Newstrike Capital (TSXV: NES) president and CEO Richard Whittall is certain the upcoming preliminary economic assessment (PEA) on the company’s 2.25-million oz. Ana Paula gold project will prove it’s a “great cash-generating project.”
“What we are going to come out with is something I think, with other things being equal, is what the industry is looking for, which is a very high margin, well average grade deposit. It’s low strip and that has all the requisite infrastructure developed,” Whittall said in a late July interview.
Located in southern Mexico’s Guerrero state, Ana Paula hosts a measured and indicated in-pit resource of 2.20 million oz. gold and 9.7 million oz. silver from 43 million tonnes grading 1.59 grams gold and 7 grams silver per tonne. Inferred resources add another 50,000 oz. gold and 1.1 million oz. silver from 1.8 million tonnes of 0.78-gram gold and 18.7 grams silver.
Newstrike bought a 100% interest in Ana Paula from Goldcorp (TSX:G; NYSE: GG) in 2010, and three years later published the project’s maiden resource, based on 130 drill holes. The estimate uses a 0.45-gram gold-equivalent cutoff grade and metal prices of US$1,450 per oz. gold and US$28 per oz. silver.
Industrial Alliance analyst Killian Charles notes that within the pit shell Ana Paula contains a smaller but significantly higher-grade resource. “The high grade package nearly doubles the grade to 2.99 grams per tonne, while still offering a decently size foundation (roughly 1.6 million oz.) for an eventual mine.”
Since the first resource estimate, Newstrike has punched another 100 holes or 46,000 metres into the project, bringing the total to 230 holes. It intends to publish an updated resource with the PEA in a few weeks, which will be the first step in demonstrating the project’s economics.
The PEA will look at Ana Paula’s near-surface high-grade breccia zone feeding an initial 5,000 tonne per day mill over an eight to 10 year life, using base-case metal prices of US$1,300 per oz. gold and US$20 per oz. silver, Whittall says.
He forecasts the proposed mine could generate around 120,000 to 130,000 oz. gold a year, at estimated cash costs of below US$500 per oz.
The project, anticipated to cost at least US$220 million to build, should have an average grade of 2.5 grams and gold recoveries of between 73% and 75%, Whittall notes. “Our payback should be well under three years,” he adds.
However, these numbers are conceptual, until backed up by the PEA.
“We know this is a very high grade, high margin, relatively low capex project and simple. And simple always translates into lower costs,” Whittall says, explaining he’s confident the PEA will prove this.
Following that study, the company plans to jump straight into a prefeasibility study, expected out in a year, noting Ana Paula doesn’t need a lot of work to get there.
“The beautiful thing about the Ana Paula project is its simplicity. It literally is just a big open pit… So it really doesn’t need a tremendous amount of advanced engineering to get to the next stage,” Whittall explains.
The company has already been working on improving the project’s metallurgy. Mineralization at the project is related to a low-sulphidation epithermal system formed within a steeply plunging breccia unit. The gold occurs in sulphides, namely arsenopyrite and pyrite. Despite some of the gold being trapped in the arsenopyrite, Newstrike has been getting around 73% recoveries, Whittall says, adding recent work shows it could slightly improve those recoveries by a few percentage points.
Asked about financing risks, Whittall said he’s certain Newstrike could move the project to prefeasibility stage and eventually to development.
“What makes projects financeable is can they make money,” Whittall says. “Ana Paula will be a great cash-generating project that makes a great deal of money [at US$1,300 gold]."
Newstrike currently has $7 million in its treasury, left over from its last financing in March 2012, where it sold 8 million shares at $3.10 apiece for $24.8 million.
It also has the support of mining magnate Lukas Lundin who holds over 21% of the company through his personal and trust accounts.
A prime location
The Ana Paula sits in Mexico’s growing Guerrero gold belt near Goldcorp’s Los Filos mine, the country’s largest gold mine, and immediately to its south, Torex Gold Resources (TSX:TXG) is developing its Morelos gold project.
