In December, Almaden Minerals (AAU) released results of the feasibility study for its Mexican Ixtaca gold-silver project. The project located in the state of Puebla has a lot of potential; however, it has also to face some opposition. The recently completed feasibility study has incorporated several significant changes that led to a higher initial CAPEX but also to lower environmental risks which should help with the permitting process. The market reaction was positive and Alamaden's shares are approximately 20% up, since the release of the feasibility study results.
According to the feasibility study, the deposit contains 73.1 million tonnes of ore reserves grading 0.59 g/t gold and 36.3 g/t silver. The volume of contained metals is 1.387 million toz gold and 85.159 million toz silver (2.5 million toz of gold equivalent or 189.2 million toz of silver equivalent). The volume of gold reserves increased by 7.35% and volume of silver increased by 8%. The measured, indicated and inferred resources (including reserves) contain 2.419 million toz gold and 131.330 million toz silver, which mean that there is potential to increase the volume of reserves in the future. Moreover, there is the newly discovered Tano zone and several exploration targets that may turn out to be very important for the later years of operations. The feasibility study envisions mine feed grade of 2.03 g/t of gold equivalent on average over the first six years of operations, but only 0.67 g/t of gold equivalent on average over the last five years of operations. Any additional ore grading more than 0.67 g/t of gold equivalent may improve the economics of the mine significantly over the later years.
Ore should be extracted using the open-pit mining method. The initial mine life is estimated at 11 years. During this time, the production should average 90,000 toz gold and 6.16 million toz silver per year. It equals to 173,000 toz of gold equivalent. The production costs should be relatively low, only $850/toz of gold equivalent. Over the first six years, the average annual production should equal 108,000 toz gold and 7.071 million toz silver (202,000 toz of gold equivalent), at an AISC of $810/toz of gold equivalent. The project should be developed in two stages. The initial stage should have a throughput capacity of 7,650 tpd and the initial CAPEX to build it is estimated at $174 million. In year four, the throughput should be expanded to 15,300 tpd. The expansion cost of $64.5 million (included in the sustaining CAPEX) should be funded from cash flows generated by the first stage operation.
At a gold price of $1,275/toz and silver price of $17/toz, the after-tax NPV (5%) is $310 million and the after-tax IRR is 42%. The numbers are very similar to the PFS that projected after-tax NPV (5%) of $310 million and after-tax IRR of 41%, but at a gold price of $1,250/toz and silver price of $18/toz. The economics remain almost unchanged despite the initial CAPEX growing from $117 million to $174 million or by 48.7%. This was possible mainly due to the inclusion of ore sorting into the mining process that helped to improve the feed grades notably (from 0.62 g/t gold and 37.7 g/t silver to 0.77 g/t gold and 47.9 g/t silver).
It is also important to note that the project offers notable leverage to gold and silver prices. At a gold price of $1,350/toz (5.88% higher) and a silver price of $18.5/toz (8.8% higher), the after-tax NPV (5%) equals $388 million (25% higher) and the after-tax IRR equals 49% (16.7% higher).
Although the project seems very promising and the feasibility study is very positive, some risks still remain. Before the mine construction starts, Almaden must complete mine financing and also obtain the permits. The permitting process may be the main obstacle. Although the project has the support of some of the locals, there is also some opposition. When Almaden released the Ixtaca social impact assessment, an activist group released some accusations related to it. The activists even organized a protest near Almaden's headquarters in Vancouver. According to the protesters, the proposed mine endangers the water supply, ecosystem, and health of the residents. Some of the measures included in the feasibility study address the objections. The most important step is the elimination of the tailings dam by using filtered dry stack tailings. This process utilizes SO2/air process to eliminate cyanide residue. Final tailings are thickened, filtered, dry stacked and co-disposed with mine waste rock. This should lead to a much smaller project footprint as well as water usage. According to Almaden's schedule (picture below), the permitting should be completed by late 2019/early 2020. However, if the opposition remains, the process may take longer.
After the permits are obtained, the financing shouldn't be an issue. However, the share dilution will be probably higher than originally expected. As of the end of Q3, Almaden held cash of $8.6 million. The money will be spent before the construction starts. The initial CAPEX is $174 million. Moreover, some additional money will be needed to finance the company until the mine starts to generate cash flow. It means that it is reasonable to expect that Almaden will have to raise around $200 million. It is possible to expect that at least 50-60% of this sum will be financed by debt. The remaining 40% or $80 million will be financed by a sale of a stream or by an equity financing (or a combination of both). At the current share price of $0.71, Almaden would have to issue 113 million new shares to raise $80 million. It would almost double the current share count. But also with 225 million shares outstanding, the upside potential would be meaningful, as NPV of almost $1.4 would be attributable to one share of Almaden. Moreover, it is possible that the equity financing will take place at a higher share price or that Almaden will have to raise much less than $80 million. If Almaden finds a development partner, it is even possible to avoid the share dilution completely. The financing process started only several weeks ago and it most probably won't be completed before the permits are obtained (late 2019 at earliest).
If everything goes well, the Ixtaca mine should get into production in 1H 2021. However, it is probable that some delays will occur and production won't start before 2022. The project is good and the exploration potential promises some future improvements. The biggest hurdle will be the permitting process; however, the changes included in the feasibility study should help to mitigate some of the biggest worries of the project opposers. Another important question is how big the final share dilution will be. Some dilution will be inevitable but its extent won't be known anytime soon. This is why Almaden's shareholders shouldn't expect any huge gains in the near future (barring a strong precious metals bull market). But from a longer point of view, Almaden Minerals is a promising addition to a speculative portfolio of junior miners and mine developers.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.