Open-pit heap leach mining goes back hundreds of years, but it has seen resurgence thanks to attractive metals prices and updated technologies that allow for the profitable processing of previously mined and once economically unfeasible deposits.
Despite its historically poor image, updated heap leaching processes offer today's mining companies several advantages: It takes relatively low capital costs to bring a mine on-line quickly; it can capitalize on low-grade ores; it often allows for a smaller facility footprint that reduces energy, transportation and environmental reclamation costs; the various chemicals used throughout the process are increasingly recyclable, leaving less waste and lowering consumption costs; and, better pad designs and liners are reducing costly leakages and ground contamination issues.
To little surprise then, mining companies are using heap leaching as a vital processing component at some of the world's most profitable mines and particularly in the mining-friendly country of Mexico. Goldcorp's (GG) Los Filos mine and Agnico-Eagle Mines Limited's (AEM) Pinos Altos mine have been cash machines, and smaller companies like Argonaut Gold Inc. (OTCPK:ARNGF), Alamos Gold Inc. (AGI), Timmins Gold Corp. (TGD), and McEwen Mining (MUX) are also finding success with low-cost open-pit heap leach mines.
A little over a year ago I had the opportunity to tour McEwen Mining's El Gallo Complex in Sinaloa, Mexico. Upon my return I wrote "McEwen Mining: A Gold Growth Play," sharing the details of the trip and the aggressive growth story they had outlined for the years ahead. Unfortunately, as anyone following the company knows, those plans didn't quite pan out thanks to declining metals prices and political unrest in Argentina that has left the company's massive minerals-rich Los Azules property unsold (NPV $3 Billion).
But the news at McEwen Mining isn't all bad. In fact, it's quite positive now that their targeted low-cost growth strategy that includes substantial use of open-pit heap leach facilities is finally paying off.
In Q3 2013, McEwen Mining finally turned a profit of $3.3 million or $0.01 per share, on then record gold production of 36,494 ounces. Total cash costs and all-in sustaining costs were $749 and $1,081 per gold equivalent ounce, 7% lower than Q3 2012 and in line with the previous quarter. While Q4 2013 financials aren't out yet (expected in March), Q4 2013 saw gold production rise again to a new record of 37,167 ounces. Assuming costs remained in line, Q4 should prove to be another profitable quarter. For the full-year, McEwen Mining produced 139,455 gold equivalent ounces (79,158 gold oz. and 3,135,467 silver oz.), an approximate 33% increase over 2012 results.
Production for 2014 is currently forecast to roughly match 2013 results, but there are opportunities to expand production. McEwen Mining President Ian Ball has said that both San Jose (Argentina, 49% share) and El Gallo (Mexico, 100% share) have excess capacity that they're looking to utilize, and although Q3 and Q4 were record quarters, there is ample opportunity to do better. An expansion of El Gallo 1 is underway and should be wrapping up by the end of this quarter at a lower cost than originally estimated ($3 million v. $5 million), and the San Jose mine is seeing grades picking up, costs coming down, and the Argentinian Peso declining bodes well for lowering all-in costs.
Current combined 2014 all-in sustaining costs are estimated at $1,100-$1,200 per gold eq. oz., but I suspect continued cost-cutting, favorable exchange rates, and increasing production and grades will see actual costs fall. At current prices, although margins will be tight, McEwen Mining should remain profitable, and 2014 may show earnings surprises if metals can sustain support and move up from their current levels.
Another positive highlight for McEwen Mining is that they haven't had to halt their exploration activities thanks to their $32.6 million treasury (as of September 30, 2013) and zero debt. Quoting Ball, "We feel the one way you can accelerate your growth is through exploration. In Mexico we've been finding new veins south of the mine and we see this really adding a number of years to the mine life at El Gallo 1…. Around El Gallo 2 we've been finding new discoveries around that deposit which we think will extend the reserve life beyond seven years." Of course, exploration also continues across their properties in Argentina and Nevada.
Despite the setbacks and headwinds, McEwen Mining is forging ahead, expanding its low-cost heap leach production facility and finding profitability with the assets it has while demonstrating increased fiscal responsibility-a rare trait in this industry. "We're not going to build for the sake of growth, the rates of return have to be there," Ball stresses.
Another thing to look out for is mergers and acquisitions ramping up across the industry. Chairman and Chief Owner Rob McEwen has said that "In addition to executing on our organic growth plans, we continue to analyze M&A opportunities. Our ideal candidate would significantly increase our production, lower our cost profile, and have cash and free cash flow to facilitate the construction of El Gallo 2."
This attitude is echoed by Lawrence Roulston, geologist, engineer, and editor and publisher of the Resource Opportunities financial newsletter. In a recent interview with The Gold Report, Roulston said, "We are in a hunter's market. Companies with good management and cash in hand are going to be making some very value accretive acquisitions in the very near term…. The focus now is on companies that are adding shareholder value aside from moves in the metal prices."
