GoGold Resources sells 
Santa Gertrudis to Agnico Eagle

GoGold Resources (TSX: GGD) is selling its Santa Gertrudis gold project in Sonora, Mexico, to Agnico Eagle Mines (TSX: AEM; NYSE: AEM) for US$80 million in cash to eliminate debt.

The junior has a 2% net smelter return royalty (NSR), but Agnico has the right to buy back 1% of the NSR for US$7.5 million.

“I can’t speak for Agnico, but obviously their technical people see something they very much like in the property, and so it’s a win-win for both companies,” Brad Langille, GoGold’s cofounder, president and CEO, tells The Northern Miner. “It’s going to go into their pipeline of projects, and, for us, it was a way to de-lever our balance sheet, pay off our revolver with the Bank of Montreal, which is US$46.5 million, and give our shareholders some upside to the project under our 2% NSR.”

GoGold, which acquired the project in April 2014 through its takeover of Animas Resources, subsequently completed 13,000 metres of drilling, updated a historic resource based on more than 2,000 drill holes, and completed a preliminary economic assessment (PEA).

Agnico, one of several companies that signed confidentiality agreements on the property, initially started due diligence on Santa Gertrudis more than a year ago. “They have a very, very strong technical team,” Langille says, adding that Agnico is a “very capable mine builder.”

“It is a great company to be involved with on this project — they are a premier major and they’re going to advance.”

Santa Gertrudis, 180 km north of Hermosillo, is a gold deposit that Phelps Dodge discovered in 1986 and developed into a heap-leach mine that began production in 1991. Phelps Dodge sold part of the mine to Campbell Resources in 1994. Before the mine was shut down in 2000 due to low gold prices, it had produced 564,000 oz. gold.

GoGold upgraded the project’s historic resource to comply with National Instrument 43-101 standards and produced a resource estimate totalling 23.2 million indicated tonnes grading 1.08 grams gold per tonne for 810,000 contained oz. gold, and another 255,000 oz. inferred (7.7 million tonnes at 1.02 grams gold per tonne).

The Santa Gertrudis gold project in Sonora, Mexico. Credit: GoGold Resources.

The company’s PEA estimated a 12-year mine life producing an average of 56,000 oz. gold a year at all-in sustaining costs of US$699 per oz. gold. Initial capex was forecast to come in at US$32 million, including a 20% contingency, with a payback in just under two years. Using a base case gold price of US$1,250 per oz., the study predicted a US$150-million after-tax net present value at a 5% discount rate and a 58% post-tax internal rate of return. “It’s a very advanced project, with good grades for a heap-leach operation of just over 1 gram gold,” Langille says. “In Mexico, average heap-leach operations are 0.65 gram gold per tonne.”

In addition, he says, the property has exploration potential.

“There is a lot of upside in the project, which very much interested Agnico,” he adds. “There’s 15 km of strike length on the project, with lots of really good gold showings.”

Langille says the net proceeds of the sale will enable the company not only to repay its senior revolving-credit facility, but also reduce outstanding trade and other payables, and be used for working capital purposes. It will also put the company in a good position to ramp up its Parral tailings project and help it pursue other opportunities, most likely in Mexico.

“I’ve been operating in Mexico for 20 years, so it’s a jurisdiction we know very well and we’re very comfortable with,” he says. “We like the northwestern part of Mexico — Sonora, Chihuahua, Durango — we’ve done a lot of work in those areas … we can go out and look for things that aren’t on everyone’s radar and do asset deals, while we produce cash flow from our Parral operation.”

In a research note to clients, Rob Chang of Cantor Fitzgerald described the sale as positive and upgraded the company to a “buy” rating from his previous “sell” recommendation. He increased his target price on the company’s stock from 35¢ per share to 95¢ per share.

“The proceeds of the sale will be applied towards repayment of the senior revolving-credit facility in which, as of the most recent quarterly filings, GoGold was in breach of the financial covenants,” Chang noted. “Though we most recently valued Santa Gertrudis at US$195 million [net asset value, on a] 5% basis, this transaction will go a long way towards the debt issued under the senior-secured facility, which is to mature on July 21, 2018, with a principal payment of US$46.5 million due. The remaining cash will be allocated accordingly, as the Parral tailings project ramps up to its full potential by 2018.”

The Parral tailings site has 21.3 million tonnes of tailings left over from 340 years of mining operations (which ended in 1980), near the heart of the city of Hidalgo del Parral, in Mexico’s Chihuahua state. GoGold completed a feasibility study that defined a reserve of 35 million equivalent oz. silver, or 23 million tonnes grading 38.4 grams silver per tonne and 0.31 gram gold, and a 12-year mine life.

The company built a heap-leach facility in 18 months at a cost of US$32.5 million (below the prefeasibility estimate of US$35 million), and production got underway in June 2014. In February 2015, GoGold acquired a nearby tailings property containing another 5.8 million tonnes at 49 grams silver and 0.26 gram gold. The doré produced has silver with minor amounts of gold, copper and zinc. Mining and processing the tailings has averaged US$6.50 to US$8.50 per tonne.

Parral produced 2,237 oz. gold and 151,422 oz. silver for a total of 314,910 equivalent oz. silver during the fiscal quarter ended June 30, up 13% from the previous quarter.

Langille says the project will ramp up during the 2018 fiscal year, which started on Oct. 1.

“We are the first or one of the first to heap leach tailings for precious metals, at least on this large scale, at plus 5,000 tonnes per day,” Langille says, adding that the company has processed up to 7,000 tonnes per day at the relatively low all-in cost of US$12 per equivalent oz. silver.

“Lots of people reprocess tailings — like in South Africa, where it’s big business — but in lots of cases they are re-milled in more of an agitated leach. What we do is we truck [the tailings] down the highway. We mix them with 16 kilos of cement in an agglomeration drum and convey them out to our heap, where we stack them and we leach them with a typical cyanide leach, and the back end process plant is a Merrill-Crowe, due to the high silver content.”

The tailings “are in the middle of the city of 125,000 people,” he says, and the company’s heap-leach facility is 12 km from where the tailings are deposited. The company partners with the city, and in exchange for US$50,000 per month, the company has the irrevocable right to access and process the city’s tailings. “It’s taking something that was an issue for the city and reprocessing them with 21st century environmental standards,” he says. “It’s a win-win for the city and for us.”

He admits, however, that “there have been bumps along the road.”

Initially the company used 10-metre lifts to leach the tailings, but it found there was too much compaction and the leach solution did not percolate properly through the material. (The lift height is how high the ore is stacked for the first pass.) In the last six months management has lowered the lift height to four metres and now gets better percolation and speedier and improved recoveries, Langille says. It is also adding more cement to the tailings to further solidify them, Langille says, and the two changes have sped up recoveries dramatically, and lowered inventory on the heap.

“It was supposed to take about four to six months to get the bulk of the metal out, but it became two and a half years, so we had to finance a big inventory,” he explains. “But now we’re getting expected recoveries of four to six months. It’s a big turnaround, and since we made those changes, we are seeing production going up.

“It’s really a metallurgical project,” he adds, “but we have that all worked out now. This project is really going to shine over the next 12 months. We think we can get Parral up to 2.5 million equivalent oz. silver in our next fiscal year.”