“[Ana Paula] happens to be absolutely in the best jurisdiction on the planet, which is Guerrero, despite safety issues and a number of things, it is a mining jurisdiction,” Whittall says.
Newstrike holds 889 sq. km in the roughly 55-km-long mineralized trend, with Ana Paula and its early stage Aurea Norte and Aurea Sur projects.
The newest face in the district is Osisko Mining, which in 2012 staked 10,000 sq. km and recently spun that off into Osisko Gold Royalties (TSX:OR) along with $155 million in cash and a 5% royalty on the Canadian Malartic mine.
Although, the district has grown in 10 years from 2.5 million oz. gold to 31 million oz. with the Los Filos, Morelos and Ana Paula projects, Whittall maintains it is still “grossly underexplored.”
However, Newstrike benefits from having a management team with ample experience in Mexico and the Guerrero belt. Of note, Newstrike’s vice president of exploration Gillian Kearvell co-discovered Teck Resources' (TSX:TCK.B-T; NYSE:TCK) Nicolas massive sulphide deposit in Zacatecas, and led the exploration team that found Morelos’ El Limon gold deposit. Several of the junior’s directors were also involved with either or both the Los Filos and Morelos discoveries.
Whittall was a director at Enrique Miranda’s firm called Miranda Mining, which partially owned the Los Filos mine before Goldcorp’s predecessor Wheaton River acquired it 2003. Whittall then co-founded Aurea Mining and acted as its president and CEO until it merged with Lundin-controlled Newstrike in 2008.
“Unfortunately we merged just as the financial crisis in 2008 unfolded, about a month before the Lehman Brothers went broke, so it was quiet for the first year and a half,” Whittall admits.
The junior was able to get its wheels turning after it made a bid for a minority interest in the El Limon deposit that Goldcorp owned at that time.
“We didn’t win it, but we ended up getting a termination fee,” Whittall says. In turn, the company used that cash to buy Ana Paula from Goldcorp for $1.5 million and 1.4 million of its shares in a transaction that closed in June 2010.
Since then, Newstrike took the project that Goldcorp had drilled 11 exploratory holes on and transformed it into a multi-million oz. discovery. “So we didn’t buy a deposit, we found it,” Whittall maintains.
Growth opportunities
Along with defining the 2.25 million oz. in-pit resource last year, Newstrike drilled off a 3 million oz. conceptual resource that lies outside of the pit shell, showing room for growth.
There’s also an opportunity to introduce a heap-leach pad at the project. The company recently released results from a column leach test on a sample from the low-grade breccia zone, previously labeled as waste. Over a 91-day leach period, recoveries were 84%, with a majority of that occurring in the first 10 days.
“When the lab results came back, we almost fell off our chairs,” Whittall admits.
The reason why Whittall and his team were surprised was two-fold. First, Ana Paula is largely a sulphide deposit, which doesn’t lend itself to a heap leach, however, the material around the high-grade zone appears more oxidized.
Second, the Los Filos mine is a dump leach operation with recoveries of 45–55%, Whittall says. “So we were not expecting 84%.”
While it’s too early to say how a heap leach pad could improve the economics of the project, Whittall notes the company will explore this option in the prefeasibility study.
Meanwhile, Newstrike’s focus will remain on Ana Paula’s high-grade core.
“Our game plan is to move this quickly and efficiently as we can towards development,” Whittall says.
Charles of Industrial Alliance writes Ana Paula will be the third project developed in the Guerrero belt after Los Filos and Morelos. “Unlike its peers, Newstrike does not face the infrastructure challenges encountered by Torex or the social issues that recently plagued Goldcorp’s Los Filos mine.”
Newstrike closed Aug. 8 at 93¢, within a 52-week window of 53¢–$1.16. It has a market cap of $107 million.
Charles has a 95¢ price target and “speculative buy” on the stock.
