Newstrike Capital maiden resource is big, shows signs of growing

Newstrike Capital has reported a maiden 43-101 resource estimate on its Ana Paula project in Guerrero, Mexico. It’s a noteworthy resource estimate for a number of reasons, yet coming in the midst of a chill in the TSX Venture market, the company’s share price hasn’t budged. In fact, the more than two million ounce gold equivalent resource caused a short-lived dip in share price from about $1.40 down to $1.27, which then recovered back into the $1.40 range.

The resource estimate, developed by Independent Mineral Consultants of Tucson, estimated the measured and indicated resource to contain 43 million tonnes of material grading 1.63 g/t gold, resulting in about 2.26 million gold-equivalent ounces (2.2 Moz Au at 1.59 g/t and 9.7 Moz Ag at grades of 7 g/t).*

The inferred resource was estimated at 1.8 million tonnes grading 0.89 g/t, containing 60,000 gold-equivalent ounces (50,000 oz of gold at 0.78 g/t Au and 1.1-million ounces Ag at 18.7 g/t).*

Using the calculators at www.rianalytics.com, the insitu value of the indicated gold alone is shown to be over $3 billion (using an 85% gold recovery and 23% silver recovery rate suggested in the report, at today’s metal prices).

Now let’s make some conservative changes to the tonnages and add reasonable cost estimates and see where we get with this new addition to potential mines in Mexico. Let’s use $1,200 per ounce gold and $20 per ounce silver in our calculations—precious metals bugs be damned.

We’ll remove the inferred ounces completely, so that we’re working with mining 24.6 Mt at 7.6 g/t Au indicated plus a measured resource of 18.4 Mt at 6.2 g/t. We’ll add $6 per tonne operating costs (similar to other heap leach projects in the region) and add $350 million in capital costs.

The result?

$1.7 billion dollars, net. At 10,000 tonnes per day, the mine life would be close to 12 years.

You can add a discount to this, because it’s early stage and not permitted and has a long way to go, but you still get excellent numbers.

Potential concerns with this project? Some may consider the the strip ratio modestly high at about 4:1, but a closer look at the resource estimate suggests that not all the material falls into this category and that, in fact, a good portion of it—more than 10 million tonnes of material—comes from a high grade zone that lies near to surface, with a much lower strip ratio. The average grade of this more than 10 million tonnes of potential ore is 3.83 g/t gold, which looks like a slam-bam-thank-you-ma’am starter pit if I’ve ever seen one. After conceptual operating costs of $6 per tonne that would be equal to $482 million recoverable value.

While none of these numbers are compliant with the regulations of NI43-101 (Canada’s regulatory system for disclosure for mineral projects) and should not be taken as accurate in any way, such calculations are useful—and necessary, I think. Newstrike is an early-stage exploration project that does stand up to early stage scrutiny.

In terms of future potential for growth, this one reminds us of SilverCrest Mines’ Santa Elena Project, which began as a 2,500 tpd heap leach operation and is now moving underground to get to the higher grade material at depth. Ana Paula would operate at a larger capacity of 10,000 tpd, but it’s high grades at depth do suggest a future underground operation. As well, the project is open in several directions, not to mention the fact that this is a huge project area, much of it still within the GGB, which has yielded so much already. If the Ana Paula deposit area is a needle in a haystack, history suggests there are others here.

Of course, this company isn’t about to take Ana Paula into production. They are elephant trackers, but they don’t pull the trigger. They track it, find it, put it in their sights, then call in the big guns.

Ana Paula is located in a great part of the world for mining, and is surrounded by other major projects—including one that this team discovered some years ago. Now owned by Torex Gold, the advanced stage Morelos Project with more than three million ounces is located about 12 km from Ana Paula.

Key senior members of the Newstrike’s current management and directors have participated in other Guerrero Gold Belt (GGB) discoveries, too, including Goldcorp Inc.’s producing Los Filos Mine, presently the largest producer in Mexico—although Goldcorp’s Penoles will soon take its place. Today Los Filos employs 2,100 people and produces in excess of 340,000 ounces of gold per year, from a total reserve of roughly 13,000,000 ounces of gold. And it’s a stone’s throw from Ana Paula, and a part of the same GGB.

And so a clear picture begins to emerge, of a team with a history of finding very large deposits, developing, and selling them (or being bought) and making investors a lot of money.

There is no shortage of producers in Mexico looking for accretive acquisitions today. Argonaut Gold is looking. Timmins Gold is looking. SilverCrest Mines is looking. Heck, First Majestic Silver could take a slight detour into gold after looking closely at this one. After all, now is a great time to acquire great projects that are clearly undervalued. In what other industry today are companies growing and simultaneously losing value? Only on the TSX Venture, methinks.

For investors, as the TSX Venture exchange hits new lows, the time is ripe to look for the bottom feeder deals, the ones that you can expect to surge greatly once the market gets over its current mania and returns to reasonable growth levels. (As long as the Venture exchange doesn’t get hit with a spring selloff in the meantime.)

Newstrike CEO Richard Whittall recently told me he was “very impressed” with the numbers.

“We’re a relatively conservative company and I don’t want to put a timeline on anything in terms of a Preliminary Economic Assessment, yet, but we’re very excited to be moving forward with a project that has so much potential and is so close to two of our great examples of success through teamwork—Los Filos and the Morelos Project.”

For me, it was a good sign that when I called the company in mid-afternoon on a Tuesday, Whittall answered the phone himself. Everyone knows: Management is key. Too often today, you call a company and reach an IR department that puts on airs. It’s a breath of fresh air to reach a CEO who doesn’t.

*Don’t NI 43-101 rules make saying complicated things that much more complicated?! It would be so much more straightforward to say: So far, the company has proved up about 2.3 million gold equivalent ounces, but those days are distant memories…

April 8th, 2013
Categories: Uncategorized . Author: caliche