Canaccord initiates coverage of Goldgroup Mining

Junior Goldgroup Mining (GGA-T, GGAZF-O) believes it can produce more than 200,000 ounces of gold a year within three years through organic growth from a combination of its Mexican assets and Canaccord Genuity mining analyst Nicholas Campbell thinks those numbers aren’t far off the mark. 

Campbell has initiated coverage of the company with a speculative buy rating and forecasts the company “should be able to grow from 22,000 ounces of production currently to 97,000 ounces of gold in 2013 (with contribution from Caballo Blanco) to 137,000 ounces in 2014 (with contribution from San Jose de Gracia) to 157,000 ounces in 2015 (through the ramp up of the san Jose de Gracia operation).” He also estimates total cash costs will fall from US$1078 per oz. this year to US$545 per oz. in 2015.

Caballo Blanco, 65 km northwest of Veracruz, Mexico’s largest port city, is Goldgroup’s flagship asset and is envisioned as an open pit run-of-mine heap leach operation.

The company expects to complete a preliminary economic assessment by the second quarter of next year and is currently at work on a 30,000-metre drill program to expand the resource estimate at the La Paila anomaly in the fourth quarter of this year.

Currently the La Paila deposit has indicated resources of 6.7 million tonnes grading 0.65 gram gold per tonne for contained gold of about 139,000 ounces, plus inferred resources of 27.6 million tonnes grading 0.58 gram gold for 517,000 ounces of gold.

Goldgroup says it is targeting an updated resource “sufficient to sustain 100,000 ounces of gold production a year starting in the second half of 2012.” Campbell of Canaccord forecasts capex of US$60 million for a 20,000 tonne-per-day operation producing roughly 107,000 ounces of gold per year at an average cash cost of US$521 per oz. He estimates production could start in late 2012.

Meanwhile, Goldgroup is working on a revised resource estimate for its 50%-owned San Jose de Gracia project that it expects to be finished in the third quarter of this year, with a preliminary economic assessment to be completed in 2012. Goldgroup forecasts San Jose de Gracia will start production as an underground operation in the second half of 2013.

The high-grade advanced gold project in northeastern Sinaloa, about 120 km northeast of the city of Los Mochis, has an inferred resource of 3.4 million tonnes grading 5.6 grams gold for about 618,000 ounces of contained gold at a cut-off grade of 2 grams gold per tonne.  “These resources should be sufficient to support a 1,500 tonne-per-day underground mining operation over a six-year mine life,” Campbell notes.

Finally Goldgroup’s 100%-owned Cerro Colorado open-pit mine in northern Sinaloa is expected to produce gold for another five years, with the company forecasting production this year of   25,000 ounces. The mine started producing gold in 2003. Gold is produced in doré and then shipped to a refiner in the United States for final processing.    

“In the current gold price environment, the Cerro Colorado mine provides some operating cash flow (we estimate US$4-11 million in annual free cash flow over the remainder of the mine life), which provides working capital to pay for corporate overhead and finance some exploration and development,” Campbell notes.

The property consists of six mineral concessions covering the area of the mine and 44 concessions in the immediate vicinity totaling 33,767 hectares and exploration drilling around the mine site is underway.

Over the course of his thirty-year career in the industry, Keith Piggott, Goldgroup’s president and chief executive, has launched two gold mines in Mexico. He initially made his mark developing mining systems as a mine superintendent in Zambia’s copper and cobalt mines (at Luanshya, Chibuluma, Chambishi and Kalengwa) before operating an exploration company in Australia and Papua New Guinea and identifying the gold cap of the OK Tedi copper ore body, which was then dealt to BHP Billiton (BHP-N), Goldgroup states on its website. In addition he has started and produced, mostly through companies that he has controlled, a number of gold/silver, tin, tungsten, rutile/zircon open pit and heap leach mines in Mexico and Australia. For the last twelve years Piggott has focused on gold production in Mexico and Latin America.

At presstime in Toronto Goldgroup was trading at $1.42 per share within a 52-week range of 68¢ and $1.67 per share.

Cambpell has a 12-month price target on the stock of $2.50 per share.

“As investors recognize Goldgroup’s growth profile, its valuation should begin to catch up with the peer group average,” he wrote, noting that Goldgroup is trading at 0.40 times P/NAV (5% spot) and 2.1 times 2013 estimated cash flow per share versus the junior producer average of 0.76 times and 8.8 times 2013 estimated cash flow per share.Goldgroup has about US$40.8 million in cash and equivalents and no long-term debt.

According to Campbell, Goldgroup’s largest institutional shareholders are Ruffer LLP (5.5%), Sceptre Investments (4.2%), Sprott Asset Management (3.2%), Mackenzie Financial (2.8%), May Investment Advisors (1.1%) and Well Capital (1.1%).