Mexico: 3 Mining Stocks to Watch

Goldgroups's flagship Caballo Blanco project is located in Veracruz, Mexico - the origin of Colonial Mexico in 1535.

According to the Mexican Mining Chamber, in 2010 revenue mining and metallurgical production (US$13.16 billion) surpassed the revenue generation of Mexico’s tourism industry and established mining as the country’s second most productive sector after oil and gas. The growth of the sector has led to increased exploration and the opening of new mining operations.

In 2010, Goldcorp’s (Stock Profile – TSX:G & NYSE:GG) open pit Peñasquito mine, Mexico’s biggest project, began operations. Over a 22-year life, Peñasquito is expected to produce an annual average of 500,000 ounces of gold, 28 million ounces of silver, 450 million pounds of zinc and 200 million pounds of lead.

In addition to Peñasquito, the Buenavista Cobre copper mine owned by Grupo Mexico SAB de CV (Stock Profile – OTCPK:GMBX) reactivated its operations and reached 100% of its production capacity in 2011. The current annual capacity of  the mine is 180,000 tons.

Projects having been moving forward despite the fact that the resource markets have been staring a bear in the face for the past 12 months – perhaps we should follow David Morgan’s advice and “accumulate during a soft period and balance your portfolio into issues with good liquidity, good management and good prospects”.

Although Morgan states, “I can make a strong case that mining equities particularly are your best value right now”, he reminds us that no one can call a market perfectly. With numerous development projects underway, we take a look at three mining companies in Mexico that are worth keeping an eye on as we navigate these volatile markets.

Goldgroup Mining Inc. (Stock Profile – TSX:GGA & OTCPK:GGAZF)

2011 was a banner year for Goldgroup. The company completed its earn-in interest for 100% ownership of its flagship project, Caballo Blanco, situated near Veracruz, Mexico. Goldgroup is moving the Caballo Blanco project forward and aims to be in full production in 2013. The company also completed a $40.25 million financing in 2011 at $1.40 per share to fund development expenses.

In addition to 100% ownership of the Caballo Blanco gold project, Goldgroup also maintains a 50% interest in DynaResource de Mexico, S.A. de C.V., which owns 100% of the high-grade gold project San José de Gracia located in the Mexican state of Sinaloa; and, a 100% ownership of the Cerro Colorado gold mine in Sonora, Mexico. The Cerro Colorado mine produced approximately 20,000 ounces of gold in 2011 and is expected to produce approximately 20,000 ounces of gold in 2012.

Goldgroup remains in a flexible financial position with a strong cash balance ($23 million as at December 31, 2011), no debt and no gold hedging. Goldgroup’s pronounced mission is to increase gold production, mineral resources, profitability and cash flow while building a leading gold producer in Mexico.

The company recently released its Preliminary Economic Assessment (PEA) for Caballo Blanco. The project is expected to generate a 66.4% pre-tax internal rate of return and a US$283.8 million pre-tax net present value using a 5% discount rate and a $1500 gold price, and produce 687,000 ounces of gold and 1.3 million ounces of silver, based on the current mineable resource.

According to Keith Piggott, President and CEO of Goldgroup, “As seen in the Caballo Blanco PEA, the project is economically robust both in terms of NPV and IRR, even well below current gold prices. We are moving this project forward responsibly to achieve production within the earliest possible timeframe. We are confident that our team at Goldgroup is capable of achieving the conservative parameters described in the PEA. Furthermore, we intend to continue growing our resources in 2012 as we continue to conduct infill and step-out drilling at Caballo Blanco.”

The company’s Environmental Impact Statement is now expected to be released in the third quarter of 2012. However, it is not unreasonable to think extensions by the Mexican Federal government may occur. Shares of Goldgroup are currently trading at $0.70.

MAG Silver Corp. (Stock Profile – TSX:MAG & AMEX:MVG)

Geologically speaking, if you believe in high-grade epithermal silver vein deposits and carbonate replacement deposit types then MAG Silver has to be near the top of your list. With that said, perhaps the best way to summarize MAG Silver is 728 grams per tonne silver. These are the grades that support the company’s Minera Juanacipio joint venture with Fresnillo (Stock Profile – LSE:FRES) at the partner’s Valdecañas deposit in Zacatecas, Mexico (MAG Silver: 44%, and Fresnillo: 56%).

