The Fruits of their Labor
By and large, most of my visits are to exploration companies. The projects may date back 2000 years but I see a lot more potential gold than actual gold. Recently I was asked to go to Manitoba to visit a real production gold mine. And while the exploration potential of the mine is giant, with gold almost touching $1400 an ounce, it was a great pleasure seeing someone gain from the fruits of their labor.
San Gold (SGR-T) is right on the eastern border of Manitoba. I know I don’t think of Manitoba as being a big gold producing province but San Gold’s deposit at Rice Lake is a Red Lake style deposit on the same trend as the Red Lake district. Rice Lake is just 80 km to the west of Red Lake, home of Canada’s richest gold mines.
At first glance, I thought San Gold might be a little expensive with a market cap of about a billion dollars. They have a little over 3 million ounces of gold in a 43-101 resource with 835,755 ounces of it in M&I. When I was there, the stock was about $3.75. But they have a nice 1250-ton per day mill they are expanding to 1800 tpd in 2011.
I’ve made the point many many times in the last 9 years that I thought the future of the dollar was bleak and investors need to be in production and near term production stories. Well, San Gold is a production story and a great production story. The company has a true management team with both width and depth.
San Gold is moving forward with two goals. One is to define more ounces and the other is to increase gold production. On the first part, their excellent geological team has come up with a new model for the district and found five new near surface high-grade gold discoveries in the last two years alone. They need multiple faces to produce more ore to feed the mill.
They are using a relatively new technique called LIDAR. They fly over an area they want to do a study on and send down a laser beam similar to the way radar works. LIDAR uses light waves rather than microwaves. LIDAR can measure very subtle differences in topography. The geological team at San Gold showed me reports where you could see a shallow pit where prospectors dug holes 75 years ago. It’s pretty slick. If you want to pick up subtle details about structure, LIDAR is just the tool.
I hope that by now my loyal readers understand enough about geology to understand that in a structurally controlled mineral deposit where you have crosscutting structures, that’s where you get the highest grades.
In simple terms, minerals are moved around by fluid solutions. You need a heat source, you need a source of mineralization, you need rock that is prepared for a mineralization event and you need circulating fluids.
Earthquakes and earth movement prepares the ground. Essentially, where you have faults in the rocks, you have low-pressure areas where fluids can seep to the surface. And you can have multiple events of earthquakes and faults where one fault cuts across another. You can have multiple mineralization events. Where one fault crosses another, the most fluid will come to the surface and you will have the richest grades.
Some very bright minds in the geological department at San Gold have determined that there is a series of northeast trending structures that crosscut the main northwest structures mined in the past. In fact they determined that the northeast structures were probably the result of a massive intrusive body coming up from below and the location of the faults could actually be predicted on a regular occurring basis. They are using predictive drilling very successfully validating their theory.
While I was down in the mine looking at the structure, I saw some visible gold [VG] and took a small sample. I’m always pleased when I can actually see gold at a project. When I went into the core shack to see their latest drilling results, I was disappointed to find that I hadn’t found much of anything at all. They have lots and lots of visible gold in their core.
The Red Lake gold district has been home to the production of over 20 million ounces of gold. There probably has been 100 times as much money spent on exploration at Red Lake than at Rice Lake, home of San Gold but the potential is similar. While San Gold is only showing a 43-101 resource of just over 3 million ounces, that does not represent the potential or even a large fraction of the potential.
I’m a production guy. I was thrilled to see a company run on a financially sound basis. Right now the company is mining and milling an average of 650 TPD at a grade of about 7 g/t at a brilliant recovery of over 92%. They are on track to produce over 50,000 ounces [pdf] for the year increasing to over 100,000 ounces next year and in the vicinity of 150,000 ounces after the capacity increase in 2011. They are using a figure of $575 an ounce for production costs. Every dollar that gold goes up flows right to their profit.
When you start buying production companies rather than exploration plays, the price gets far more stable. SGR isn’t going to double next week but on the other hand, it isn’t going to drop 50% with a $10 drop in the price of gold. The company is well managed, well financed, production is increasing at a nice rate. They have plans for increasing capacity as well as for opening up more faces to provide more ore. The technical team is first rate and seems to have a firm understanding of the district.
It doesn’t get any better than that. Even with the sharp advance of the POG lately the price of San Gold has actually come down 20%. Management owns about 12% of the shares, institutions own another 55%. Today’s price offers investors a reasonable entry into a good solid gold production story.
San Gold is an advertiser and as such, we are biased. The company maintains an excellent website with lots of information. We remind potential shareholders that we share in neither your profits nor your losses so you must take the responsibility for doing your own due diligence.