Argonaut Gold's Castillo Mine referenced in this newsletter regarding penny stock SMG.V
LAWRENCE ROULSTON’S RESOURCE OPPORTUNITIES
Volume 14, #13 September 2011-1
Initiating Coverage
Sierra Madre Developments (TSX-V:SMG)
Sierra Madre is exploring a project in Mexico that has potential for both gold and silver in a number of highly prospective zones. Drilling is presently underway. Sierra Madre's CEO, Carl von Einsiedel, is a well regarded Ph.D. geologist with considerable experience in this type of setting. The other directors and management bring a wealth of geological and mining industry experience.
The Penoles project is located in Durango state in the Mexican silver belt, one of the most prolific silver mining trends in the world. The property covers a historic mining district that was mined from 1887 to 1908. Like many other mines in that region, the miners were restricted to taking ore above the level of the groundwater, as they lacked the pumping capabilities to go deeper.
Sierra Madre's geological team believes that the ore zone continues to depth. That premise has never been tested. Endeavour Silver (EDR-TSX) has had tremendous success with its nearby Guanacevi district, following a similar approach. By demonstrating that the silver veins that were previously mined near surface continued to depth, Endeavour now built a profitable mining operation and a billion-dollar market value.
Sierra Madre optioned the property from Riverside Resources (RRI-TSXV), a highly successful project generator. That company optioned the property from private interests that have held the property for many years. The deal with Riverside allows Sierra Madre to earn up to 70% interest by funding project expenditures, issuing shares to Riverside and making the underlying property payments.The underlying deal requires payments of $2.85 million, most of which is due in early 2013. That time frame gives the company ample time to drill the project and assess its value.
The core of the project is a silver vein system that was the original Penoles mine, the foundation of the namesake company. After the high-grade ore was extracted from the upper levels, the property went to private interests. A junior optioned it for a time, but did little work as they focused on another project and then faced financial constraints.
Riverside, with its highly qualified exploration team, recognized the potential at depth. They evaluated the considerable geological information available from the earlier work and conducted some surface work and a small drill program on the gold zone. While there has been no drilling to test the deeper silver potential, there was a considerable amount of geological work conducted in the near surface zone. That work, including techniques such as fluid inclusions, supports the premise that the silverbearing zone continues to depth.
Riverside also identified a number of other targets zones, including a number of zones with potential for high-grade
silver veins. They also identified a shallow gold zone. Following their prospect generator business model, Riverside
optioned the project to Sierra Madre, maintaining an interest in the project and securing a share position.
The El Capitan gold zone is a shallow zone of oxidized material with widespread gold values. Riverside drilled five
holes that demonstrate that the gold values extend below surface. That drilling is too widely spaced to outline a resource. However, a crude estimate suggests the potential for something in the order of three quarters of a million
ounces of gold encompassed by the area of drilling, with a grade of 0.5 grams per tonne. The area remains open and could be somewhat larger.
A grade of 0.5 g/t may seem low. However, in that setting, it has potential to be enormously profitable. For example,
Argonaut Gold (AR-T) operates the nearby Castillo Mine. In the latest Management Analysis and Discussion, Argonaut noted "Full Year Guidance of 70-75.000 ozs at $575 - $600 per ounce". In the second quarter, they produced 17.453 ounces at a cash cost of $578. The average grade of ore processed during the quarter was 0.33 g/t.
The resource for Argonaut's Castillo project is 165 million tonnes at 0.32 g/t, hosting 1.7 million ounces. (This discussion is included solely to demonstrate the potential value of a deposit with grades similar or lower than the grades encountered on the El Capitan zone.)
While that gold zone is certainly interesting, the main targets are the silver zone below the old workings and the other silver vein targets. The initial phase of drilling consists of several shallow holes to further test the gold zone.
The next target will be the silver zone beneath the area that was previously mined. At least some of those holes will
be positioned in a way that they will pass through the gold zone and provide tests of the two zones in each hole.
The company is just finalizing a private placement priced at C
.15 per unit to fund the drilling program. The total
amount expected to be raised is about $2 million.
Sierra Madre is clearly a high risk exploration play, with the value of the company heavily dependent on the results of the drilling program now underway. The trade-off is that success in that drilling could add enormous shareholder value, with the company testing both a shallow oxide gold zone as well as high-grade silver targets. The underlying property payments add an additional element of uncertainty. The potential reward is large, as the company already has the beginning of a substantial near surface gold deposit and the potential for a large silver deposit beneath the old workings.Based on the amount of work conducted to date and the credentials of the exploration
team, I see this as being a very attractive balance of risk and potential reward.
Investors should be extremely cautious in buying shares in this company, as there is very little liquidity. Do not chase the stock. Be patient and try to get a share position in the low C
.20's.
Price September 9, 2011: C
.155
Shares Outstanding: 15 million
Shares Fully Diluted: 16 million
Market Cap: $2.3 million
Contact: Investor Relations
604-685-3359
www.sierramadredevelopments.com