Roulston points to True Gold Mining Inc. (OTCQX:RVREF) as being a prime acquisition target. "The company has a great asset with near-term production potential and a very strong management team that raises money. Its stock is trading at a very low value. True Gold is precisely the kind of company that will be sought after by people in the know," he says. "On the other hand, True Gold is determined to build a mine on its own." Later on in the interview Roulston also reminds us that "First Majestic (AG) and Endeavour (EXK) achieved fantastic success by developing past-producing silver mines and then bringing subsequent mines on with a strong operating team."
These themes bring to mind a newer name nearing production in Mexico with another low-cost, open-pit heap leach mine that's commencing operations in exactly that fashion-Marlin Gold Mining Ltd. (OTCQX:MLNGF). On the surface, this looks like any another penny-pinched junior, but if you drill a little deeper, there's more to Marlin Gold's story, and it resonates well with what Roulston and McEwen are preaching.
Marlin Gold spawned from the aggressive takeover of Oro Mining Ltd. by Wexford Capital LP, a Greenwich, Conn.-based private equity firm and hedge fund manager. Highlighting Wexford's track record is a number of successful oil companies that they've built, restructured, sold, or taken public, like Diamondback Energy Inc. (FANG) and EPL Oil & Gas Inc. (EPL). Now Wexford is looking to build its own gold mine.
Seeing opportunity in the depressed sector, Wexford acquired its majority ownership through a private placement, open market purchases, and a tender offer to take up any and all common shares at $0.11 per share. The firm then proceeded to take over the reins by appointing a new Board, renaming the company, and placing a highly experienced and proven management team at the helm with the top priority being to advance the La Trinidad Gold Project towards production, which is also located in the mining-friendly State of Sinaloa, Mexico. Sinaloa is a great place to be for low-cost, government-encouraged and community-supported precious metals mining.
Marlin Gold is currently focusing its efforts on its property's gold-rich Taunus deposit. As of January 2014, the La Trinidad mine construction is materially complete and below budget. Marlin Gold is also well funded with cash on hand that should cover all remaining pre-production budgets. Majority shareholder, Wexford, also has the ability to fund ongoing mine development, exploration and acquisitions if strategically beneficial.
Additionally, a mobile crushing and screening plant was installed in December to reprocess the "old" leach pad material that will be the first material leached to give an initial boost to cash flows-the first gold pour is expected in Q1 2014. As for the "real" new production, the Taunus deposit's Preliminary Economic Assessment [PEA] forecasts production of around 196,900 ounces of gold over a 5-year mine life at a cash cost of $753/oz. Marlin Gold is projecting an approximate 2.5-year payback period followed by accelerating free cash flow in years 3, 4 and 5 driven by increasing gold grades at depth.
Marlin Gold's management team is also optimistic that the modeled pit shell will be expanded with further exploration drilling on and around its 118,509 contiguous hectares of exploration property in Sinaloa. On a side note, Marlin Gold also 100% owns 2,900 hectares of exploration property in Zacatecas, Mexico showing intriguing gold and silver veins, and a PEA is in process along with MIA permitting (corporate presentation).
If Wexford's track record proves right, Marlin Gold is going to be a good catch as it matures. Generally, one of the better times to build a position is just before production begins; with metals prices showing signs of stabilizing and interest in miners starting to perk up again, this may be the right time to start dipping a toe in the water if you're looking to speculate.
If you're looking for a more advanced junior miner that's still in its early growth stages, I still think McEwen Mining is an attractive candidate to explore; production is ramping up and showing profitability, and the share price has rallied from recent lows and is exhibiting signs of support.
As Roulston says, "The message for the non-crybabies is that the resource market is notoriously cyclical and it makes a whole lot of sense to come in at the bottom of the cycle. Evidence is mounting that we are close enough to the bottom of the gold cycle and the resource market cycle that this is a good time to acquire shares in the best quality junior companies."
Sure, you can look at the PHLX Gold/Silver Index (XUA) and NYSE Arca Gold BUGS Index (HUI) and bullion prices at your local dealer and see that the last two-and-a-half years have been brutal. It's anyone's guess as to where we go from here, but in recent months we've seen a rise in the indexes, there are signs that miners are finding funding sources, and M&A activity is building. In the long-run, I still believe investing in promising miners will yield heaps of returns to those who remain convicted to investing in well-managed and capitalized firms. Of course, the volatility also presents plenty of opportunities to actively trade long and short.
"Mining has traditionally delivered a lot of wealth to investors; it has been a volatile time for the whole industry, metal prices obviously have been trending down… but it's not going to stay this way forever," says Ball. "For the companies that are delivering on their stated goals, that are growing, that are expanding their margins… there's going to be opportunity for investors to make money in this industry once again."
Disclosure: I am long MUX, TGD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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