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Leverage to Gold in Mexico

Bob Moriarty
Apr 21, 2014

In investing, you want to be buying when everyone is saying, “sell” and you want to be selling when everyone is saying, “buy.” Last December gold shares were as hated as you can ever find. By one measure, there were “zero” bulls.

I wrote a piece titled, “If you believe gold is going to go up. . .” Most of the shares on that list went up 50% to 300%. Gold is undergoing another much needed correction to wring up the excessive optimism that builds up so quickly among gold bugs who believe gold should go up every single day and any day that it doesn’t go up is a sure sign of manipulation.

Markets go up, markets go down. That’s how markets work. Gold is in a correction and you should be looking around for bargains. If you believe gold is going to go up after the correction, you want to be buying heavily leveraged gold stocks in safe environments. We could well see a test of last December’s lows in the coming months but now is the time to be selectively identifying the pick of the litter.

My favorite mining company in Mexico is Almaden Minerals (AMM-T) run by the father/son team of Duane and Morgan Poliquin. The company just released an important milestone in their progress at the Ixtaca gold/silver project in sounthern Mexico. The company released a recent updated 43-101 in January 2014 showing 3.53 million ounces gold equivalent in the M&I category and an additional 717,000 ounces in inferred.

The release that the market has been looking for is the PEA and that came out on April 16th. The numbers were pretty good and if you are looking for high leverage to the price of gold, Almaden is a good candidate.

With a market cap today of just under $100 million and $12 million in the bank, another $2.5 million in gold and $4 million in other investments, Almaden has an enterprise value of about $20 per ounce of gold equivalent in the ground. As a takeover candidate, companies with over 4 million ounces would probably be valued at $100 to $300 an ounce especially given being in Mexico. So Almaden would have to be thought of as a takeover candidate.

The PEA used a base case of $1320 gold and $21 silver. The project would have a NPV at a 5% discount rate of $437 million and IRR of 22%. That gives a mine life of 12.1 years doing 30,000 tonnes per day. Average production would be about 250,000 gold equivalent ounces. The project would require about $496 million US in capex and need an additional sustaining capital of $106 million US.

Almaden has completed over 135,000 meters of core drilling to date. I’d guess the feasibility study would suggest some infill drilling to bring up the quality of the resource even though 29% of the resource is measured and 55% indicated now.

Using a more optimistic $1530 for gold and $29 for silver, the NPV shoots up to $875 at a 5% discount rate and an IRR after-tax of 34.1%. That’s what I mean by being highly leveraged to the price of gold.

The operation would be an open pit mine using contract mining. That reduces Capex but increases Opex. With the current resource, the mine would produce 1.6 million ounces of gold and 94.4 million ounces of silver during the mine life. The PEA calls for a 30,000 TPD operation using a combination of gravity seperation, vat-leaching, some flotation and a Merrill-Crowe system on the back end. Tests show an average of 90% recovery for both silver and gold.

Depending on the prices for gold and silver, dropping the cutoff grade from .5 g/t to .3 g/t would increase the contained metal about 20%. I suspect they will be mining and milling the lower grade material because they have to blast it and move it anyway. So their numbers are probably pretty conservative.

Almaden is one of the best run mining companies in the business. I happen to be biased about operating in Mexico. In the past 20 years, there have been a lot of mines reopened and the Mexican work force are among the best in the world. I like Mexico and I like Almaden.

Almaden is an advertiser and I am biased. The company has JVs with a number of companies in Mexico, Canada and the United States where Almaden has sold a project but retained an NSR. Those could provide a steady stream of revenue over the coming years. Please take responsibility for your own due diligence.

Almaden Minerals
AMM-T $1.49 (Apr 17, 2014)
AAU-Amex 64.5 million shares
Almaden Minerals website


Bob Moriarty
President: 321gold

321gold Ltd

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