Roulston on TXGTorex Gold: The Heavyweight
Champion of Gold Developers
“Few companies have been as successful recently at finding, financing and developing a gold mine as Torex Gold (TSX: TXG). Although gold is experiencing its most volatile period in history, Torex has raised over $1.3 billion in shares, exercised warrants, and debt since going public in 2009,” says Travis McPherson, mining analyst. On September 18, hosted by senior management and joined by fifteen analysts, Resource Opportunitiestoured Torex’s Morelos project in the Guerrero Gold Belt.
Buy Right, Sit Tight
Torex is in the late stages of developing one of the highest-grade undeveloped open-pit gold projects in the world. In addition to grade, it has size. And its location in mining friendly Mexico makes it that much more rare and attractive for senior miners looking to replace quality gold ounces. That is why we are calling Torex Gold a ‘buy right, sit tight’ type of investment.
The company’s motto has always been: “Build the first mine and find the second”.
Their team – led by President and CEO Fred Stanford (previously the head of Inco’s Canadian operations) – is building its first mine, El Limon-Guajes. Ten months into a twenty-one month build, the project consists of two open pits (El Limon and Guajes), which host 55.2Mt at 2.79 g/t containing 4.9 million ounces of gold in the Measured and Indicated category. For $725 million (including a $67 million contingency), Torex will operate a 14,000 tonne per day (tpd) mill that will produce roughly 358,000 ounces of gold annually at $504/oz cash costs (net of byproduct credits) over a 10.5 year mine-life. At peak production they are expected to produce 464,000 ounces of gold. By 2018, the El Limon-Guajes operation could generate in excess of $150 million in cash flow per year (at $1,200/oz gold).
The company is developing a second mine called Media Luna. Preliminary design planning has envisioned an underground scenario with one portal and two drives accessing the upper and lower mine zones. With its higher-grade gold and rich copper and silver content, Media Luna already looks potentially more profitable than El Limon-Guajes. If the company can integrate Media Luna into the El Limon mill design, return on invested Media Luna capital may impress even the most skeptical investors.
Key Site Visit Takeaways
1. With the grade and operating margins at El Limon-Guajes, Torex will become a prime takeover target once construction is complete. With major miners such as Barrick and Newmont crippled by low margins, they’re unlikely to make a bid for Torex until the company gets El Limon-Guajes fully built and running smoothly. They are currently on budget and schedule with 64% of the capex already committed ($461 million). Once Torex begins producing, which is on schedule for August 2015, major gold miners may look to acquire the company, given the opportunity to add significant ounces and margin to their production profile. This offers substantial upside to the current valuation.
2. Media Luna is grossly underappreciated in the market and will likely surprise to the upside when the maiden Preliminary Economic Assessment is published mid-2015. Media Luna hosts an even higher grade deposit (albeit all in the Inferred category) at 4.55 g/t gold equivalent. It has an average copper grade of 0.97%, but in an 80,000 metre drill campaign last year, drill intercepts hit grades in excess of 4.5%. Since putting out its initial resource estimate a year ago, management has been working on a comprehensive scoping study for the project, which they expect to have ready by the middle of 2015.
3. ‘Exploration upside’ is an overused phrase, but one that genuinely applies to the Morelos property. In addition to El Limon-Guajes and Media Luna, Torex’s exploration team has identified multiple targets. One is the newly discovered Modelo – named after the delicious Mexican lager – which sits just west of Media Luna. The company expects to spend a modest $12 million on drilling over the next three years, with a big focus on Modelo. The team is looking
for the feeder porphyry system that they believe is the El Limon-Guajes/ Media Luna source.
Mexico City To Morelos
Our tour of Torex’s Morelo project started in Mexico City with an early 185 kilmetre drive southwest to Guerrero State. The site is situated perfectly – not too remote that infrastructure is challenging, yet not surrounded by a city.
That said, Torex’s introductory presentation did discuss resettling two small villages that are home to 170 families. The company is advancing construction of the new village site, for which it has $30 million earmarked, and is already approved and permitted. They are on schedule and budget, and don’t foresee any turbulence on this front. Torex’s community relations manager—Peruvian native Andres Recalde – has helped many majors work with locals to advance gold projects.
After our morning briefing and update presentations, we were driven to the middle of the site. Here, we got a sense of the project’s layout and progress. That day, there were over 1,200 people working on site; in peak construction early next year, CEO Fred Stanford estimates this number will swell to almost 2,000.
Filling the Mill
Up a winding, steep, switchback road, we reached the top of the mountain that hosts the El Limon and Guajes pits. The road will actually be gone soon – it rests atop the section now known as the North Nose, which has an inferred 72,000 ounces of gold. Earlier this year, Torex announced North Nose would be added to its production profile in 2015.
