Mexican Gold: Big Output Boost Expected in 2010

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 |  Includes: AEM, AGII, CDE, CPQRF, CSGLF, DGL, GG, GLD, IAU, NEM, NGD, TMGOF
by: Marc Davis
Mexico’s ever-expanding gold mining industry is on-target for another banner year in 2010. In fact, output is expected to jump by an additional 880,000 ounces next year to nearly 2.5 million ounces, representing an approximately 50% increase over 2009’s projected figures (which have yet to be announced).
Much of the additional output will come from the ramping-up of production at the world-class gold/silver Penasquito mine in Zacatecas State. Owned by the world’s fifth largest gold producer, Vancouver-based Goldcorp Inc. (NYSE:GG), the mine was commercialized last October and is expected to start yielding up to 500,000 ounces of gold per annum.
Three other mines are also scheduled to reach full production status this year. They include the Pinos Altos gold/silver mine, where Toronto-based Agnico Eagle Mines (NYSE:AEM) plans to generate 190,000 gold ounces a year. Also, Idaho-based Coeur d’Alene (NYSE:CDE) is aiming to increase its output to 92,000 gold ounces from its Palmerejo gold/silver mine.
Then there’s Vancouver-based Timmins Gold Corp. (OTC:TMGOF), which is on target to produce up to 80,000 gold ounces this year and 100,000 ounces in 2011. With the pouring of its first gold bars in December at its 100%-owned San Francisco gold mine in Sonora State, it became the latest of only several “primary” gold producers (as opposed to the mining of gold on a small-scale as a by-product of silver mining) in Mexico.
Meanwhile, there has been a flurry of mergers and acquisitions among Mexico’s clutch of small gold producers over the last while. This suggests that the race is on to get as many gold deposits into production as possible and as soon as possible. In the quest to maximize output in a ‘rising tide’ market for gold prices and to realize economies of scale, gold miners of all sizes are trying to get bigger. And that is translating into a continuation of consolidation in Mexico’s junior gold sector.
Most recently, this trend has included the buy-out of Castle Gold (OTC:CSGLF) by a newly-minted and well-financed Canadian public company called Argonaut Gold Ltd. (NASDAQ:AGII). In a deal worth around $100 million for a 91% interest in Castle Gold, Argonaut got title to the El Castillo gold mine in Durango State, which is expected to produce around 52,000 gold ounces in 2010.
Though Argonaut plans to grow organically in the near-term, the company aspires to become a mid tier gold producer. And to do that it will likely have to gobble up other small producers in Mexico and elsewhere. That’s because it will need to reach a critical mass of around 500,000 to one million ounces of output per year to be considered a bona fide mid tier gold miner.
The action has been heating up elsewhere in Mexico, too. A bidding war over another Vancouver-based gold junior, Canplats Resources Corp. (OTC:CPQRF), has been garnering headlines over the last several weeks. Canplats owns the Camino Rojo deposit, which hosts 3.44 million gold ounces and 60.7 million ounces of silver, and is in close proximity to the prolific Penasquito mine.
The company’s deep-pocketed suitors are Goldcorp and Minera Penmont Inc. (which is jointly owned by global mining giants Newmont Mining Corp (NYSE:NEM) and Fresnillo Plc). Both are vying to absorb Canplats for at least a quarter of a billion dollars.
Such eye-catching transactions, which typically offer lucrative returns to the shareholders of the acquired companies, are not just a by-product of a hot gold market. Not in Mexico, at least. This is because a growing number of North America’s high-flying gold producers and legions of junior gold explorers are increasingly viewing Mexico as the optimum mining jurisdiction to do business.
So says Jeffrey Christian, Managing Director of the New York-based CPM Group, a leading commodities research, consulting, asset management and investment banking organization. A member of NAFTA, Mexico offers a level playing field to foreign investors, along with pro-business mining legislation and a streamlined process for mine permitting, he says.
Geo-political considerations aside, Mexico is also home to a good number of near-surface (inexpensive to mine) open pit gold deposits, Christian adds. They include under-developed past producers that historically suffered from a lack of investment capital. All of which are of considerable appeal to expansion-minded Canadian gold juniors.
One company that is well on its way to becoming a mid tier gold producer, while regarding Mexico as key to its growth profile, is Vancouver-based New Gold Inc. (NYSEMKT:NGD). Since 2007, it has been growing its gold reserves exponentially – and from a standing start with no output at that time. New Gold realizes that the fastest way to earn a much-coveted mid tier producer status is to buy-out other emerging gold producers or ones that are near production readiness.
Among New Gold’s several high profile acquisitions over the last 18 months was the open pit, ‘heap leach’ (inexpensive to run) Cerro San Pedro gold-silver mine is in central Mexico. Now on target to produce around 100,000 gold ounces a year, this mine came to life in 2008 when New Gold bought the Canadian gold junior, Metallica Resources. Yet, New Gold now faces increasing competition in its quest to own some of Mexico’s best production-ready gold deposits.
The latest expansion-minded gold producer to decide to flex its muscles in the mining marketplace is Timmins Gold – which has the corporate objective of significantly increasing its output over the next couple of years. Having just reached the all-important milestone of achieving production status last month, it is already looking to acquire new gold assets, according to company CEO Bruce Bragagnolo.
“We’d rather acquire ounces right now than give them up as we’re big believers in a long-term bull market for gold,” he says. “So our goal is to add assets quickly either through mergers or acquisitions. We’re already actively looking at acquisitions and hope to get something achieved in the first quarter.”
“We also think we have lots of scope for expanding the gold resources at the San Francisco mine, where we should very soon have full production and good cash flow,” he adds. “This is going to make us a more attractive candidate for mergers and acquisitions.”
Disclosure: No positions