How this management team is riding the wave of a high-inflation environment to gold mining success
A new bull market for gold continues to unfold. Governments and central bankers talk
about “fighting inflation”. The reality, however, is that inflation pressures continue to worsen
That’s bullish for gold.
Meanwhile, geopolitical and general economic risks are at multi-year (if not multi-decade) highs. Also very bullish for gold.
The price of gold has nearly doubled off of its 5-year low. It’s currently trading ~5% off of its (nominal) high with much more blue-sky potential ahead.
To capitalize on this upside, emerging junior gold mining company, Minera Alamos
(CAN:MAI / US:MAIFF) offers investors a stellar value proposition and a somewhat unique business model for the mining industry.
Dynamic Wealth Research has recently provided a more detailed snapshot of the Company in another feature article.
More on this later.
Many gold mining stocks are trading well off previous highs
While the gold market itself continues to look strong, many gold mining companies have fallen significantly from recent all-time highs.
What’s up with this? Two issues.
First, as with almost every other industry on the planet, the Covid-19 pandemic has caused operational delays along with a host of other logistical issues. This is affecting corporate performance in mining as it is elsewhere.
Second, while gold itself thrives in a high-inflation environment, gold mining operations (as with other businesses) are vulnerable to inflation pressures.
A recent Dynamic Wealth Research article pointed to an emerging “cost crisis” in the mining industry that is affecting all mining sectors, including gold mining.
The gist of this “warning” is that with exploding costs of everything from labor through to raw materials, mine construction costs (in particular) are spiraling higher.
In some cases, mining companies are even being forced to slam the brakes on projects that were being fast-tracked to production due to soaring costs.
In short, inflation is becoming an increasing risk factor for companies seeking to develop new mining projects
. As the price of gold has cooled off slightly, this risk factor becomes amplified in the eyes of investors.
Established gold producers have generally seen little slippage in their share price. On the other hand, developing gold companies (those advancing gold projects toward production) have seen a lot more erosion – with rare exceptions.
All four of the mining companies above hit new highs on the back of the price of gold moving to a fresh record. However, three of the four have given back much of those gains as the price of gold edged lower.
How Minera Alamos is outperforming its gold mining peers
Why has Minera Alamos been able to weather these same market pressures and maintain its market cap? This becomes easier to understand once we look at why some of its peers have lost ground.
With market caps well in excess of CAD$100 million, these companies are all generally well-capitalized with projects that are seen by the market as possessing significant NAV.
Labrador Gold and Liberty Gold are typical advanced-stage gold exploration companies. They are seeking to drill out large resources to form the basis for a detailed business plan (PEA), which in turn is used to raise capital (or bring in a partner) to finance mine construction.
Troilus Gold is seeking to put a past-producing gold mine (with considerable remaining resources) back into production. Another common mining business model. It is also moving toward production via first producing a resource estimate and business plan for mine development.
All of these companies are (fully) vulnerable to the inflationary pressures described above and this is currently being reflected in their share price.
Between now and when they are able to advance one of their projects to commercial production, soaring costs could seriously impair or even jeopardize the economics of their project(s).
Minera Alamos is also a developing gold mining company, and also doing a lot of exploratory drilling to discover and define gold resources as it advances its own projects (30,000+ meters of previous drilling on its Santana Project alone). But there is one crucial difference.
While these other mining companies have been spending time (and money) working on official resource estimates and business plans, Minera Alamos simply went out and built its own gold mine – fast and cheap
Minera Alamos is fast-tracking gold mine development
The Santana Gold Mine, located on a 4,500-hectare property in Sonora State, Mexico, is now built and being advanced toward commercial production. It’s a product of the Minera Alamos 21st century business model for gold mining success.
As with other mining projects around the world, the coronavirus pandemic led to delays in the construction of the Santana Mine. But unlike most other mining projects, neither Covid nor rising inflationary pressures had much impact on mine construction costs.
Santana has been put into production at a total cost of ~USD$10 million
, with 14,000 ounces of gold already mined and now being processed. Revenues from those 14,000 ounces, test production as Santana ramps up to approximately 50,000 ounces of gold output per year, will more than pay for mine construction.
