INVESTMENT COMMENTARY — Lluvia de Oro adds upside to Santa Cruz

Mining analysts love turnaround stories, as do many investors who hope to catch companies on the rebound from the rocky transition from exploration to production. One recent example is Santa Cruz Gold (SCG-T), a Mexican-focused gold producer and exploration company.

Santa Cruz evolved from a series of restructurings that it completed earlier this year with Great Lakes Minerals and Newmex Mining. The parent of them all, Great Lakes, suffered in tandem with a failed mine in Idaho operated by a senior partner. Its Mexican assets were acquired by Newmex, which, in turn, merged with Santa Cruz.

The surviving entity, Santa Cruz, currently operates the Lluvia de Oro gold mine and is developing the Magistral gold mine. It also is exploring various other projects in Mexico.

Analysts are starting to pay attention to Santa Cruz, now trading at a modest 38 cents per share. Barry Cooper and Donald McLean of CIBC Wood Gundy see plenty of upside and believe shares could potentially increase to 75 cents within a year. “Compared to other junior production companies, Santa Cruz trades at resource multiples that are 35% of its peer group,” they noted in a recent research report.

The company owns 100% of Lluvia de Oro, a low-grade, heap-leach mine in Sonora state. The open-pit operation is scheduled to produce about 23,000 oz.

gold this year from a reserve of 4.6 million tonnes grading 0.82 gram gold per tonne. Operating costs are about US$240 per oz., including royalties.

Lluvia de Oro has a mine life of about five years, though exploration is continuing and the potential for new discoveries is considered good.

With Lluvia de Oro operating profitably, Santa Cruz is turning its attention to developing the 100%-owned Magistral project, near the city of Culiacan in Sinaloa state. This project has minable reserves of 3.5 million tonnes grading 1.97 grams gold at San Rafael, plus 3.7 million tonnes grading 1.7 grams in two other zones. Tailings from past mining add a further 730,000 tonnes of 1.58 grams that could be reworked.

Capital costs to develop an open-pit mine are estimated at US$9 million.

Production is planned at a rate of 70,000 oz. per year, with cash operating costs pegged at US$235 per oz. Magistral is scheduled to start production next year.

On the exploration front, Santa Cruz holds an option to earn 100% of El Escobal, a gold project near Culiacan in Sinaloa. The project has a history of past production, and a 40-hole drill program will attempt to expand known resources.

In Jalisco state, 140 km southwest of Guadalajara, Santa Cruz holds rights to earn 100% of the Sindrome De Piedra gold-silver project. While narrow veins had been exploited in the past, the property’s potential to host bulk-tonnage targets has not yet been investigated. A $175,000 drill program is scheduled to be completed by year-end.

Santa Cruz also holds an option to acquire a 100% interest in the Palmarito silver-gold project, also in Sinaloa, which is reported to host geological resources of 5.8 million tonnes at an average grade of 0.09 gram gold-equivalent, plus dumps and tailings from past operations.

The analysts note that while Santa Cruz is not likely to be a takeover candidate for senior producers, it may appeal to smaller producers looking to expand their production base.