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Newstrike Capital - Another Interesting Company In The Guerrero Gold Belt
Aug 13 2013, 15:19 by: The Investment Doctor | about: NWSKF.PK (NEWSTRIKE CAPITAL)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Introduction
In this article I'll have a look at Newstrike Capital (
NWSKF.PK), a $100M market cap advanced stage gold explorer in the Guerrero Gold Belt in Mexico, approximately 125 miles south of the capital of Mexico City. Newstrike's Ana Paula project borders Torex Gold's Morelos project and is nearby Goldcorp's producing Los Filos mine which produced
340,000 ounces of gold at a cash cost of $551/oz in 2012.
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As trading on the US-listing is quite limited, I'd recommend to trade through the TSX-V facilities where Newstrike is listed with ticker symbol
NES.
Even though I'm not very keen to add an explorer to my portfolio, I believe Newstrike Capital offers a decent value-for-money in the currently 'hot' Guerrero Gold Belt in the Guerrero state of Mexico. As its neighbor Torex Gold is ready to start construction works on its 375,000 ounces per annum Morelos project and nearby Goldcorp already produces 350,000 ounces of gold per year, it's not entirely unthinkable there will be some M&A activity in the region, especially now Osisko Mining staked tens of thousands hectares of land on the southeast side of the Guerrero gold trend.
As Newstrike has in excess of $20M in cash, its treasury is sufficiently funded for further exploration and will have no problems to further advance the project to a stage where a construction decision can be made.
The Ana Paula Project
The Ana Paula project was originally from Goldcorp, which sold it to Newstrike Capital in June 2010 in exchange for
$1.5M in cash and 1.4M shares of Newstrike Capital, which was -in hindsight- very cheap. Ana Paula contains a 7,600 hectares land package right in the middle of Newstrike Capital's 81,000 hectares land holding, and is just a few kilometers away from Torex Gold's El Limon zone which should be in production by 2015.
(click to enlarge)
Since the acquisition of the project in 2010, Newstrike Capital drilled in excess of 67,000 meters on the property, which resulted in a resource estimate containing 2.25M ounces of gold at an average grade of 1.55g/t and 7.5g/t of silver. The company used expected recovery rates of 85% for the gold and just 23.7% for the silver, which results in a total amount of
2.32million gold-equivalent ounces at an average grade of 1.59g/t AuEq, using a cutoff grade of 0.45g/t gold-equivalent.
(click to enlarge)
As you can see in the next table, the company also provided a sensitivity analysis based on the expected gold and silver price. The lower the commodity prices are, the higher the cutoff grade has to be in order for the deposit to make economic sense.
(click to enlarge)
As you can see, even by using a gold price of just $800/oz and a silver price of $15.45/oz, the Ana Paula project would still contain 1.4 million ounces of gold. This means a (much) lower gold price doesn't immediately kill the project.
Even though the resource estimate isn't bad at all, the share price started to fall right after releasing the report, as the 2M+ ounces was less whan what people were hoping for, as several newsletter writers were touting the Ana Paula project to be a 3-5Moz deposit. Whilst they might be right in the (
NEAR) future, this caused some disappointment in the market which was obviously reinforced with the gold crash halfway through April, when Newstrike lost approximately 20% in just one week.
Is there further exploration potential?
As Newstrike only drilled 130,000 meters, I'd imagine there's a lot more potential on both the Ana Paula zone and other potentially mineralized zones on the total of 81,000 hectares land package. Newstrike continued its drill program after releasing the NI43-compliant resource estimate and released very promising infill-drill results such as
214.5 meters at 3.29g/t gold, almost starting from surface. Newstrike is conducting this infill drill program to increase the confidence in the current resource estimate and to be able to upgrade a portion of the current ounces from the resource to reserve category.
My expected timeline to production
The fact that Newstrike Capital is more focusing on infill drilling than expansion drilling shows the company seems to be committed to move the project forward quite fast. I think Newstrike might be able to delineate a reserve estimate by Q1 next year which could be the basis for a PFS by Q3 2014 and a definitive feasibility study in H1 2015. Looking at the construction time at the nearby Morelos project owned by Torex Gold of 18 months, the project could be in production by the end of 2016, H1 2017, providing there are no hiccups in the permitting process. I personally don't anticipate any problems in the permitting stage as there are several permitted mines withing just a few tens and hundreds kilometers around the Ana Paula project.
In terms of capital expenditures and operating expenditures, I have the impression the Ana Paula is a good (but smaller) copy of the El Limon zone, owned by Torex Gold. On the negative side, the El Limon project is twice as large and thus benefits of economies of scale, so I hope Newstrike Capital is able to increase the current resource estimate to be able to benefit from such economies of scale.
The Guerrero Gold Belt is becoming increasingly hot after the Morelos and Ana Paula gold finds, and Osisko has recently staked an enormous land package as you can see on the next image.
(click to enlarge)
The Balance sheet
Let's now have a look at the company's balance sheet, and more importantly, the cash position. I'm usually not very keen to purchase shares in exploration companies which are running low on cash, but Newstrike Capital seems to have a very decent cash and working capital position.
As of at the end of April this year, Newstrike Capital had a working capital position of $22.1M ( of which $21.4M in cash) and no long-term debt, so it's balance sheet looks very clean and robust. The company's overhead costs are approximately $0.5M per quarter so its G&A burn rate is approximately $2M per annum, which is relatively low.
Investment Thesis
As Newstrike Capital has defined a potentially viable resource estimate and has enough cash on hand to continue its exploration works for at least another year, I'm tempted to take a position in the company as I'm betting on more gold on its properties pushing the resource estimate to north of 3 million gold-equivalent ounces.
As Goldcorp (
GG) is a major producer in the region and now Osisko also staked tens of thousands of hectares in the Guerrero Gold Belt, there might be some consolidation in the future as it's not entirely unthinkable either Goldcorp or Osisko might want to acquire more advanced stage explorers/developers to aggressively expand their footprints in the Guerrero Gold Belt.
Newstrike Capital was able to prove up 2.26M ounces gold-equivalent in just 67,900 meters of drilling, which equates to an extremely robust ratio of 33 found ounces per drilled meter, and I'm confident the company will be able to both improve and expand the current resource estimate.
Source:
Newstrike Capital - Another Interesting Company In The Guerrero Gold Belt
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