In contrast, typical mine construction costs in the mining industry (for a gold mine of similar scale) are often in excess of $100 million. Indeed, the typical “life cycle” for mine development by a junior mining company has been illustrated by gold mining icon, Pierre Lassonde – in his famous “Lassonde curve”.
In the initial exploration phase, a succession of successful drill results leads to the gold project achieving critical mass. This generally culminates in an official resource estimate – and a profit-taking window for early investors.
Then comes development and engineering. An economic “feasibility” plan is prepared, along with metallurgical and other engineering work. With few share price drivers during this phase, the stock normally enters a trough.
Finally (hopefully), the junior mining company either arranges for mine financing itself or (more often) brings in a larger partner for mine construction, who claims a major percentage of the project. However, with a clear path to production, the share price generally again starts to appreciate, peaking when the mine reaches commercial production.
What Minera Alamos has done with the Santana Gold Mine, and to a greater or lesser extent with development of its other two Projects (Cerro de Oro and La Fortuna) is to straighten out this curve. It has eliminated much of that investing trough between successful exploration and commencing mine production.
Cutting time (and expense) out of the typical Lassonde curve for mine development also translates into lower investor risk.
Minera’s second Project slated for gold production is its Cerro de Oro property. This is expected to have a construction price tag of ~USD$25 million according to Minera Alamos’ President, Doug Ramshaw.
It’s expected to generate at least 20% more gold production than the Santana Mine, 60,000+ ounces per year. And Ramshaw is confident that the mine can be constructed in 6 – 7 months
Fast. Cheap. Very little investor risk. Shortening the mine development “curve”.
The low-risk/high-return business model for 21st century gold mining
What is the Company’s secret? Why is Minera Alamos able to advance projects to production both faster and cheaper than most of its peers?
Does Minera Alamos employ sophisticated 21st century mining techniques and technologies?
Actually, the Company’s business model is precisely opposite to that. It uses old
mining technology and relies upon one of the simplest strategies for mining gold.
The Company is composed of a proven team of mine-builders who have worked together on several previous projects.
The modus operandi for Minera Alamos is to build low-cost, open pit gold mines that use ultra-simple heap leach processing. Very fast to set up and an efficient method of gold ore processing.
For those new to gold mining, “heap leaching” is no more complicated than it sounds. You “heap” stacks of raw ore onto the processing “pad”, add the chemical reagents, and then leach-out the gold that is contained.
It is old gold mining technology that is ideally suited for the 21st century. Indeed, Minera Alamos’s entire operation has a distinct ‘back to the future’ quality to it.
Many of today’s leading gold mining companies built themselves up from mining companies the size of Minera today to their present status through basic heap leach gold operations.
With environmental concerns of importance to increasing numbers of investors, some may be wary about the environmental impact of such mining.
Here scale is critical. Crude, small-scale (and usually illegal) mining operations that leach gold are notorious as producers of “dirty gold”. Many large-scale gold mines that use this form of processing also have histories of serious environmental issues.
Conversely, moderately-sized heap leach gold mining operations are not hazardous to wildlife if properly managed
Minera Alamos is contemplating scaling-up the production model for La Fortuna, the Company’s 3rd project slated for mine development But La Fortuna will still fall in this “sweet spot” of being a robust revenue-generator without being an environmental hazard.
With average grades of 3.5 – 4.0 g/t Au equivalent (including silver/copper credits), La Fortuna is looking like an even more robust money-maker for Minera Alamos, especially with the price of gold pushing record highs.
An emerging gold producer about to be repriced
“Emerging gold producer.” The phrase has a nice ring to it to experienced mining investors.
These are gold mining companies that are just beginning
to produce their own gold, but have not yet had the market “premium” attached to their share price that comes with being an established gold producer.
It’s an ideal time for investors to jump into a gold stock under any circumstances. With the price of gold on track for yet more record-highs, it is an especially attractive window for investing in Minera Alamos.
Back To The Future.
It was a great movie. It’s also turning out to be a very profitable strategy for gold mining in the 21st century.
DISCLOSURE: The writer holds shares in Minera Alamos.