Uncovering Mexico’s Underlying Gold PotentialMon, 10/21/2013 - 10:37
Both national and international experts are quick to endorse the geological and political potential for exploration projects in Mexico, and their perspectives are supported by the fact that the country is ranked as the fourth most popular destination in the world for exploration activities. “Based on my experience I believe that Mexico is among those countries that represent the greatest opportunities for exploration success,” says Tom Burkhart, Vice President of Exploration of Argonaut Gold. “Mexico is one of the few countries that is friendly to mining, and where you can still find outcropping mineralization that has seen limited sampling and very little, if any, drilling.”
Founded in 2009, the Canadian mining company today has two operating mines and two exploration properties in Mexico. In the four years since Argonaut Gold was started the company has been busy: it has expanded operations at its two producing mines and increased resources on three of its properties. It now has 12.5 million ounces of gold in measured and indicated resources throughout Mexico and Canada. These achievements put the company on track to reach a production target of between 300,000 and 500,000oz of gold by 2016-2017, and its goal of becoming a mid-tier gold producer.
Burkhart and Alberto Orozco, Argonaut Gold’s Exploration Manager for Mexico, attribute the rapid growth and swift successes of the company to the vast experience of its management team. “The company was created by the previous management team of Meridian Gold, which was extremely successful and was eventually bought out by Yamana Gold. Brian Kennedy, Peter Dougherty and Barry Dahl were all part of Meridian and they bring years of experience and success to Argonaut Gold; that is the first thing that should make investors see us as a competitive investment prospect,” says Orozco.
Burkhart and Orozco between them have a solid background in exploration, both in Mexico and further afield in Latin America. They have developed exploration criteria for Mexico that, to judge by the company’s portfolio, have also been very successful. “There is a big difference between how advanced the projects we are looking at are - some have resources, and some have nothing. The common thread is that when we get to the site we want to see clear exploration potential,” says Orozco. For Burkhart and Orozco, ‘clear potential’ translates to obvious indications of mineralization. This might be in the form of outcropping mineralization, or previous drill holes on mineralized land. Their ideal deposits would be medium to large oxidized low-grade deposits that have open pit, heap leach potential, and they are confident that many of these types of properties still exist in Mexico. “Argonaut Gold is looking to find robust geological environments that have the potential to grow. We want to see clear potential for a minimum of 600,000oz of gold. It is just a matter of being in the right place and carrying out the correct style of program to identify them,” says Burkhart.
An important part of the assessment process involves making a forecast on the operating cash cost of the mine, in order to assess what the return on investment will be. “To do this we look at the quality of the resources and geology in a lot of detail. We want to know that even when the price of gold drops substantially a mine will still be profitable. We do not want to create mines that will only work when the gold price is at US$1,500 per ounce – they have be profitable when the price gets as low as US$700-800 per ounce. That is how we can ensure that our investors will be protected,” says Orozco.
“We are looking for value that exists on projects, but that has not yet been identified. Even when we may be looking at a project that has a determined number of ounces of gold, we look beyond that to see whether there are other aspects of the project in which we could unlock extra value,” explains Orozco. At this stage Argonaut Gold feels that it is established enough, and has the necessary cash flow available, in order to fulfill this role. “Fortunately, Argonaut Gold has a positive balance sheet that can support an aggressive exploration program, and we have the geological expertise required to identify these opportunities and hopefully make good acquisition decisions in the current buyer’s market’,” says Burkhart. By buyer’s market Burkhart means the lull in the metals market, and specifically the spring 2013 drop in the price of gold that has resulted in drilling activities slowing down significantly in Mexico, and some junior companies being pushed out of the market entirely. This places companies like Argonaut Gold, which have a portfolio of producing mines and capital to spend, in a strong position to buy exploration projects with good potential that struggling junior companies are trying to sell off. Burkhart and Orozco do, however, acknowledge that they are not the only companies trying to do this. “We do know that the competition from other companies for the acquisition of quality properties is increasing, and generally if we are looking at a project there are other companies with similar acquisition criteria looking at it too. Clearly we are not the only ones who realize that Mexico offers good opportunities compared to most other countries,” says Burkhart.
Argonaut Gold believes that it can continue to build its portfolio in Mexico and continue acquiring new properties despite this competition. The company is also starting to look outside Mexico for further opportunities, as part of a strategy to diversify the company’s portfolio. At the end of 2012 it completed the acquisition of the advanced stage Magino exploration project in Canada, which was the company’s first property outside of Mexico. “This is going to diversify the way Argonaut Gold is working – it lowers the risk and makes the company more stable, given that Canada is probably the most stable mining country, which is good for investors. This acquisition also doubled the company’s resources: the deposit has over 6 million ounces of gold, and has the capacity to produce around 250,000oz of gold per year,” says Orozco.
In terms of Mexico’s new mining tax, which is likely to be confirmed in late 2013, Burkhart and Orozco argue that the company’s solid foundations and low operating costs stand it in good stead to remain financially strong. “One thing in our favor is that our costs are low, so we will be protected in that sense. We also want the government to take into consideration the fact that the mining industry is cyclical, and that there has recently been a sharp drop in the gold price. The government needs to take into consideration the fact that a huge amount of money is invested in exploration that never reaches the exploitation phase, and that mining companies also improve the economy by bringing work to more isolated places,” points out Orozco. “The decrease in the gold price has also already impacted us to some extent, so we are being more diligent about setting priorities and watching the budget,” adds Burkhart.
Returning to the subject of Argonaut Gold’s plans in Mexico, Burkhart and Orozco are positive about the potential for new grassroots exploration projects. “Exploration has been conducted mostly around old known mines, where deposits and mines have been expanded. But really, in recent years there has not been a great deal of grassroots exploration, especially during the junior cycle. The potential for Mexico is therefore still very large,” says Orozco. As the best place for grassroots exploration they highlight Sonora, which is also Mexico’s number one producer of gold and copper and has a strong mining culture. Durango also stands out as a growing, attractive destination for future exploration for Argonaut Gold. “We are fully staffed up in our exploration group, with a good exploration budget and a long term view,” says Burkhart. “We will continue with our exploration methodologies and make adjustments to our criteria as circumstances dictate. It has been my experience that persistence and determination pay off and Argonaut Gold is well positioned in Mexico to stay the course. We have a very strong commitment to Mexico: we think it is the place to be.”