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In August I suggested that investors consider taking a position in GoGold Resources (OTC:GLGDF). I argued that the shares offered a compelling speculative opportunity with a lot of upside potential and limited downside risk.
At the time GoGold had two primary properties. The first -- Parral Tailings -- was a low-cost silver/gold project in development that had just received its final permits. Initial capex costs were extremely low and the company had already found financing. Initial production at 1.8 million silver equivalent ounces at $6.50/ounce cash costs was, and still is, slated to begin in May.
This in itself didn't justify taking a position in GoGold Resources. What I found to be so compelling was the potential value of the San Diego project. The San Diego project is a huge -- 70,000 hectare -- land mass with several instances of promising drill results that suggest that it could contain several mines and perhaps be in itself several times more valuable than GoGold's current valuation. The cash flow from the Parral Tailings could be used to bring this value out. While there is no guarantee that San Diego contains a valuable mine the possibility seemed to me to justify taking a stake in the company's shares.
In this article I revisit the company after a key development, which I believe to be transformational. On December 4th GoGold finalized its acquisition of the Santa Gertrudis property from Animas Resources (OTC:ANIMF). This is not merely a case of bottom fishing for cheap gold-bearing properties, although this is certainly one praiseworthy aspect of the deal. What I find to be transformational is that Santa Gertrudis has become a top priority -- management intends to come out with a feasibility study by the middle of 2014 and to restart production at the property's past-producing sites as soon as possible.
This means that my initial investment thesis needs to be re-evaluated. The company no longer intends to focus on exploring and developing the large San Diego project using cash flow from the smaller Parral Tailings project. Rather, it is taking a page from Santacruz Silver Mining's (OTC:SZSMF) play-book: i.e. management wants to focus on smaller projects with minimal start-up costs in order to generate cash flow. It is worth citing my assessment of Santacruz's strategy here:
Santacruz Silver Mining offers investors a unique opportunity to participate in the highly speculative endeavor of mineral exploration without having to endure the high costs of external funding. Thus there will not be large secondary offerings from the company, nor will it enter into punitive royalty agreements or partnerships that severely limit the upside potential that can be realized from mineral exploration. Furthermore there will be some cash flow that will cushion the downside should the company fail to find any additional resources.
Investors who saw this appeal in Santacruz shares should also take interest in GoGold Resources, as I hope to make clear below.
I will first analyze the Santa Gertrudis deal.
Santa Gertrudis
GoGold purchased the Santa Gertrudis project from Animas for $5 million plus some other benefits. The specifics are as follows:
- $250,000 due at signing
- $4,750,000 due at closing
- Animas retains a 3% NSR royalty on all gold and silver mined at Santa Gertrudis, and a 2% NSR royalty on all other metals.
- GoGold owes Animas $250,000/year for four years from 2017-2020 in advance royalties if Santa Gertrudis isn't producing.
A brief look at the company's finances reveals that GoGold is in a position to invest $5 million. As of the last financial report in June the company had $15 million in cash/working capital. It also recently received $35 million in financing for the development of its Parral Tailings project, which should cost $35 million in initial capex expenses. Seeing that the company's recent cash-burn rate has been about $1 million/month it should have just enough capital to operate until Parral Tailings goes into production in May, keeping in mind that the feasibility study will likely cost the company a few million dollars.
The Santa Gertrudis property itself is a large land package in Sonora, Mexico.
It has a history of production: from 1991 until 2000 roughly 565,000 ounces of gold were produced here by former mining companies Phelps Dodge and Campbell. Production stopped because of low gold prices.
This observation is very promising, as it implies that production could have continued at higher prices, which we have today ($1,200/ounce vs. $300/ounce). In fact the property contains several regions that have NI 43-101 compliant resources at relatively high grades for a surface mine.
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From these tables and the map we see that Santa Gertrudis contains several regions with small defined deposits that are relatively high grade for surface mining. The fact that they are small means that development should be inexpensive and quick. The fact that there is infrastructure already in place from past mining further supports this projection.
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Furthermore, the high grade of the deposits, even using a fairly low cut-off grade of 0.3 grams/tonne, suggests that there is a fairly high probability that this gold can be mined economically. And since GoGold paid so little for the entire property it is likely that the investment will pay off even if only a small handful of the regions with defined gold resources can be mined.
