GoGold Resources: Advancing Los Ricos
Jun. 18, 2023 7:05 AM ETGoGold Resources Inc. (GGD:CA), GLGDF12 Comments
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Don Durrett
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Summary
GoGold Resources is a small gold producer in Mexico with a significant undeveloped silver project, Los Ricos, which has large resources and is well-advanced.
GoGold's biggest risk is the opportunity cost, as the big payoff for GoGold won't occur until both projects (LRS and LRN) are built, which is expected to culminate in 2027.
GoGold has a strong balance sheet and significant upside potential, but it is a speculative investment with risks, including location, permitting, and dependence on higher precious metal prices.
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Introduction
GoGold Resources (OTCQX:GLGDF) (TSX:GGD:CA) is a small gold producer in Mexico, but what they really are is a development story. They have one of the best undeveloped silver projects (Los Ricos) in the world. Los Ricos is both large and well-advanced.
I have had bad luck with development projects. Many things can go wrong and usually do. I would estimate that only about 20% of the development projects that I have invested in have made significant returns. The number one reason why they disappoint is that they usually get taken out by a larger company. Quality projects tend to attract sharks (companies looking to grow via acquisitions).
So, the biggest risk IMO is the opportunity cost. Also, the big payoff for GoGold won’t occur until both projects (Los Ricos South (LRS) and Los Ricos North (LRN)) are built. That won’t culminate until 2027. Ouch, that is a long wait. We will have to tie up our money for 4-5 years and then pray they don’t get taken out.
I know what you’re thinking, why would I want to do that? Stick around, you may find it intriguing.
The assumptions I use for investing in PM miners are a stretch for most investors. I expect PM prices to rise substantially, to at least $3,000 gold and $75 silver over the next 3-5 years. Some would say $75 is too high, but a 40 to 1 GSR (gold-silver ratio) is not crazy talk. We had a 17 GSR in 1980 and a 39 GSR in 2011 ($1,935/$49). I think we should expect a 40 GSR or lower if gold breaks out.
Other assumptions include expecting GoGold to reach their targeted production. I expect costs, taxes, and royalties not to explode, although I pad costs for expected future inflation. I expect GoGold not to get acquired (they have enough insiders to prevent one), and I expect their management team to execute. I could easily get disappointed if any of these assumptions prove false.
One thing I always like to point out is that investing in PM miners is speculating. We are gambling since so many things can go wrong. Keep your allocations low and expect to lose money on some of your PM mining stocks. What we are really betting on is PM prices going higher. If silver prices rise, then GoGold will be in a strong position. If silver prices languish, then bad things can happen.
Stock Name
Symbol (US)
Type
Category
Share Price (US)
FD Shares
FD Mkt Cap (6/15/2023)
GoGold Resources
OTCQX:GLGDF
Gold
Emerging Mid-Tier Producer
$1.08
342M
$371M
Company Overview
GoGold Resources (they also call themselves GoGold Silver & Gold as a tagline on their website) is a silver producer in Mexico. They will potentially produce 2 million oz of silver equivalent (including gold) in 2023 with all-in costs of around $20 per oz (free cash flow).
The Parral tailing project has 30 million oz silver equivalent (including gold). The mine life is about 10 more years. As a tailing project, it does not have any exploration potential.
They have a second tailing project (Esmeralda) that has 13 million oz, and could add another 1 million oz per year, with similar all-in costs. This project does not have a timeframe yet for production.
The reason GoGold has exploded in value is because of Los Ricos. This project (55,000 acres) has large resources (around 250 million oz AUEQ at 120 gpt), plus it is growing in size (100,000 meter drilling in 2022). It is a large mine in the making. However, it is still early exploration with 8 known veins and will take about 2 more years to get to production. So, this is really a drill story or long-term development. Recent drill results point to much larger resources (5,000 gpt AgEq over 1 meter).
Los Ricos has two separate deposits (North and South), and both will be big mines. They have completed a PEA for both Los Ricos South (LRS) and Los Ricos North (LRN). The first project to be built will be LRS. It is expected to begin production at 8 million oz a year, with a capex of $125 million, and break-even costs (free cash flow) of around $16 to $18 per oz. A PFS is scheduled for completion in 2023 and will find out more about costs. Production is scheduled for 2025.
The company is fully funded for the construction of LRS and expects the payback to be only one year. That means the funding of LRN should not be an issue, and they will not be accumulating a lot of debt.
The LRN PEA has a capex of $220M to produce 9M oz AGEQ annually, with an AISC of $10 per oz. Production isn’t until 2027, so costs will rise, but they have a lot of room for error.
Both projects do not have a high capex, nor have long builds. Combined, they will produce around 17M oz AGEQ from 2027 to 2030 (production could drop after this if they don't have exploration success). Plus, their tailing project should still be producing at that time, adding another 2M oz a year. That is a lot of production and a lot of potential FCF (free cash flow).
