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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 and Agnico Eagle 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.
Work completed by GoGold includes an extensive data review, which
incorporated assays from over 2500 drill 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-plus
complex 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 only fell 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.
Overall GoGold Resources is part of an elite group of high-quality
high-potential junior gold stocks that are poised to rocket higher when gold
finally mean reverts. And with the ongoing cyclical gold bear doing
extensive damage to the gold industry’s exploration pipeline, when this
happens these companies will be in high demand by both investors and the
larger mining companies seeking to bolster their portfolios.
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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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