Cerro Moro looks good for Extorre in Santa Cruz

The markets have reacted with enthusiasm to Extorre Gold Mines’ (XG-T, XG-X) preliminary economic assessment of its Cerro Moro gold-silver project, 70 km southwest of Puerto Deseado in Argentina’s Santa Cruz province.

Extorre shares jumped 8% following the announcement on April 2, rising 49¢ to a $6.49 close on an above-average 450,000 share volume.

The new economic assessment takes into account an upgraded resource estimate released in November that includes the new high-grade Zoe vein in the indicated category and the new Carla, Martina and Esperanza-Nini discoveries in the inferred category. 

“Zoe was a fantastic discovery for us. From a material-impact point of view for sure, but it’s also an exciting discovery from an exploration perspective,” said company president and CEO Eric Roth in a January investor presentation. “On the surface the Zoe vein doesn’t look like anything special. Our exploration guys went in and said ‘we have enough smoke here, let’s drill deeper,’ and literally 20 metres below surface you hit this high-grade mineralization. It was a real game changer on how we explore and discover new resources at Moro.”

Cerro Moro has an indicated resource of 2.4 million tonnes grading 7.4 grams gold per tonne and 499 grams silver per tonne for 578,000 contained oz. gold and 38.9 million contained oz. silver. A further 4.7 million inferred tonnes carry 3.5 grams gold and 172 grams silver for 528,000 contained oz. gold and 26.3 million contained oz. silver.

“One of the key things with the Extorre assets is the very high grades in both gold and silver,” Roth commented. “You do not see many projects like this at the global scale. At the mining and development stage, it will really translate into lower cash costs.”

Extorre’s current mining permits allow for a 750-tonne-per-day operation, but with recent discoveries and increasing grades, the company foresees daily throughput rates closer to 1,300 tonnes, which would increase annual production to 250,000 oz. gold equivalent over a nine-year mine life.

Using the new model Cerro Moro has an after-tax internal rate of return of 47% with a net present value of US$463 million at a 5% discount rate. Development carries an initial capital expenditure of US$284 million, with a 24-month payback period. Projected average cash costs sit at US$304 per equivalent oz. gold through the first five years.  

“Typically the systems are mined through open cuts (pits) close to surface, with the deeper portions being mined underground,” Roth said. “The mineralization in these systems sits on very long structures, but within those structures you have discrete ore shoots. Cerro Moro is very similar to AngloGold Ashanti’s Cerro Vanguardia mine [also in Santa Cruz] in this regard, which has historically been one of AngloGold’s lowest cash-cost producers over the past fifteen years.”

If precedent is any indicator, Extorre should have little trouble with the permitting process in mining-friendly Santa Cruz. The provincial government approved Goldcorp’s (G-T, GG-N) plan to increase throughput to 4,000 tonnes from 1,850 tonnes per day at its Cerro Negro gold project in December after only two months of review.

Extorre plans to apply for its mining permit during the third quarter with construction aimed to start shortly thereafter, and initial production pegged for the first quarter of 2014. 

“From an investor’s perspective we will have strong news flow through 2012,” Roth said. “We have a two-pronged strategy of continuing to expand the system through exploration as well as proceeding with the mine development studies as we move towards eventual production.”

Extorre plans to keep four drill rigs active through 2012 while expanding resources and discovering additional mineralized zones. The drill program includes a combination of infill drilling at Zoe and scout drilling at the Zoe East, Tres Lomas, Mosquito, Alejandra and Carlita targets.

“With these types of systems you can start a mine even if you don’t have all of your resources yet,” Roth said. “If you look at our neighbours, they reach a particular resource level and move to the development stage, but continue to make additional discoveries. That’s the underlying value for the company.”

Extorre released updated drill results on the Zoe infill program in early March, with high-grade hits at depths exceeding 250 metres and highlights of 3 metres grading 41.4 grams per tonne gold and 2,245 grams silver; 4 metres of 53 grams gold and 4,300 grams silver; and 2 metres of 51 grams gold and 6,426 grams silver. The zone remains open in all directions.

Roth noted that the Cerro Moro deposit has never been drilled to a great depth, and that the bulk of the Escondida mineralization has been drilled to 200 metres. At the Zoe discovery, Roth said Extorre geologists have identified mineralization at least 450 metres below surface.

Extorre’s mineral rights extend over 1,600 sq. km in Santa Cruz, and within this area the company recently announced gold mineralization at its Falcon project, as well as positive silver results from its Puntudo project.

“We feel the Santa Cruz province is a bit underdeveloped from an exploration perspective, though it’s quite busy these days,” Roth said. “With the quality of projects in the neighbourhood, it’s not too surprising.”  

With a US$50-million bought-deal equity financing completed in January, a US$37-million treasury and a US$577-million market capitalization, Extorre looks ready to take advantage.