is where the highest gold mineralization occurs.
"So
far, two companies have reported 16 Moz of NI
43-101 gold resources in the Guerrero Gold Belt."
Gold occurs either in chlorine complexes or in a variety of high-sulfidation complexes that are stable at lower
temperatures, which tend to drop out at lower near-surface temperatures,
usually because of some event that changes the oxidation state. Therefore,
you can get multiple economic mineralization in the same hydrothermal
system—higher temperatures and less fluid mixing at depth giving you
gold, copper, and silver; and lower temps and magmatic/meteoric mixing as you
move higher in the system, giving you gold with much less silver and copper.
TGR: Is there a company working on one of
those polymetallic deposits?
MMcH: Torex is
working on the Media Luna project, to the south of the Balsas River, where
the mineralization tends to be deeper. To date, Media Luna is 300 to 600
meters deep and looks to be polymetallic, not
predominantly a gold project.
TGR: It is rare for a polymetallic
deposit to get developed at depth, given the expense of bringing the minerals
up.
MMcH: Yes.
Before Torex released its feasibility study, I had
moved it from a Buy to a Hold and changed the price target to $2/share. The
stock has hung in there around $1.90–1.95/share because it is a show-me
situation. Pending further Morelos gold project development, the market needs
to see that Media Luna has enough mineralization and thick intercepts that
can be accessed, ideally through an adit, to make
the project economically viable.
TGR: It was exploration of the Carlin that
led to the discovery of the Cortez Trend, where Barrick
Gold Corp. (ABX:TSX; ABX:NYSE) now operates its
massive Cortez gold mine. Have similar high-grade trends been found in the
Guerrero?
MMcH: Yes, that
is one of the Guerrero's calling cards. When it opens several years from now,
Torex's Morelos project, at 3.14 grams per ton
(g/t) Measured and Indicated, will be one of the highest-grade open-pit mines
in the world.
Newstrike's Ana Paula
project has some phenomenal drill results. To give you an idea, just one hole
at Ana Paula had 174m of 5.4 g/t gold that included a 76m interval of more
than 10.57 g/t gold and 15 g/t silver.
TGR: Are there advantages to mining the
Guerrero over the Carlin?
MMcH: Many
projects in the Carlin Trend are destroyed limestone—black rock formed
by the hot springs upwelling mineralization while deforming the host
rock—so you cannot distinguish what is gold mineralized. That makes
finding the ore bodies difficult visually; in most respects, you are drilling
blind without geophysical signatures other than the generalized trend to
guide you. The intrusion-hosted mineralization in the Guerrero tends to be
quite visible so you can see where you are likely to have potential gold
intercepts.
Also, a fair amount of the ore in the Carlin Trend is refractory ore
and a lot of that has to go through an autoclave. That process is expensive,
and a lot of the cost of an autoclave is capital expense, not processing.
TGR: Mexico is now on the list of the top
10 gold-producing countries. What are some mines that helped it crack that
list?
MMcH: Mexico
also had the fastest growth of any gold-producing country last year, and the
Guerrero had a lot to do with both accomplishments. Last year, Goldcorp's Los
Filos project produced 336,500 oz,
with cash costs roughly $463/oz. The company estimates production of 345,000 oz gold in 2012.
Mexico is a very fertile country for gold production. In central
Mexico, you have the volcanic trends for mineralization, which tend to be
vein swarms and silver-oriented projects. Then, you have the unique
mineralization of the Guerrero.
TGR: All of the mineralization created in
the past is good news, but present-day Mexico has its troubles. What
issues—security, nationalization, rising costs—might make Mexico
a riskier jurisdiction?
MMcH: Mexico had
its nationalization experiment with PEMEX, its national oil company. PEMEX
was a jobs machine, but its production growth has been flat to declining
because it is not operated efficiently or effectively.
"As
long as QE in is play and economies remain stagnant, gold will continue to do
well."
There can be security concerns when a project is just starting up. For
example, five trucks were stolen from Torex at
gunpoint last year. So, the company built its own security force. Other
companies have taken a different route. Number one, they employ a lot of
local Mexicans. Number two, they work on community relations, support the
community and fund social projects. Number three, they just lay low and try
not to attract attention.
