Newstrike Capital (TSXV: NES) president and CEO Richard Whittall says he’s not marketing the company’s 2.3-million-oz. Ana Paula gold project for a takeover — at least not yet.
A takeover is ultimately the crux of the Mexico-focused junior’s business plan, but for now, Whittall’s focus is on de-risking the project and courting Newstrike investors.
“Our mission and our business plan is really simple: it’s discover, partner or sell, and at some point we will do that,” said Whittall in an interview during a recent visit to Toronto. “We’re not actually running a process now, we’re not trying to sell ourselves. What we’re trying to do is for the next six months, or until this market changes, we’re going to go out and tell a pretty good story.”
Newstrike acquired Ana Paula, located in Mexico’s Guerrero gold belt, in 2010 from Goldcorp (TSX: G; NYSE: GG), which still holds a 3% net smelter return royalty on the project. Despite gaining some traction in 2011 and 2012 with drill results of up to 231 metres of 7.51 grams gold, Newstrike’s initial resource for Ana Paula failed to impress when it was released in late March.
After trading as high as $2.69 last September, the company’s stock price slid below $1.50 in March and as low as 64¢ in late June before recovering somewhat to its current price of 90¢. Newstrike has 115 million shares outstanding, 8.1 million options, and no warrants.
“What we’re guilty of is spectacularly bad timing, announcing a multimillion-ounce deposit — which are very difficult to find — at probably the weakest point in the market in a decade,” Whittall says. After starting the year at around US$1,700 per oz., the price of gold hit a low of around US$1,200 in June before recovering to its current level of US$1,330 an oz.
Located in southern Mexico’s Guerrero state, Ana Paula contains measured and indicated in-pit resources of 43 million tonnes grading 1.59 grams gold and 7 grams silver (1.63 grams gold equivalent) for 2.26 million gold-equivalent oz. Inferred resources add a minimal 1.8 million tonnes grading 0.89 gram gold-equivalent per tonne for 60,000 gold-equivalent oz. The estimate uses a cutoff grade of 0.45 gram gold-equivalent per tonne and a gold price of US$1,450 per oz.
The deposit consists of a high-grade, near-surface breccia zone measuring 250 by 150 by 250 metres, and a lower-grade alteration zone with mineralization hosted in intrusion, hornsfels, skarn and sedimentary rocks.
Ana Paula is on the same gold belt that hosts Torex Gold Resources’ (TSX: TXG) development-stage Morelos gold project, 14 km southeast, and Goldcorp’s Los Filos gold mine, 28 km southeast. In fact, Newstrike team members were part of the Miranda Mining/Teck Resources (TSX: TCK.B; NYSE: TCK) team that discovered both deposits. (Miranda Mining was acquired by Wheaton River — now Goldcorp — in 2003.)
Osisko Mining (TSX: OSK) recently revealed it had staked nearly 10,000 sq. km of land in the Guerrero gold belt to the southwest of Ana Paula, Morelos, and Los Filos. Until that acquisition, Newstrike had been the largest claimholder in the belt at 880 sq. km.
Although Whittall concedes Ana Paula is not the biggest deposit, it is robust. As part of its resource calculation, the company “stress-tested” the deposit at gold prices as low as US$600 per oz. gold. At that level, the grade increases to 3.77 grams at a cutoff grade of 1.05 gram gold equivalent per tonne and contained gold-equivalent ounces shrink by about half to 1.3 million oz.
“Grade works in a good market and in a bad market,” Whittall says.
And the deposit still has room to grow. Ana Paula has a “conceptual” resource — drilled off material that lies outside the current floating pit outline, or what used to be known as a global resource — of 5.4 million oz. Only 2.3 million of those ounces fall within the pit, but the company should be able to bring in some of the “conceptual” ounces into the pit shell with geotechnical drilling to assess slope stability, potentially allowing it to steepen and deepen the pit walls.
Newstrike’s last financing in March 2012 was a bought-deal private placement of common shares for $24.8 million at $3.10 per share. The company had about $12 million in the treasury at the time, and currently has cash of about $16.5 million. In a worst-case scenario, Whittall says the company could survive for about 18 months before having to raise funds again. It also has $1.5 million owed to it in Mexican value-added tax receivable, which have not yet been processed because of administrative delays.
Hoping to preserve its cash through the current bear market, Newstrike will not be rushing to complete a preliminary economic assessment. But in the meantime, Whittall likes to quote numbers that mining analysts at Scotiabank published in May estimating that a mill would cost $350 million to build, and that at US$1,300 gold, Ana Paula’s after-tax net present value is $383 million, and its internal rate of return, 26%.
Even with such healthy figures attached to Ana Paula, Whittall isn’t overly concerned that the company’s low stock price might attract a hostile, low-ball takeover bid. Mining entrepreneur Lukas Lundin’s family trust is Newstrike’s largest shareholder with over 21% of its shares, making a hostile bid very difficult to pull off.
The coming months, which will be about increasing confidence in the resource at Ana Paula, and not about adding big ounces, may not stir up much investor excitement. Because of the rainy season, Newstrike is down to a couple of drill rigs, although Whittall says if the market perks up in September, it will add more. One is a deep rig testing potential for underground mining. Newstrike already has 10 million tonnes of material grading more than 2 grams gold per tonne from its initial resource estimate, and the goal is to double that tonnage at the same or higher grades for a potentially mineable underground resource.
While Whittall is embarking on a road show through cities in the United States and Europe to spread the word about Ana Paula, it’s actually the company’s earlier-stage projects that he and his colleagues find really exciting.
“We’re an exploration company, that’s what we do exceptionally well.”
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