Torex readies the shovels at Morelos

Torex Gold Resources (TSX: TXG; US-OTC: TORXF) is set to break ground on its Morelos gold mine in Mexico.

The Toronto-based company has the permits in place, and says contractors are being mobilized in anticipation of a November construction start-up.

Morelos — which will mine the El Limon, North and Guajes pit once in production — should take 21 months to build, and it will be Torex’s first mine and mill complex.

The company has high hopes for the mine, even in today’s slumping commodity market, and expects  Morelos will become one of the world’s largest and lowest-cost gold mines.

A bankable feasibility study estimated life-of-mine cash costs, net of silver credits, of US$421 per oz. gold. The study estimated it would cost US$675 million to build the mine and another US$86 million in sustaining capital.

Much of the financing would come from a $380-million equity financing in October 2012. Torex also has indicative agreements signed with five banks for $250 million in debt financing.

The money would build a mine with a 10.5-year life and average annual production of 375,000 oz. gold per year. Proven and probable reserves stand at 48.8 million tonnes with a grading 2.61 grams per tonne, and the mill head grade is expected to be 2.61 grams per tonne. The overall strip ratio for the open pits is expected to be 5.6 to 1. The metrics would help generate an after-tax net present value (NPV) of US$900 million using a 5% discount rate and a US$1,276 oz. gold price.

And while the latest permits were key to get construction into full swing, Torex has not been sitting on its hands while waiting for the final approvals. The company has finished 43% of the detailed engineering, and says that procurement and contracting commitments are well advanced. Dozer trails are in place to access the Guajes pit, the construction camp has been built and all equipment has been assembled, thanks to previous permits.

Morelos sits in the Guerrero gold belt, 180 km southwest of Mexico City. Within the 100%-owned, 290 sq. km property the company has two projects: the El Limon–Guajes project, where construction is set to get underway; and the Media Luna project, which is an advanced-stage exploration play with 5.8 million equivalent oz. gold in the inferred category.

Scotiabank analyst Trevor Turnbull has a “sector outperform” rating and $3 price target on the stock. He states that once the financing overhang is removed, Torex shares should get a positive re-rating and emerge as a low-cost, mid-tier producer.

On Oct. 22 — the day the positive permitting news was released — the company’s shares were up 7%, or 8¢, to $1.28 per share.