TGR: What recent discoveries might add to
Mexico's gold and silver production?
MMcH: As I
mentioned, I expect Newstrike to have 3 Moz in pit resource by year-end. The most logical
efficient outcome is to tie Ana Paula in with Torex's
planned mill and use a conveyer belt to deliver it to Torex
for processing.
Bear in mind that Newstrike has the largest
land holding in the region. I believe it will have other successes. Newstrike has already extended and increased the width of
the high-grade breccia zone; it is currently pending an "in-pit" NI
43-101 resource. It also has land to the northwest and southwest of the Ana
Paula region, where I expect additional resources to be found.
TGR: Has Newstrike
done any metallurgical studies to determine the amount of recoverable gold?
MMcH: Yes, it is
expected to be in the mid-80s percentage range, similar to Torex.
TGR: Is either Torex
or Newstrike likely to be bought out?
MMcH: Richard Whittall, CEO of Newstrike, is
a very credible and capable operator who does things on a very conservative
basis. My take from him, and he has clarified this for the Street, is that Newstrike does not plan to develop Ana Paula.
TGR: Torex issued a
feasibility study on its Morelos project Oct. 1. What stood out to you in
that study?
MMcH: First,
the costs continued to increase in an environment where that does not go down
well. Notably, although necessary to grow and develop,
general and administrative costs per ton of expected production had roughly
tripled in three months to a level where I wonder if the final project tally
will rise excessively.
Second, when a company does financing and it is working on project
development, it is in a dead zone for catalysts. Most of what happens is
delays and cost increases in this period—unless the company can prove
up additional resources. In time, I believe it may. Until the company can
actually say, "We started the mill earlier than expected and at a lower
cost," it gets no credit in the market; it just gets skepticism.
TGR: Have you visited Morelos?
MMcH: Yes, it is
a great-looking project. The destroyed magnetite oxidized Calc-alkaline
potasically altered mineralization tends to host
very good mineralization. Torex will use an
innovative "RopeCon" conveyer belt system
developed by the Austrian firm Doppelmayr. RopeCon is an innovative, green derivation of ski lift
technology. It produces electricity as the weight of the ore going downhill
generates electricity, as well as saving on trucking and diesel costs.
One challenge is that because of the angles, the company will have to
relocate two small villages. Unfortunately, it will take time, in some ways
delaying project development.
Broadly speaking, Newstrike, Torex and Goldcorp have blazed a trail. The next exciting
thing will be juniors starting to drill on intrusive zones that are similar
to what you see on Torex or Goldcorp's projects.
These junior companies could really pop.
TGR: What are some of the early stage
discoveries that our readers might be unaware of?
MMcH: I am
extremely excited about Cayden
Resources Inc.'s (CYD:TSX.V) projects.
It is currently drilling on Magnetita East. The
company is fully funded and has more than $5 million (M) in the till.
Preliminary trench results on Magnetita have been
significant, such as 5m of 11.65 g/t.
Magnetita East has
northwest to southeast faulting structures, where intrusions come up and the
destroyed magnetite rock looks exactly the same as the rocks at Torex's project or at Los Filos.
Magnetita East has the rocks and the ground
sampling. It also has a rapid transition from magnetic to non-magnetic zones
in what is called RTP airborne magnetics, which can indicate destroyed
magnetization during the retrograde phase. That is when the rock basically
sucks in the gold when it drops out the iron. You can have gold
mineralization without that; but in the Guerrero, the highest gold grades
have a measure of replacement of iron during the retrograde (cooling) phase.
TGR: Speaking of Los Filos,
some of the waste rock Goldcorp has been dumping from Los Filos
has made its way onto Cayden's property. How will
that be resolved?
MMcH: In
addition to already having dumped waste ore there, Goldcorp wants to expand
its leach pads. Most likely, Goldcorp will have to buy the easternmost
portion of Cayden's property, given that Cayden can definitely say Goldcorp is violating the
integrity of Cayden's Morelos Sur portion of the
concession.
TGR: That could be an interesting story to
follow. Are there other early-stage discoveries that you want to talk about?
