Alio Gold to make construction decision on Ana Paula in Q2 2018

Since Mexican regulator SEMARNAT approved Ana Paula’s environmental impact assessment in April, Alio Gold (TSX: ALO; NYSE-AM: ALO) has continued to take big strides in de-risking the relatively high-grade, open-pit project that lies along the northwestern extension of southern Mexico’s Guerrero gold belt.

A prefeasibility study in May indicates the company could build the mine for an initial capital cost of US$137 million, and outlines a seven-and-a-half-year mine life producing a total of 868,000 oz. gold.

The study estimates operating costs would be in the first quartile, with cash costs of US$489 per oz. and all-in sustaining costs of US$524 per oz. gold. At US$1,250 per oz. gold, Ana Paula’s net present value is estimated at US$223 million using a 5% discount rate, and it has a projected 34% internal rate of return.

In September, Alio Gold received its second major permit with the approval of the change of land use application. Reaching this milestone means the company can focus on finishing a definitive feasibility study and arrange project financing.

The Ana Paula project. Credit: Timmins Gold.

“Those two permits are the two main hurdles to getting construction started,” Greg McCunn, Alio Gold’s CEO, tells The Northern Miner. “We’re happy to have those ones behind us, and we expect to have all permitting virtually complete by the end of this year.”

The open pit proposed in the Ana Paula prefeasibility study contains “proven and probable reserves” of 13.4 million tonnes grading 2.36 grams gold per tonne for 1.02 million contained oz. gold using a US$1,200 per oz. gold price.

Included in the “reserves” are 2.3 million tonnes grading 5.9 grams gold per tonne for 436,000 oz. gold within a high-grade breccia core, with an approximate depth of 190 metres.

“We’ve got high-grade breccia mineralization that outcrops at surface, and that breccia is surrounded by a lower-grade halo,” McCunn says, adding that the mineralized breccia makes up almost half of the project’s current “reserves.”

Based on prior drill programs, the high-grade breccia is known to continue for 300 metres below the bottom of the proposed pit, which sits at 150 metres.

Intercepts from the breccia zone include: 55.7 metres grading 3.66 grams gold per tonne starting from 287 metres downhole, with 19.7 metres of 6.46 grams gold from 289 metres; 39.6 metres of 1.62 grams gold starting from 481.8 metres deep; and 2.6 metres of 5.19 grams gold from 706.9 metres deep.

The company’s directors recently approved excavating a decline to facilitate exploration drilling. The 1,200-metre decline will be driven from a portal in the adjacent valley from the proposed pit and 400 metres from the proposed mill site.

The Ana Paula gold property in Guerrero, Mexico. Credit: Timmins Gold.

It would take nine months for the decline to reach the mineralized area, at which point the company can start an underground diamond drill program.

McCunn expects to start drilling from underground by the end of the second quarter of 2018.

“We’re going to drill it off from underground, and there’s potential to double the reserves there, but of course we need to drill it to prove that,” McCunn says.

The mining executive notes that part of the value proposition at Ana Paula is that a mill it purchased (from Goldcorp’s (TSX: G; NYSE: GG) El Sauzal operations for US$17 million in cash and shares) has a capacity of 6,000 tonnes per day, while the geometry of the Ana Paula pit means that it will not be able to fill the mill to full capacity.

“The pit is limited to about 5,000 tonnes per day, so we’ve got potentially an extra 1,000-tonne-per-day capacity,” he says. “If we can feed 1,000 tonnes from underground, that will significantly improve the economics and make them much more compelling.

“The project is good enough to approve it without any exploration,” he adds. “We haven’t committed to build the whole project yet. We need to finish the definitive feasibility study and get the rest of our permits, but presumably the start of drilling underground and the start of construction will be about the same time.”

The US$16-million decline and underground exploration program is not expected to provide results that will be incorporated into the feasibility study. Drill results aren’t expected until mid-2018. If the exploration program is successful, however, the mine plan will be optimized during construction to balance feed from both the pit and underground for start-up and commissioning.

Drill core at Alio Gold’s Ana Paula gold project in Mexico. Credit: Alio Gold.

Alio Gold expects to spend US$24 million between July 2017 and June 2018 advancing the project, including costs for the new study.

Meanwhile, McCunn is starting surface exploration.

McCunn notes that with Ana Paula’s 560 sq. km, Alio Gold, “has one of the best land packages in the Guerrero belt, and the probability of finding another deposit on our concessions is significant.”

“Torex is immediately to the southeast of us. It’s about 7.5 km to El Limon — you can actually see it from our project — and Leagold’s Los Filos mine is equidistant farther southeast of Torex,” he says. “This is a highly prolific gold belt, and there have been over 3 million oz. produced in it. This will continue to be a world-class gold camp, and we’ve got one of the best land positions in it.”

McCunn admits that with a great land package and a fairly modest market cap, Alio Gold could become a takeover target. When asked if Leagold Mining (TSX: LMC) might be interested, McCunn acknowledges he’s heard the rumours.

“The new owners of Leagold are intending to build a company like they did at Endeavour Mining, where they built a company in West Africa through acquisitions, so there’s speculation about who they might acquire first,” he says.

“Potentially we’d be a good fit — there’s always that potential — but our mission is to build a mid-tier gold mining company, so we’ll keep doing the right things, and if someone wants to buy us, we’ll run like hell and make them tackle us from behind.”

In addition to Ana Paula, Alio Gold owns the San Francisco mine in Sonora, Mexico. The mine produced 67,488 oz. gold in the nine months ended Sept. 30 and is on track to produce between 88,000 and 90,000 oz. this year. McCunn says the mine should produce over 100,000 oz. gold next year.

The company had US$68.5 million in cash as of Sept. 30.