Additionally there is exploration potential here. The property is huge at over 5,500 hectares. Preliminary findings indicate that there are several zones with enough gold in order to merit further exploration.
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While this doesn't imply anything in terms of signaling actual mineable resources, it does suggest that there is a distinct possibility that one or more potential mines exist here beyond the aforementioned inferred resources.
All of these points lead to the conclusion that there is an excellent possibility that GoGold Resources will be able to generate profits from Santa Gertrudis that exceed the minimal initial layout of $5 million.
To summarize:
- Capex should be low
- Development should be quick
- Mining should be profitable
- Exploration opportunities are plentiful
Bear in mind that there is no guarantee of any of this -- probability is in play here and we won't know any of this for sure until next year when the company comes out with its feasibility study. But at the same time in the worst case scenario -- i.e. the property is worthless -- the loss is limited to $5 million now, an additional million in the future, and the cost of conducting the feasibility study. In all this shouldn't exceed $15 million at worst. And even if this is the case the feasibility study should find gold deposits that can be mined profitably at a higher gold price. At best, as previously suggested, the company can find a significant deposit, and given its current market capitalization of just $117 million such a discovery can add multiples to the valuation.
To close my discussion of the Santa Gertrudis property I want to emphasize that while there is no guarantee that it has significant value GoGold Resources paid a small price for what could be an extremely valuable property. GoGold Resources identified a financially stressed competitor and took advantage of a situation where a company with a $0.03 share price and a market capitalization below $5 million needed to either punitively dilute shareholders or go bankrupt. I appreciate management's initiative and assertive strategy in such a depressed environment for precious metals. While the gamble may not pay off, it was a gamble made when there was proverbial "blood in the streets," and the reward can potentially change the company's fortunes.
The "New" GoGold Resources
The Santa Gertrudis acquisition is more than a calculated gamble with a potential payout that dwarfs the risk taken. It changes the company's strategy. As I argued in my first article GoGold Resources seemed to be a company on the verge of producing on a small scale, which would have provided cash flow to explore the San Diego property, which has no defined resources but which has preliminary drill holes that show a lot of potential.
In the above-cited press release announcing the Santa Gertrudis acquisition management asserts its intention to expedite a feasibility study. Given that we have established the high likelihood that the development of any of the small mines on Santa Gertrudis will take very little time, it appears that the San Diego project has been put on the back burner... at least for now.
It appears as if the acquisition has engendered a change in strategy to that which is implied in the following statement from this press release: "The Santa Gertrudis mine fits GoGold's vision to add projects with potentially low start-up costs and a fast track to production."
Thus, presuming that the feasibility study yields positive results, the cash flow from the Parral Tailings mine -- which I estimated to be about $9 million annually in my previous article at $20/ounce silver -- will go towards the development of the most promising zone(s) found on Santa Gertrudis. Once this development is complete management can devote more time and capital to San Diego with cash flow from two sources.
Given my enthusiasm for the potential at San Diego it is somewhat disappointing to watch this property gather dust for another year or two. The potential for a large discovery that was the basis for the speculation thesis in my first article has been postponed. However the implicit strategy I outline above makes sense. Santa Gertrudis has a higher probability of success than San Diego seeing that it contains inferred resources and given its history of production. Furthermore it would take more time and capital to bring out value at San Diego given that management needs to drill more, and then it needs to define a resource before it can perform a feasibility study.
Conclusion
Since there is no guarantee that Santa Gertrudis can be mined profitably, and since the Parral Tailings mine is too small to justify GoGold's current valuation alone, I still think GoGold resources is speculative. However the downside risk is limited given the upcoming cash flow from Parral Tailings, while the company now has two enormous properties exceeding 12,000 hectares on which to explore and develop mines, which leads me to believe that the upside potential is even greater than it was before. Furthermore the recent acquisition means that there is a greater chance that the company's cash flow will be greater than it would have been in the next 2-3 years, which can further cushions the downside risk and increase the company's leverage to precious metals prices.
With these points in mind I think GoGold Resources is an excellent speculation stock for precious metals bulls.
One thing to keep in mind is that trading volume is incredibly low. The last trade was for 2,000 shares (about $1,800) on December 16th. Therefore investors are encouraged to purchase the shares on the TSE (GGD) which trade almost every day.
Disclosure: I am long OTC:GLGDF. 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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