The improbable feat of commercializing Latin America's second-largest undeveloped gold deposit has achieved a major milestone validation for its unlikely owner, a small Canadian explorer named Exeter Resource (XRA) [TSX: XRC].
Last week, Vancouver-based Exeter completed an initial blueprint for a mine, known as a pre-feasibility study, that suggests a mine worth over $27 billion in future revenue is technically and economically viable.
Known as the Caspiche deposit, this monster deposit is located in northern Chile's gold-rich Maricunga mineral belt, where more than 100 million ounces of gold are already concentrated among a clutch of existing mines.
Now the region has gained some additional luster with the announcement that Caspiche boasts 19.3 million proven and probable ounces of gold. A further 4.6 billion pounds of copper and over 41 million ounces of silver also sweetens the overall value of the deposit. This makes it one of the world's biggest gold discoveries in recent years and one of only a tiny handful of mega deposits not yet snapped up by the world's major mining companies.
David West, a precious metals analyst for the Vancouver-based investment bank, Salman Partners, says that this pivotal benchmark development significantly de-risks Caspiche and makes it a prospectively tantalizing takeover target for the world's top gold producers.
"It certainly raises the company's profile as a takeover candidate, which could be one of the usual suspects in terms of larger mining companies," he says. "Or you might even see a Chinese company take a run at it."
In spite of the prohibitive mine development costs involved - totaling $4.8 billion -- a project of this magnitude is something that major mining companies can't really afford to pass up on indefinitely, West adds. "Sooner or later, someone will buy-out this project."
Caspiche's appeal is underscored by the fact that fewer and fewer world-class gold deposits (at least five million ounces in size) are being found. The current success rate is about one per year, regardless of how many companies are hunting for them and the approximately U.S. $4 billion per year that is being spent on this increasingly challenging quest.
In spite of bullion's spot price having increased six-fold since its lows nearly a decade ago, the world's deep-pocketed, big-league gold miners have found themselves scrambling to replenish dwindling inventories. So they're aggressively targeting takeover candidates that own undeveloped multi-million ounce discoveries, rather than merely relying on organic growth.
The fact that Caspiche is projected to produce approximately 700,000 ounces of gold per annum for at least 19 years would be meaningful to the bottom line of any multinational gold miner, West says. This is especially the case for any of the world's top producers, all of which need to yield up to several million ounces each year just to keep pace with their rivals.
Another major value driver for Caspiche is that it sits at the heart of the Maricunga mineral belt, which has ample mining infrastructure already in place. This considerably reinforces the odds in favor of Caspiche becoming a mine, according to Marshall Berol. He co-manages the San Francisco-based Encompass Fund, which has a heavy weighting in mining equities, and which has been a stellar performer over the past few years as a result of a resurgent market in gold stocks.
"Significant economies of scale could be realized if the major players in the area get together to share mining infrastructure," Berol says.
The dominant gold industry "players' that he's referring to are Barrick Gold Corp. (ABX) , Kinross Gold Corp. (KGC) [TSX: K] and Goldcorp Inc. (GG) [TSX: G]. In particular, Barrick and Kinross own most of the Maricunga gold camp's prized assets. They include the two nearby mines that straddle Caspiche on each side, one of which is a comparably-sized mine in-the-making called Cerro Casale.
Unlike several other large-scale gold projects elsewhere in Latin America, Caspiche's location in Chile, also offers a key geopolitical advantage to Exeter and to any of its suitors, Berol says. Specifically, Chile is a politically stable democracy that has long been mining-friendly, especially since this capital-intensive industry is essentially the backbone of its economy.
Meanwhile, Goldcorp (the world's fifth-largest gold producer and second biggest in terms of market capitalization) is aggressively expanding its mining activities in the Maricunga region. Just last week, the company announced its decision to spend $3.9 billion on the building of mine at its El Morro gold deposit, which is one of Caspiche's neighbours.
At 8.4 million ounces of gold and 6.1 billion pounds of copper in size, El Morro is considerably smaller than Caspiche, in spite of being almost as expensive to build. And its projected annual output is only 210,000 ounces of gold and 200 million pounds of copper over a 17-year mine life. On a comparison basis, this demonstrates how relatively inexpensive the Caspiche mine will be to build relative to its prolific projected gold and copper output over nearly two decades.
This reality further heightens Caspiche's appeal as a takeover candidate. In fact, its prolific size "should draw the attention of numerous interested parties" according to Wendell Zerb, a Vancouver-based mining analyst for the brokerage house Canaccord Adams.
"We continue to value Exeter on metrics related to it ultimately being acquired," he adds in a recent 13-page letter to investors. Along with the premium that Exeter's share price should enjoy in the event of an attractive takeover offer, additional value should be built into the stock's pricing by the completion of a full feasibility study (a final blueprint for a mine), which is expected to be published before the year's end, Zerb says. Hence, he foresees considerable potential upside for the company's share price over the next 12 months.
Disclosure: The principals of Top40GoldStocks.com and its sister publication BNWnews.ca do not directly or indirectly own shares in any of the companies mentioned in this article.