Gammon Gold bouncing back

The evolution of Gammon Gold (GAM-T, GRS-x) from a small junior exploration company to a mid-tier gold and silver producer was a nice growth story — at first.

But then things started to unravel for the Nova Scotia-based miner. Last year, production at its mines in Mexico reached just 218,734 gold-equivalent oz., nearly half of what the company had originally estimated. At the same time, cash costs climbed to US$650 per oz. — well above the US$400-peroz. average. By the time the year was out, Gammon had lost more than $100 million; its stock had dropped 60%, and shareholders had started to file lawsuits.

It was a wakeup call and new management was hired to shake things up. Since the turnaround strategy was launched in December 2007, Gammon’s new management team, led by chief executive Ren Marion, has vaulted production by 48%; slashed total cash costs by 25% and boosted net earnings per share by 132%.

These achievements translated into a $22.6-million improvement in operating cash flow and a $16.1- million gain in net free cash flow in the second quarter of 2008, compared with the fourth quarter of 2007. Indeed, cash flow was so strong that Gammon made unscheduled debt repayments of $8 million.

Today, the company is about to list on the New York Stock Exchange under its current Amex trading symbol, GRS. The new listing is planned for Oct. 14.

Financial results for the first six months of the year ending June 30 demonstrate the extent of the turnaround.

Gammon’s Mexican mines produced 76,564 oz. gold and nearly 2.8 million oz. silver, or 129,100 gold-equivalent oz., at a cash cost per oz. of US$499 per gold-equivalent oz. Those numbers represent a 5% improvement in gold-equivalent production and a 21% reduction in total cash costs per gold-equivalent oz. over the same period in 2007.

Revenue from mining operations reached $115.9 million, up from $81.9 million in the first half of 2007, while net earnings climbed to $15 million compared with a net loss of $35.8 million in the year-earlier period.

Gammon owns two producing mines in Mexico — Ocampo and El Cubo — as well as an advanced gold-silver exploration project called Guadalupe y Calvo.

“We are well poised to fully leverage the 2008 capital project initiatives at Ocampo, where mill capacity will increase by 65-78 per cent and heap-leach capacity will increase by 113-146 per cent,” Marion said in a statement announcing the second-quarter results in early August.

Gammon is also continuing to cut costs with initiatives to reduce the stripping ratio at Ocampo over the third and fourth quarters, accessing 20 megawatts of grid power by 2009, and optimizing reagent use and economy of scale improvements through expanding the Ocampo mill. The mill expansion is expected to be complete in the fourth quarter of this year.

Additional cost-saving strategies will be implemented at El Cubo, including rationalizing the workforce, consolidating all of the processing activity to the standalone, lower-cost Las Torres mill, closing the Tajo mill and receiving new underground mining equipment.

The upturn in operational performance prompted the board of directors in May to approve a $28.5-million exploration program for 2008-2009. Less than 20% of Gammon’s property at both Ocampo and El Cubo has been explored to date.

Gammon has been exploring the Ocampo mining district since 1999. Ocampo is made up of an underground mine and an open pit, about 235 km southwest of the state capital of Chihuahua, in Mexico’s Chihuahua state.

Proven and probable reserves at Ocampo are 52.1 million tonnes grading 9.87 grams gold per tonne and 40 grams silver, for total contained gold of 1.46 million oz. and 66.4 million oz. silver.

Situated in the Sierra Madre Occidental, Ocampo is in an extensive physiographic province that consists mainly of volcanic rocks that have been intruded by plutonic rocks, which overlie a Precambrian through Jurassic basement. This province extends from the centre of Mexico to the U. S. border.

During the first half of this year, Gammon completed $30.2 million, or 67-76%, of Ocampo’s $40- to $45-million capital expansion program, including acquiring six pieces of primary production equipment for the underground operations.

In partnership with Agnico-Eagle Mines (AEM-T, AEM-n) on a 50-50 cost-sharing basis, Gammon is contributing $7 million to the construction of a 25-km, 115-kilovolt power line to bring in full grid power to its Ocampo operations.

Gammon expects the power line will be up and running by the end of the second half of 2009 and estimates that lower-cost grid power will cut production costs by up to $24 per gold-equivalent oz.

As part of its efforts to raise mill production by 65-78%, a third filter line is being added to the mill. The project is currently 50% complete with the filter frame already installed. Commissioning is expected by the fourth quarter of 2008.

At the end of June, Gammon also completed a lined leach pad expansion, which will allow for an additional 5 million tonnes of ore to be stacked and leached. A design for additional pad space is underway and construction is anticipated to start later this year.

Gammon’s second mine, El Cubo, which it acquired in 2004, is about 275 km northwest of Mexico City in the village of El Cubo, about 10 km east of Guanajuato, the capital city of Guanajuato state.

El Cubo has proven and probable reserves of 3.53 million tonnes grading 3.16 grams gold per tonne and 158 grams silver for total contained gold of 359,000 oz. and 17.9 million oz. silver.

The project consists of 58 mining and exploration concessions that cover 85 sq. km. The El Cubo mine itself is a multi-level, underground mine with access ramps for mining equipment and four shafts to hoist ore.

Meanwhile, Gammon’s Guadalupe y Calvo gold-silver exploration project is in a previously mined area adjacent to the town of Guadalupe y Calvo in the southwestern corner of Chihuahua state, about 300 km southwest of Chihuahua city.

The project contains an inferred resource of 1.08 million oz. gold and 45.6 million oz. silver, or 2 million gold-equivalent oz.

In March, Gammon reported that gold and silver grades from all drill holes to date with intercepts above a cutoff of 3 grams gold per tonne, averaged 3.56 grams gold and 299 grams silver over an average interval of 3 metres.

Gold and silver grades from all drill holes with intercepts above a 0.5-gram cutoff averaged 0.98 gram gold and 85 grams silver over an average interval of 10.7 metres.

So far, the results suggest the extension of the mineralized zone along strike and at depth and continue to support the potential for both open-pit and underground operations, the company says.

Drilling in the first half of this year was designed to update the resource estimate, conduct metallurgical work and complete a scoping study for a potential open-pit and underground operation.

The scoping study is due out in the first half of 2009, but Gam-mon’s management says it expects the results will be positive and that the project will advance to the feasibility stage in the second half of next year.

Gammon is currently trading at about $8.17 per share in a 52-week window of $5.80-12.02.

The company has 119.69 million shares outstanding.