MMcH: I am
super-excited about Minaurum
Gold Inc. (MGG:TSX.V). Late
this year it will probably start drilling on its Vuelcos
del Destino project, just southeast of Goldcorp's
Los Filos project.
I visited Vuelcos and you can see the
intrusive zones as plain as day. The project also has large areas of intrusives and jasperite—hallmarks
of good prospectivity—complemented by
interesting airborne geophysics.
Vuelcos is a
high-impact, high-risk, high-reward situation. Minaurum
has only $7M or so in market cap, but it has about five projects now. I
expect the company will joint venture its Santa Marta project—a former
producing mine with significant copper mineralization at surface.
Minaurum's most
immediate way to unlock value is to drill Vuelcos
in the Guerrero. In my opinion, there is very likely gold there. The question
is how long a strike and how much gold. The surface and intriguing airborne
geophysics are great, but not definitive.
One of the best things you get with Minaurum
is board member Dave Jones, a noted geologist. He found Los Filos. To have his expertise guiding the drill program in
such a fertile region is a strong indicator that you are looking at some very
interesting projects that you would not normally find in a small-cap company.
TGR: Any other names to share?
MMcH: Oroco Resource Corp. (OCO:TSX.V) has a
small, 193-hectare project, the first mine discovered in the Guerrero. Its
questions are: Is it economic? Is it enough? I expect Oroco
will do some funding and drilling in the near term, so time will tell.
TGR: Developing the Guerrero will depend on
sustained high prices for gold and silver.
MMcH: Although
not necessarily any more dependent than other gold regions in the world. Keep
in mind Mexico has the lowest cash costs of any country, $325 versus $649
world average, according to Thomson Reuters.
TGR: What market signals do you think point
to higher gold prices over the long term?
MMcH: Both the
U.S. and the EU have been printing money and doing quantitative easing (QE).
As long as QE is in play and economies remain stagnant, gold will continue to
do well. If you lag global money supply by three to six months, you see a
significant correlation with the gold price. Recently a World Gold Council
study indicated a U.S. money supply to gold correlation of 90%.
I would also point out though that Q4 has the strongest by far gold seasonal
of the year, finishing strong after typically having an October correction.
Though rallies may be capital markets constrained, I would think from now
until the end of the year the wind is at your back for gold exploration and
gold development companies.
TGR: What wisdom can you offer our readers
when it comes to playing precious metals companies?
MMcH: The more
exploration companies you have, the more diversified your portfolio should be
because there is no second guessing what is underground until the company
actually drills.
That diversification can be within one company. Minaurum,
for instance, has multiple projects, any of which could hit. Cayden is in the thick of it with several projects on Magnetita. Oroco is a two-trick
pony.
TGR: Merrill, thank you for your time and
insights.
Merrill W.
McHenry, MBA, CFA, has been in the investment
business for over 28 years. Early in his career, as a portfolio manager he
managed over US$1.5 billion in three U.S. mutual funds, and set up an
international mining merchant bank visiting mine project sites on multiple
continents. As a mining analyst, he has worked both the buy and the sell
sides, providing research for Tier 1 and Tier 2 Investment Dealers, as well
as prominent global investors. A couple years ago, he led special projects
modeling at BMO Capital Markets for the Global Mining Research Group that was
top ranked in Canada by Brendan Wood during his tenure. Currently McHenry is
a private mine industry consultant and is a member of the CFA Institute and
the Toronto Society of Financial Analysts.
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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He
personally and/or his family own shares of the following companies mentioned
in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: Goldcorp Inc. and Newstrike
Capital Inc. Streetwise Reports does not accept
stock in exchange for services. Interviews are edited for clarity.
3) Merrill McHenry: I personally and/or my family own shares of the following
companies mentioned in this interview: Cayden
Resources Inc. and Minaurum Gold Inc. I personally
and/or my family am paid by the following companies
mentioned in this interview: None. I was not paid by Streetwise Reports for
participating in this interview.
Companies Mentioned : Cayden Resources Inc. : Goldcorp Inc. : Minaurum Gold Inc. : Newstrike Capital Inc. : Oroco Resource Corp. : Torex Gold
Resources Inc.
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