A DFS for Cerro del Gallo and more Namiquipa silver Cerro Resources has released the definitive feasibility study (DFS) on its flagship Cerro del Gallo gold and silver project (Cerro’s interest 67%) in Mexico.
The findings of the definitive feasibility study validates Cerro del Gallo as an operating mine. While exploration at the company’s Namiquipa silver project continues to intercept silver mineralisation. A share purchase plan has been activated.
The recently released DFS for Cerro del Gallo covers the stage 1 development of the project, with stage 2 to be the subject of a separate DFS in the future. Stage 1 envisages a processing circuit with a capacity to process 4.5 million tonnes of ore annually. The processing circuit will be capable of producing an average of 94,600 ounces of gold equivalent per annum. The mine would produce annually an average of 67,900 ounces of gold, 1.072 million ounces of silver and 1,113 tonnes of copper.
The life of the mine would be an initial 7.2 years.
The stage 2 development could extend the life of the mine by a further seven years. The company anticipates being in a position to commence the DFS on the stage 2 development of Cerro del Gallo in year three of mining operations. The DFS estimates a capital cost for the process circuit and mobile fleet of US$154.8 million. Operating cash costs are forecast to be US$516 per ounce, which would position Cerro del Gallo toward the lower end of the current gold cost curve.
Given the inputs into the DFS the capital cost payback period is forecast to be 2.7 years. We consider the high grade of the silver at Cerro del Gallo delivers the company a considerable cost advantage.
In support of mining, the stage 1 mineable resource stands at 32.2 million tonnes of ore showing 14.82 grams per tonne (g/t) silver, 0.69g/t gold and 0.08% copper. The following table shows the Cerro del Gallo resource numbers and classification (Au is the symbol for gold, Ag silver and Cu copper).
We are of the view that on going exploration at Cerro del Gallo will likely lead to further upgrades to these numbers. The Namiquipa silver project continues to deliver successful exploration results, with the latest round of results returning excellent outcomes.
The better of the results from the Stage 1 drilling include 3.66 metres showing 654g/t silver, 0.62% lead and 2.43% zinc from 122.3 metres deep and 8.8 metres showing 255g/t silver, 0.19% lead and 0.32% zinc from 145 metres deep including a sweet spots of 0.25 metres showing 2,340g/t silver, 1.0% lead and 1.0% zinc. These are significant intersections in terms of grade, depth and seam thickness.
We have little doubt that the Namiquipa results, when modelled will deliver a significant uplift in the company’s total resource estimate. The company expects to declare an initial mineral resource for Namiquipa during the current half.
Ongoing exploration ay Namiquipa will include surface activities consisting of soil geochemistry and an induced polarisation geophysical survey. The results of these activities will be used to identify further high priority targets for future drilling.
We look forward to reviewing the results of this collective exploration activity at Namiquipa over the months ahead.
The company has activated a share purchase plan that will allow eligible shareholders to purchase a maximum of A$15,000 at a price of A7 cents per share. Over subscriptions will be subject to a scale-back. The plan closes on 7 August 2012. Documentation regarding the share purchase plan will be forwarded to eligible shareholders very shortly.
We recommend Members participate in the share purchase plan to the maximum capacity that Cerro Resources can be carried in portfolios.
At the company’s last required public reporting date of 31 March 2012, cash stood at A$7.5 million. The estimated outflow for the current quarter is A$2.9 million. We note that A$2.5 million of the outflow is earmarked for exploration and evaluation.
We consider the company is more than adequately resourced to meet current commitments.
After finding support at the 6.5 cents region, prices have rotated north. A decisive break above the 50 day moving average would signal a rotation of momentum favouring the upside.
Resistance is expected at the technically important 200 day moving average of 11.6 cents over the months ahead. We continue to maintain our view that the company’s activities in Mexico have the potential to deliver shareholder value well into the future. Cerro del Gallo on the back of a DFS appears to be a well undervalued project.
Exploration success at Namiquipa has been largely ignored by the market. Both projects in our view have delivered significant in-ground value improvement post our initiation of coverage on the stock in FAT-MIN-268.
We are expecting ongoing exploration success at both of the company’s Mexican silver projects, success that will continue to deliver future resource upgrades.
With this in mind, we reiterate our speculative buy recommendation on Cerro Resources, for Members who do not already have exposure to the stock.
CJO Price at posting:
7.6¢ Sentiment: Buy Disclosure: Held
