US Gold Hastens Mexico Mine, Plans Merger
By Greg Klein
Drilling started in 2009; the first resource estimate came out last summer, an updated resource last November and a PEA in February. Full feasibility is scheduled for 1Q 2012. With 11 core drills, five percussion drills, a 2011 budget of $25 million and an on-site assay lab running 24/7, this project has definitely hit the fast track. By early 2014, US Gold’s El Gallo project in Mexico is slated for open-pit silver-gold production, potentially becoming one of the 10 largest low-cost silver mines in the world.
“We’ve been trying to advance quickly,” says Senior VP Ian Ball. “The project’s pretty simple from a mining standpoint, being all near-surface. So there’s no underground development to worry about. The infrastructure in the area is quite reasonable. You’re close to power and the roads are well developed.”
The November resource estimate shows 39.8 million silver ounces and 543,728 gold ounces measured and indicated and 19.7 million silver ounces and 23,764 gold ounces inferred. About 90% of the resource lies within 100 metres of the surface.
Based on November’s figures, the February PEA estimated production at 5 million silver ounces and 50,245 gold ounces annually for six years. Assuming silver to be $18 an ounce and gold $1,000, the report estimates a 27% internal rate of return with a $155-million net present value. With $28.50 silver and $1,350 gold, the IRR reaches 65% and the NPV $521 million. And since November, continued drilling has found six new silver-gold veins.
Assays released August 11 include 180.4 grams per tonne silver over 72.4 metres (including 955.2 g/t silver over 10.1 metres), 168.1 g/t silver over 36.6 metres (including 289.3 g/t silver over 11.7 metres), 88.7 g/t silver over 27.4 metres (including 205.8 g/t silver over 9.9 metres), 325.4 g/t silver and 6.8 g/t gold over 4.5 metres (including 675 g/t silver and 13.9 g/t gold over 1.5 metres) and 9.3 g/t gold over 3.1 metres (including 22.5 g/t gold over 1.1 metres).
Ironically, El Gallo production has been held back by assays that are too good to ignore. “Originally our feasibility study was scheduled for release later this year,” Ball explains. “But it’s probably going to be 1Q of next year. A lot of issues involve drill findings. There have been a lot of cases where we wanted to place waste rock or the site of the mill on a certain location, then we hit mineralization below those planned buildings. So we have to follow up and see how much material is down there or whether it’s just a one-off occurrence. That’s been the main reason for the delay.” El Gallo includes the former Magistral Mine, whose buildings and assay lab will be incorporated into the new project.
Working in Sinaloa State, however, means proximity to a drug cartel. “We have been very active there for three or four years and have been able to establish a pretty good relationship—and this might sound strange—with the cartel. You have to know who they are and inform them what you’re doing and where you’re moving to…. They don’t want you near their marijuana crops,” Ball says.
“We do have quite an extensive security policy,” he emphasizes. “We do have audits that are done by outside security, and they make ongoing recommendations on how we can continue to improve. We provide training for the employees; all that is ongoing.”
If you combine this pretty strong cash flow with something that’s growing in size and providing excitement, you are going to be combining the best of both worlds —Ian Ball
Closer to home, the company’s Gold Bar Project in Nevada is undergoing prefeasibility. “We’ll publish at the end of October,” Ball says. “We will not be going to final feasibility, based on the small CAPEX that’s required—we’re in the $50-million ball park.” Bell expects permitting to take at least 18 months.
“That deposit right now, all in, is about a million ounces at one gram per tonne, approximately 90% oxide material. We are envisioning an open-pit heap-leach process there,” Ball says.
About 120 kilometres away in Nevada, the company is drilling its Limo Project, which produced 91,000 gold ounces from 1989 to 1990.
Perhaps the best indication of US Gold’s future came last June with the announcement of a planned merger with Minera Andes Inc. The new company, to be called McEwen Mining Inc, is the concept of Rob McEwen, chairman and CEO of US Gold and CEO of Minera. He’s the largest shareholder of both companies, holding 21% of US Gold and 30% of Minera. As the founder of Goldcorp Inc, McEwen is credited with steering that company from a market cap of $50 million to over $10 billion.
Minera currently has three Argentina assets: a 49% interest in the San Jose Silver-Gold Mine, which produced 5.3 million silver ounces and 84,000 gold ounces in 2010, a 100% interest in Los Azules copper exploration project, which is currently undergoing prefeasibility, and a portfolio of silver-gold exploration properties. Ball expects to see the merger completed by November.
“With Minera Andes you have a mine that’s in production, that’s generating silver and gold. It has exciting exploration properties but no discoveries yet beyond the mine. Whereas El Gallo has some very attractive exploration but no cash flow. And so we thought, if you combine this pretty strong cash flow with something that’s growing in size and providing excitement, you are going to be combining the best of both worlds—benefiting from the higher prices of metals through the cash flow on the mine, which should be able to build the mine in El Gallo.”
At press time US Gold had 136.3 million shares outstanding at $5.97, for a market cap of $813.9 million. Minera Andes had 282.7 million shares at $2.35 for a market cap of $664.3 million.