Mexican Precious Metals

Toronto’s influence in production and exploration

Mexico has been rocked by Covid-19; the country has the third highest body count and its GDP dropped by 8.5% in 2020, its biggest economic contraction since the Great Depression in 1932. In parallel to this, president Lopez Obrador (otherwise known as AMLO) has alienated a number of foreign investors with his populist policies and state-heavy approach. The AMLO administration also ruffled the feathers of Mexico’s mining sector with the removal of the mining sub-secretary post in 2020, and government initiatives to combat organized crime have left power vacuums in the cartel structure, causing violence to rise in certain regions of the country. The launch of a new police force to protect mining operations in high-risk areas is a welcome development, but its necessity is indicative of a reality that investors should be aware of.

Despite the challenging macro environment, Mexico’s mining industry has remained robust, as the world’s largest silver producer and 9th largest gold producer benefits from rich geology, a skilled workforce, and a clear one-year permitting process that allows projects to be moved into production quickly and at low capex.

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“Having scalability as well as size also distinguishes DSV in the silver space, where nine of the top ten primary silver mines are underground operations, which tend to be more difficult to scale up. Cordero has a higher-grade core surrounded by medium to lower-grade mineralization which means the deposit can be mined strategically and in a staged fashion to take advantage of the grade distribution of the deposit.”

Taj Singh, President & CEO, Discovery Metals

Indeed, the ability to act rapidly helped Canadian mining companies operating in Mexico respond to the pandemic in a more timely manner than in their home ‘tier one’ jurisdiction. “At our Mexican operations we were testing quickly as far back as May, but in Canada, even though the testing equipment is developed here, the Canadian healthcare system (Health Canada) was not allowing companies to use the equipment until July 1st,” observed John McCluskey, president and CEO of Alamos Gold (TSX: AGI), which operates the 150,000 oz/y Mulatos mine in Sonora, Mexico.

Toronto-based Torex Gold (TSX: TXG) was recognized by the National Mexican Institute of Social Security for its safety standards and leadership on the development of Covid-19 precautionary measures, one of a number of milestones achieved by the company as it celebrated its 10th anniversary in 2020. On the corporate side, Jody Kuzenko transitioned from COO to president and CEO in June 2020, as Fred Stanford moved to the role of executive chair. Additionally, Rick Howes, Robin Bienenstock and Roy Slack were brought on to the TXG board as new directors.

On the operational front, TXG’s El Limón Guajes (ELG) mining complex delivered a marquee Q3, with the company’s best financial quarter to date, generating US$124 million in free cash flow (FCF), as well as all-time highs for gold sales, realized margin, EBITDA and operating cash flow. “For the first time since commercial production, we achieved a net cash position hitting US$77 million,” said Kuzenko, before highlighting that the company’s proudest record is in safety, as ELG crossed the threshold of 10 million hours worked without lost time injury in November 2020.

A feasibility study for TXG’s Media Luna project is scheduled to be concluded in mid-2021, and a plan for the commercialization of its Muckahi ore transportation technology has given the company an organic and varied growth pipeline. Kuzenko also hinted at potential M&A on the horizon: “We are actively seeking growth opportunities that enable value accretive geographic diversification. TXG’s goal is to become a 1 million oz to 1.5 million oz producer.”

She also affirmed that the company’s primary focus is to deliver reliable and consistent cash flow from ELG, pay down debt and internally fund and bring Media Luna into production by early 2024.

Soon to be Mexico’s newest gold producer, Minera Alamos (TSXV: MAI), enjoyed a stellar 2020, with its share price appreciating 143% from January 1st to December 31st on the back of the successful development of its first mine, Santana, and the August acquisition of its third project, Cerro de Oro. Santana represents the fourth mine in 15 years the MAI management team has built in Mexico, and delivering within its pre-Covid guidance is a particularly impressive feat considering construction was only able to commence in July 2020.

For MAI shareholders, a number of upcoming catalysts point to continued success in 2021, starting with the expected re-rate as the company transitions from developer to producer, with first gold from Santana expected early in Q2 and FCF by early Q4 of this year. Furthermore, growth through the drillbit offers upside as MAI moves from final pit-optimization to test the other pipes at Santana. “The success of this drilling will dictate whether Santana is a nice 45-50,000 oz/y operation, or what we believe the project can grow to – a 100,000 oz/y operation from a series of discrete pits to a central pad,” explained president Doug Ramshaw.

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With Santana up and running and construction at CDO a possibility by the end of 2021, MAI’s third and arguably most exciting project, La Fortuna, could potentially be built without taking on debt, according to Ramshaw. La Fortuna’s 2018 PEA showed a sub-US$500 AISC, and US$27 million capex for a 50,000 oz/y operation, and drilling at the asset in 2021 will go towards a remodeled PEA as the company looks to achieve a 7-year LOM – the minimum starter point for its projects.

Silver outperformed gold in 2020, appreciating 47.61% compared to gold’s 24.88%, and Mexico, as its biggest producer, could be in for a spectacular year if the bull market continues. For those looking for a greenfield play with multi-bagger potential, Sable Resources (TSXV: SAE) has the team, asset, and importantly the timing, to deliver significant shareholder returns in the coming years.

SAE has taken a patient and methodical approach in searching for properties in Mexico, and over time, the company has acquired over 1.1 million hectares in mineral applications and 40,000 hectares in mineral titles. According to president and CEO Ruben Padilla: “Sable is now one of the largest landholders in the silver mineral belt region of Mexico. We have done a lot of work on our properties, and we have identified 140 anomalies or targets to be evaluated.”

Three of these projects (Vinata North, Vinata South and El Escarpe) currently stand ready for drilling, and are located in the same region where SAE discovered the Margarita Silver deposit, which was recently sold for C$7.5 million after an initial investment of only C$1.5 million – a clear example of Sable's capacity to generate value through mineral discovery.

In describing the prospective territory in which Sable’s assets are located, Padilla asserts: “The Central Mexico Silver Mineral Belt is the richest silver mineral belt in the world, the permitting process is very straightforward, the infrastructure is great, and there are no problems with local communities.” He also noted: “The exploration and drilling costs are very competitive with the leading jurisdictions in the world", so Sable is confident in the value that these properties will generate.

Another of the silver-focused juniors active in Mexico is Discovery Metals (TSXV: DSV), which made the 2020 TSX Venture 50 list with a share price appreciation of 247% on the back of over 100 holes drilled at its Cordero asset in Chihuahua, the fourth largest undeveloped silver resource in the world. Eric Sprott has increased his stake in DSV to 27%, as the Toronto-based junior has become one of the go-to names in the nascent silver bull run.

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“It is an asset that offers the scarce combination of margin, size and scalability,” stated Taj Singh, DSV’s president and CEO, remarking that Cordero’s deposit geometry makes it amenable to a staged capex approach. This scalability distinguishes DSV in the silver space, where nine of the top ten primary silver mines are underground operations, which tend to be more difficult to scale up. “Cordero has a higher-grade core surrounded by medium to lower-grade mineralization which means the deposit can be mined strategically and in a staged fashion to take advantage of the grade distribution of the deposit,” he explained.

Singh described the DSV story as a relatively simple one: “A world class silver asset that will continue to get better as we de-risk and optimize it,” noting upcoming catalysts that include a resource update and PEA in H2 2021, and ongoing drill results on both brownfield targets as well as DSV’s first ever drill testing of greenfield targets elsewhere on its land package. “We have a cash balance of over C$80 million and no debt, so we have significant firepower to continue to aggressively advance the project and drive value through the exploration and development.”

Image courtesy of Sable Resources