Countless junior gold stocks have risen to dizzying heights so far this year. Take Brazil Resources (TSX.V:BRI) for instance. Its share price rocketed as much as 700% to $3.16 at one point.
But are such lofty prices really justifiable? In other words, how many gold juniors really have the goods?
More to the point, how many in-development gold deposits can actually be monetized any time soon? Very few.
However, Amarillo Gold Corp. (TSX.V: AGC)
is an obvious exception.
This low-profile, thinly-traded company was recently issued a preliminary permit to build a gold mine in Brazil. And not a moment too soon. After all, it endured a four-year wait before getting this crucial nod of approval from government regulators.
But timing is everything in the business world.
So Amarillo is finally poised to capitalize on a resurgent gold market in the most meaningful way—by inexpensively mining and selling upwards of 1.2 million ounces of gold.
For its president Buddy Doyle, this milestone development isn’t just about technically de-risking a gold project that’s he’s been developing for over a decade. It’s also a triumph of the “quality over quantity” mindset that motivates him.
Such thinking makes him something of a contrarian in the gold exploration business. Most geologists are obsessed with so-called “elephant hunting”, which involves trying to find headline-grabbing multi-million-ounce deposits.
However, Doyle has already been there and done that. His claim to fame is being integral to an exploration team that discovered the giant 45-million-ounce Lihir gold mine in Papua New Guinea (by far one of the biggest mines ever found).
That was in his younger days when he was as recklessly adventurous as he was ambitious, he says. So he remained undaunted by bouts of malaria, foot rot, and even a life-threatening helicopter crash as he slogged through jungle terrain in search of the geological jackpot that became Lihir.
Now in his 50s, he says he’s much more of a cool-headed pragmatist. Which is why he’s happy to focus on grooming a far more modestly-sized gold deposit in central Brazil, near the town of Mara Rosa.
It’s called Posse. And it contains a little over 1.2 million ounces in the clearly defined “measured and indicated” category, as well as nearly 300,000 additional “inferred” (far less clearly defined) ounces.
However, Posse’s biggest selling point is that it promises to become one of the lowest-cost mines in the world. And it can be monetized at a fraction of the cost of any big-league gold discovery, like Lihir.
Magic in the Metrics?
In fact, Posse also has all the right characteristics and operational logistics to become a very lucrative gold mine, which is a considerable rarity these days, Doyle says.
An initial 2011 resource model (a preliminary blueprint for a mine) that was independently conducted for Amarillo computes production and refining costs of around US $524 an ounce.
Since then Brazil’s currency has dropped around 50% in value against the dollar. At current exchange rates, this means that Amarillo’s mining costs would significantly lower than the original US $524 estimate.
By comparison, most mining companies — big or small — are typically paying around US $1,100 an ounce to extract gold. This helps explain why most of them have been losing money in recent years.
So exactly how is Amarillo Gold planning to seriously buck an industry trend by keeping costs to an absolute minimum?
First, the deposit it can be inexpensively mined as an open pit (a quarry-like operation) because it’s near the surface. It’s also relatively high grade (averaging 1.71 grams per tonne), which also helps curtail costs.
An average of 125,000 ounces of gold per annum is expected to be mined this way for the first few years of the mine’s life. So this scenario also offers a relatively fast anticipated payback on capital costs of only three years.
Why Amarillo is Low-Hanging Fruit
With the likelihood of becoming Brazil’s next gold mine, Amarillo represents one of the ripest plums among the ranks of aspiring gold miners. It therefore makes this cash-poor but asset-rich company a potential takeover target.
In fact, de-risked gold projects like Posse represent rich veins of opportunity for supply-hungry major gold producers. Such deposits can be commercialized relatively quickly and inexpensively. And that’s a big deal for large producers that are increasingly focused on generating more near-term cash flow without committing to large cash outlays.
Posse’s appeal to prospective suitors is further sweetened by the fact that it’s located in a well-established mining district. There are several relatively proximal mines, including the Yamana Gold’s Chapata mine (35 kms away), which has a mill that is close enough to also process ore from Posse. This would offer Yamana obvious cost-cutting synergies.
There’s also plenty of other regional infrastructure in-place to support a new mine. This includes a hydroelectric power grid, a skilled labour force, and even a freeway. All of this promises to minimize projected capex (mine construction) costs, as well as operational expenditures, at Posse.
Savoring the Moment
For now, Doyle is content that Amarillo has finally cleared all the regulatory hurdles that have held up Posse’s development for the past several years.
“In the process of making Posse shovel-ready, we’ve demonstrated that we can be a good corporate citizen and a conscientious environmental steward," he says. “We’re also proved Posse’s suitability to become a very low-cost operation with sizeable annual output and some of the best profit margins in the industry.”
As for whether Posse’s for sale, “No it isn’t,” Doyle says. “Well…not yet,” he finally concedes.
His company plans to conduct a pre-feasibility study this fall, while also doing some more drilling that’s intended to increase the size of the ore body a small margin.
Beyond that, a bankable feasibility study will be undertaken, which should be finalized next year. This should definitively delineate all the necessary metrics involved in building a mine.
“Once these final benchmarks are reached, we will have finally de-risked the project and will be ready to make a mining decision,” Doyle says.
The principals of www.BNWnews.ca may from time to time hold positions in companies mentioned in its news coverage.