Argonaut unveils Veta Madre resource at La Colorada

The La Colorada deposit in Sonora Mexico has come a long way since Jesuit missionaries first staked the ground and mined the Minas Prietas zone in the mid-1700s. From 1860 to 1914 the deposit was mined from underground (production was shut down at the start of the Mexican Revolution), and from 1994 through 2000, La Colorada was mined as an open pit. 

Argonaut Gold (AR-T) acquired 100% of the property in January 2011, and expects it will produce 9,000 oz. gold in the first half of 2013, and 27,000 oz. gold in the second half of the year.

In the first quarter the La Colorada and Gran Central pits produced 5,782 oz. gold, an 87% improvement over the first quarter of 2012, and 44,879 oz. silver, a 161% year-on-year improvement.

Argonaut says mining during the first half of the year at La Colorada will be low grade with a high strip ratio, whereas the number of tonnes processed are expected to increase in the second half of the year, along with the overall grade. 

The La Colorada property hosts several gold deposits near the historic mining town of La Colorada, about 53 km southeast of Hermosillo, in the western foothills of the Sierra Madre Occidental mountain chain, 110 km east of the Gulf of California.
The El Creston and Minas Prietas veins make up the largest vein system at La Colorada and were originally mined as separate orebodies, but are now recognized as being part of the same mineralized zone.

Argonaut hopes to start mining the Veta Madre deposit 1.5 km east of the El Creston-Minas Prietas pit by 2014, pending the receipt of permits. On April 15 the Mexico-focused junior gold producer released an initial resource estimate for Veta Madre outlining an inferred resource of 6.7 million tonnes grading 0.51 gram gold per tonne and 3.25 grams silver per tonne, for 110,145 contained oz. gold and 701,908 contained oz. silver.

Annual production from Veta Madre is forecast to be in the range of 10,000 to 20,000 oz. gold, and mining the deposit will have minimal capital requirements, the company says, as it would be built as a heap-leach operation with solution pumped to the La Colorada plant. The mineralization at Veta Madre is oxidized material that begins at surface and runs to current drill depths of 170 metres. Column heap-leach testing indicates that recoveries could reach 85% for gold and 15% for silver.

The resource is constrained to Argonaut’s surface-rights concessions, but Argonaut maintains that if it can secure more surface rights, the surrounding mineralized envelope at Veta Madre “provides potential growth in ounces.”  

Tom Burkhart, Argonaut’s vice-president of exploration, noted in prepared remarks that the company’s current resources at La Colorada are part of a large gold-silver district that historically has produced between 3 and 5 million oz. gold. The company is reviewing satellite gold targets near the mine.

The mineralized zones, he contends, show evidence of limited past underground production where there is potential for open-pit extraction of mineralized wall rock.

“These surrounding gold occurrences offer significant potential, and may add resources to the La Colorada operation,” he noted in a press release. “Also offering long-term upside at La Colorada is known high-grade mineralization that underlies all of the current open-pit mining operation.” Burkhart believes there is potential for underground mining at La Colorada, and will be studying the possibility throughout 2013.

In a technical report, Argonaut described the La Colorada gold district as having many of the characteristics of a low-sulphidization epithermal vein gold-silver deposit.  

In addition to first-quarter production from La Colorada, Argonaut’s 100%-owned El Castillo mine in Durango, Mexico, produced 23,125 oz. gold, up 30% from the first quarter of 2012.

The company took over operating mining at El Castillo from contractors in March, and is building almost 30 million tonnes of capacity on the west side pad No. 8. Capital expenditures for a west side crusher and overland conveyor, designed to reduce costs, will be completed and operational in this year’s third quarter.

Argonaut believes El Castillo will produce 46,000 oz. gold during the first half of 2013, and 49,000 oz. in the second half of the year.

In addition to El Castillo and La Colorada, Argonaut has the advanced exploration-stage San Antonio project in Baja California Sur, Mexico, and the exploration-stage Magino project in Ontario.

Rahul Paul of Canaccord Genuity and Andrew Kaip of BMO Capital Markets both have target prices on the stock of $12 per share.

Paul notes that the company has an “attractive valuation in the context of one of the best, fully funded growth profiles in the sector,” and that “with a proven management team at the helm and expected operational momentum over the next twelve months, we see substantial re-rating potential on execution on the ramp-ups at El Castillo and La Colorada, in addition to advancing San Antonio and Magino.”

Michael Siperco of Macquarie Equities Research describes Argonaut as “a defensive stock in a bearish world,” and has an $11-per-share target price.

“Low-cost existing operations, minimal ongoing capex, a large cash balance and development optionality are all positives,” he notes. “We recommend investors buy the stock both for downside protection in a $1,200 per oz. gold price scenario, and for potential upside from growth at San Antonio and Magino, should gold rebound.”

Siperco says Argonaut has US$200 million in cash and no debt on its balance sheet this quarter, and that at US$1,200 per oz. gold, it will have free cash flow from El Castillo and La Colorada of about US$50 million a year. He also says the company has potential upside from its development properties that he argues can be funded internally. He anticipates capex for San Antonio will come in at US$85 million, and US$315 million for Magino. “With US$200 million in cash today and cash flow of US$250 million over the next three years, both projects should be affordable, or require minimal additional financing depending on capex plans,” he writes.

At press time, Argonaut was trading at $5.77 per share. Over the last year it has ranged between $5.57 on April 15, and $11.08 on Oct. 4, 2012.