MAG Silver’s share of the Minera Junacipio joint venture currently translates into 64 million ounces silver (Indicated) and 37 million ounces silver (Inferred).

The relationship with Fresnillo has not always been, how shall we say, friendly. In 2009 MAG Silver successfully defended itself in a proposed $350 million hostile insider takeover bid by Fresnillo. Fresnillo ultimately abandoned its takeover following an adverse ruling by the Ontario Securities Commission in MAG’s application to compel Fresnillo to disclose financial information relevant to its bid.

Since then, MAG Silver has mended fences and built its resource base through the exploration and development of their various projects. Today, the company’s shares are trading at just under $10 per share valuing MAG Silver at roughly $550 million.

MAG Silver has also been building credibility with the investment community – the company is currently covered by four prominent analysts. On March 26, 2012, Canaccord’s Nicholas Campbell issued a “speculative buy” on the company’s stock with a 12 month target of $18 per share. Campbell cites recent developments at the lesser known Cinco de Mayo project, “We believe that the grade and resource potential of the Cinco De Mayo is not reflected in the current valuation for MAG Silver. We previously ascribed a value of $2.50/oz on a potential resource of 20 million ounces of silver to account for the Cinco De Mayo project. Given the results to date, we have increased the potential resource to 50 million ounces of silver.”

Valdecañas and Cinco de Mayo may be the key assets in MAG’s crown but the company also has a number of additional projects in Mexico – located in or near key mineral districts in Mexico. For a comprehensive overview of MAG Silver and their projects – CLICK HERE.

Orko Silver Corp. (Stock Profile – TSXV:OK & OTCPK:OKOFF)

What happens when one of the world’s largest silver producers, Pan American Silver (Stock Profile – TSX:PAA), pulls the plug on your joint venture? Just ask the management of Orko Silver. On April 10, 2012, Pan American advised Orko Silver that it could not meet the April 13th deadline to deliver a feasibility study in accordance with the terms of their joint venture agreement and that its interest in the La Preciosa project would be returned to Orko.

Geoff Burns, President and CEO of Pan American, commented, “After completing almost three years of exploration, engineering and project development work, we have come to the unfortunate conclusion that our continued participation in the La Preciosa project is unlikely to generate a rate of return that meets Pan American’s internal economic hurdle rate. As a consequence, we have decided to relinquish our right to earn a 55% interest in La Preciosa. We thank Orko for the positive relationship that we have developed as partners and wish them good fortune with La Preciosa going forward.”

A few weeks later, Pan American also terminated its option agreement with Canasil Resources (Stock Profile – TSXV:CLZ) on the Carina silver-gold project in Durango, Mexico adjacent to La Preciosa. All on the heels of Pan American’s announced $1.5 billion acquisition of MineFinders. MineFinders, coincidentally enough, maintains significant mining assets in Mexico.

Although Orko Silver’s PR department quickly put a positive spin on the event highlighting that the company “regained 100% ownership of La Preciosa” the company’s stock sold off dramatically from $2.22 per share to a low of $1.05 just two days later. Since then, the company’s stock consolidated in the $1.20 range and recently made a decent recovery back to the $1.70 mark.

From the company’s Preliminary Economic Assessment (PEA) released in June, 2011, La Preciosa contains 113 million ounces of silver and 222,000 ounces of gold (Indicated) from a combined open pit/underground mining operation. We contacted Orko Silver to ask the company’s management a couple of key questions: first “what’s next” and second “what’s next”?

Mike Devji, Executive Vice President of Orco Silver, provided the following corporate update, “After spending roughly $20 million on the development of La Preciosa the way Pan American exited the project was surprising to us. We have $12.5 million in the bank and the message we want to deliver is the project is still one of the largest pure primary silver projects in the world with 159 million ounces of silver (Indicated & Inferred). Going forward, we have an upcoming engineering report and then an independent resource estimate that should be delivered by mid-May. We also hope to have an independent PEA ready by mid-August. Since the project has come back to us we have been contacted by a number of companies – four of which have signed NDAs.”

Undoubtedly, shareholders of Orko Silver are hoping that everything is going turn out in accordance with company’s TSXV stock symbol: “OK”.

For the related article: Mining in MexicoCLICK HERE.

Mike Luft

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