LRS and LRN are mostly open pit projects, with some underground, which adds risk. It’s not permitted yet, and Mexico has been a difficult place to permit open pit projects under its current president. Both projects rely on base metals for their low costs. LRS has copper offsets. LRN has copper, zinc, and lead offsets.
Both LRS and LRN are growing in size. The drill results were excellent in 2022, especially at LRS. They are targeting 8M oz of production for the first 5 years at LRS. I think they will be able to maintain that level for at least 10 years. They are targeting 9M oz of production at LRN for the first 11 years. I think that total could increase from exploration success.
As you can see, Los Ricos is a monster project, and they will not have to incur very much debt to achieve this production. If you are a silver bug like me, it’s pretty juicy (big upside potential), even if we have to wait 4-5 years for the big payoff.
Company Info
Cash: $100 million
Debt: None
Current Silver Resources: 250 million oz.
Estimated Future Silver Resources: 250 million oz.
Current Silver Production: 2 million oz.
Estimated Future Silver Production: 18 million oz.
Current Silver All-in Costs (breakeven): $20 per oz.
Estimated Future Silver All-in Costs (breakeven): $25 per oz.
Current FCF Multiple: 47
Scorecard (1 to 10)
Properties/Projects: 8
Costs/Grade/Economics: 8
People/Management: 7.5
Cash/Debt: 8
Location Risk: 7
Risk-Reward: 8
Upside Potential: 8
Production Growth Potential/Exploration: 8
Overall Rating: 8
Strengths/Positives
Significant upside potential
Quality properties
Strong balance sheet
Exploration potential
Risks/Red Flags
Location risk in Mexico.
Permitting risk in Mexico.
Dependence on higher PM prices.
Long timeline until full production at Los Ricos.
Could get acquired.
Speculation stock (high risk).
Estimated Future Valuation ($75 silver)
Silver production estimate for the long term: 18 million AGEQ oz.
Silver All-In Costs (break-even): $25 AGEQ per oz.
18M oz. x ($75 - $25) = $900 million annual FCF (free cash flow).
$900 million x 8 (FCF multiplier) = $7.2 billion
Current FD market cap: $371 million
Upside potential: 1800%
Future Valuation Explained
This is an estimated return, and will only occur if all assumptions are correct. A more likely outcome will be something less than this amount, although it is not crazy talk to expect silver to exceed $75 or the FCF multiple to exceed 8.
My All-In Costs are the expected costs that will generate FCF (free cash flow).
I used a future FCF multiplier of 8, which I consider to be a conservative expectation. A quality producer today can easily have a multiple of 15.
I used a future PM price of $75 silver because I am a long-term investor who plans to wait for higher silver prices. I expect to see this level reached within 3-5 years. In fact, I use $100 silver for valuations on my website since that is my expected future price. I tone it down a bit to $75 on Seeking Alpha, which I think is more reasonable.
It is my opinion that gold drives the silver price and that macroeconomics drives the gold price. The only reason I expect to see $100 silver is because I expect to see at least $3000 gold.
A $75 or $100 silver price may seem like pie-in-the-sky fantasy, but silver traded at $49 in 2011 when gold was at $1,935. If gold rises 50% from its current level, there is a good chance that silver will rise 150%. This is usually what happens as the GSR gets squeezed. Of course, this is an assumption.
Balance Sheet/Share Dilution
They currently have a strong balance sheet, and they won’t have to borrow much (around $50M) for the LRS capex. The payback is only 1 year at current silver prices. They will have to borrow more for LRN (around $150M), but that is not until 2026. I don’t think it is a concern.
They do have a significant number of FD shares, and I hope they don’t dilute too much more. I'm confident they won't and that they are investor-friendly.
Risk/Reward
As I mentioned at the beginning, the risk-reward is never that great for long-term development projects. One of your assumptions is bound to get flipped. That said, I like this one a lot. Insiders own at least 25% of the shares, and they know Los Ricos is one of the best silver projects in the world. They are not going to give it away (hopefully!).
The biggest risk is that PM prices won’t rise, or inflation will cause costs to rise significantly, reducing expected margins. Plus, permitting is a big risk for this project, as well as political risk in Mexico. Of course, those are not the only risks. This is speculation investing, and many things can go wrong.
Investment Thesis
I use a pyramid approach to investing, with many safer bets at the base of my pyramid. This includes physical PMs at the base to reduce risk. I also want to own as many quality PM producers as I can find at good entry prices to diversify risk.
After I get the bottom of the pyramid in good shape, I can then speculate on higher risk stocks such as GoGold, and bet they will pay off with high returns. Only a few of these will pay off big, but you can’t find big winners if you don’t bet.
I like to find as many stocks like GoGold as I can and then let the winners appear. I always say that you can’t pick PM winners. All you can do is pick potential winners and then let the winners appear. I can tell you from experience that my big winners are always a surprise. That said, I want to own stocks like GoGold that at least point to big winners if my assumptions hold.
GoGold has a good chance of doing two things. First, beginning to trend once LRS gets into production. Second, reaching its potential once LRN gets into production. Of course, the key will be the silver price, which is always the most important factor.
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