One of Torex’s main pursuits has been filling capacity at the mill as quickly as possible. A 2012 feasibility study estimated a twenty-four month ramp up period, primarily to develop enough work faces capable of generating 14,000 tpd of material for the mill. There are a few critical path items that need to occur if they are going to beat their guidance, including:
• Completion of the El Limon access road. Despite the obvious challenges of working in such steep topography, Torex has made good progress on El Limon’s access road, but it’s still rough, and needs widening in many places. Torex has estimated this will be complete by August 2015, though I wouldn’t be surprised if it finished prior to that.
• Relocating the villages. Relocating the two villages at the base of the El Limon-Guajes mountainside is critical. Here Torex has made a lot of progress, having finished thirty-seven of the 170 new homes since March 2014. Relocation is conservatively scheduled for completion in August 2015. Landowner conflicts are not a concern because Torex has a secure thirty-year agreement with the local ejidos.
• Commissioning the rope conveyor (RopeCon). RopeCon, the project’s rope conveyor system, will transport El Limon ore to the mill at the bottom of the mountainside. It extends approximately 1,200 metres, dropping 400 metres from the top to the mill. Earthworks for the conveyer and crusher’s installation at the top of El Limon are well underway, and is conservatively estimated for completion in July 2016.
Torex has the opportunity to deliver commercial production earlier than expected if they continue their current trajectory.
With North Nose’s approximately 72,000 ounces of gold moved forward in the production schedule and added to the existing 38,000 ounces of production already planned, the mill will begin to fill up in 2015.
Torex also released an updated resource for the El Limon Sur deposit in early September, which increased the Measured and Indicated resources in ounces and grade. It added 137,000 ounces (156% increase) and upped the grade from 2.54 g/t to 2.73 g/t gold (7% increase).
This scenario offers further upside to the share price, given that investors typically only pay for production up to twelve months out. This means the re-rate from developer to mid-tier producer could occur more quickly than anticipated.
The Second Mine, Media Luna
Visiting Media Luna was the most impressive part of the tour. Stanford’s explanation of its preliminary mine design and thinking behind its integration into El Limon-Guajes gave a lot of colour to just how unique and profitable this operation could be. At current prices, the market is giving minimal value to Media Luna (if any at all). Management is targeting a 20% after-tax return.
Compared to El Limon Guajes, Media Luna is higher grade and will have a substantially lower economic and environmental footprint. Media Luna hosts 39.9Mt at 2.3 g/t gold, 41 g/t silver and 0.4% copper (4.55 g/t gold equivalent) containing 5.84 million ounces of gold equivalent (albeit all in the Inferred category). Torex has only tested a third of the site’s anomalies, and will be investing in a $12 million regional exploration program over the next three years.
With $85 million of the $90 million $1.50 warrants exercised in August, Torex is now more than capable of expediting Media Luna’s development. The company is working through metallurgical test work and plans to put out a maiden PEA by September 2015 that will likely surprise investors to the upside.
One challenge Torex faces is integrating Media Luna’s different ore into the existing mill facilities at El Limon-Guajes. The gold-silver-copper mineralization at Media Luna is associated with magnetitesulphide skarn, which is different from that found at El Limon-Guajes. Because Torex wants to utilize its
existing facilities, it will have to develop a new flotation circuit for a copper-gold concentrate. This will require a long hole and cut and fill underground mining operation that will target 7,000tpd capacity. The company foresees a single portal that will split into two separate drives accessing the upper and lower mines.
Torex’s early plans outline a 5.8 kilometre rope conveyor to move the material from Media Luna, across the Balsas River, over the El Limon pits, and into the processing facility.
Torex isn’t waiting for someone to come along and acquire them. They have the team, the funding, and the plan in place to build a mine that will see them debut as a 300,000-ounce per year producer at the lowest quartile cash costs in the world. Media Luna provides tangible near-term upside and offers a
new component – a substantial copper resource – to the mix.
Of course, during the construction and ramp-up phase there is always risk for long-term investors with ‘buy right and sit tight’ attitudes. But Torex offers a unique opportunity. Its grade, size, and scale bring it to the top of investors’ and mining executives’ wish lists around the world.”
Editor’s Note: Travis McPherson, mining analyst reported on the mine site visit. Lawrence Roulston, editor, Resource Opportunities, 1510 – 800 W. Pender St., Vancouver, BC V6C 2V6. 1 year, 20 issues, $299. Includes Instant Alerts, is a geologist with more than 25 years of hands-on experience in the mining industry as an analyst and mining company executive. Mr. Roulston’s years of hands-on experience and extensive personal contacts in the industry provide unique insights that have generated an impressive track record for Resource Opportunities. For more information visitwww.ResourceOpportunities.com.