Why These Two Gold Companies Continue to Make Progress
It’s surprising to see that despite all the macro-economic and political uncertainties such as Greece, free money being printed worldwide, the Chinese stock market going under, and ISIS, the gold price is going nowhere.
But gold, similar to most other commodities, is a cyclical market. So even though it may feel like there’s no end to the gold and silver bear market, rest assured that the bull will be back one day.
In order to diversify your portfolio, and to be prepared for higher commodities prices that are due to come, it doesn’t hurt to have a few resource stocks in your portfolio. In this market, you need to be very selective though. It’s critical that you pick companies that have an experienced and well-balanced management team, that have enough money in the bank to advance their projects, or that are nearing production.
There are two such companies on Smallcaps Investment Research that we continue to like very much.
Goldsource Mines
The first gold company that we have in our portfolio is Goldsource Mines (TSXV: GXS – 0.16 CAD & Frankfurt: G5M – 0.11 EUR). It’s on schedule to get its Eagle Mountain Gold Project, located in Guyana, South America, into production by Q4 2015.
In order to minimize initial capital and project risk, Goldsource is applying a phased-approach model to move Eagle Mountain towards production in which the easy accessible near-surface soft weathered rock (gold mineralized saprolite) will be mined first.
This conceptual approach encompasses four phases over four years. Phase I development anticipates a 1,000 tonnes per day open pit ‑ gravity plant with estimated pre-production capital costs of US$4.0 to US$5.0 million and post-commissioning cash operating costs of US$500 to US$600 per ounce of gold. Note that the pre-production costs are down from $5.9 million estimated initially.
Upon successful completion of Phase I, the Company plans to systematically install and operate three additional similar plants over a four-year schedule with a cumulative rate of 3,500 to 4,000 tpd. The additional processing plants will be paid for through operating cash flow.
| Category | Material | Tonnes | Au Grade (g/tonne) | Contained Ounces Au |
| Indicated | Saprolite | 1,590,000 | 1.45 | 74,000 |
| Fresh | 2,331,000 | 1.52 | 114,000 | |
| Total | 3,921,000 | 1.49 | 188,000 | |
| Inferred | Saprolite | 7,202,000 | 1.32 | 306,000 |
| Fresh | 13,433,000 | 1.13 | 486,000 | |
| Total | 20,635,000 | 1.19 | 792,000 | Eagle Mountain Mineral Resource. The easy accessible near-surface soft weathered rock (gold mineralized saprolite) will be mined first. Source: Company press release. |
The deposit remains open in three lateral directions and at depth, showing strong mineralization along its edges. And with the above resource only covering 250 hectares of the 5,050 hectares Eagle Mountain property, there’s plenty of opportunity for expansion. For 2016, the Company plans a drilling campaign on the property.
As a matter of fact, condemnation auger drilling under the proposed processing plant area encountered near surface mineralization of up to 6 metres grading 2.0 grams per tonnes gold, which was not included in the resource estimation. As a result, the proposed plant site will be moved to another part of the property, which can be accomplished with no disruption to the schedule and budget.
Mineralogical and metallurgical testing show strong recovery potential of up to 92%, which is in line with historical recoveries from mines in the region.
The Phase I development at Eagle Mountain is fully financed, the mine area is fully permitted for operations. In addition, the technology is commonly used and straight forward, and Goldsource’s management team is well-experienced in bringing projects into production and operating them. In a few short months, Goldsource will be a gold producer at very favorable operating costs!
Rye Patch Gold Corp
Our second gold company that we continue to track, is Rye Patch Gold Corp. (RPM – $0.14), which has several properties along Nevada’s Oreana and Cortez gold trends. The major advantage of Rye Patch is that it’s able to advance those projects with meaningful on-the-ground activities and at no dilution to shareholders thanks to the royalties that it receives from Coeur d’Alene Mines.
In June 2013, Rye Patch settled a legal dispute with Coeur d’Alene, in which Rye Patch conveyed a number of claims to Coeur in return for $10,000,000 in hard cash and a net smelter royalty (NSR) of 3.4% on gold and silver produced and sold from Coeur d’Alene’s Rochester Mine, covering 39.4 million ounces of silver equivalent. At today’s gold and silver prices, Rye Patch will receive more than $33 million in total from this NSR. As of June 30, 2015, the Company had cash and cash equivalents of $4,490,515.
Mid July, Rye Patch received its second quarterly royalty payment for 2015 of CAD$1,490,000 (USD$1,213,398) from its NSR on the Rochester mine. For the first half of 2015, the Company has received CAD$3,340,000 in royalty payments — CAD$1,850,000 in Q1 plus CAD$1,490,000 in Q2 – compared to a total of CAD$4,137,000 received in 2014.
Rye Patch’s budget for 2015 is $5 million, which grants the Company the opportunity to develop its most advanced property, called Lincoln Hill, towards production; drill other properties such as Garden Gate and Patty; and search for new project opportunities and acquisitions.
In addition, the Company has started a share buyback program earlier this year, in which it is allowed to purchase a maximum of 7,300,000 common shares. This represents approximately 5% of the Company’s 146,446,746 issued and outstanding shares. For the period ended June 30, 2015, the Company purchased and cancelled a total of 923,500 common shares.
Lincoln Hill
The Company’s most advanced property is its 100% owned Lincoln Hill project, located in the Oreana trend. Following the successful completion of a robust Preliminary Economic Assessment (PEA) with a low capital expenditure ($30.2 million), the Company intends to advance this project toward feasibility over the next 12 to 18 months.
In May 2015, Rye Patch initiated a feasibility-level metallurgical program to determine if crushing the mined ore increases the gold and silver recoveries. The current PEA assumes a run-of-mine heap leach operation with no crushing and a recovery rate of 64% for gold and 59% for silver.
However, the neighboring Rochester mine, owned by Coeur d’Alene, which has a geology and mineralization similar to Lincoln Hill, is crushing its ore and has recoveries of 92% for gold and 61% for silver. So the detailed metallurgical program will provide information that could add tremendous value to the project, making Lincoln Hill even more robust while adding only an incremental amount of capital for a crushing circuit.
Using $1350 per ounce for gold and $22 per ounce for silver, the PEA returned a pre-tax IRR of 76.5% and a NPV (5% discount rate) of $64.2-million, and a total cost of $759 per gold equivalent ounce within a $775 gold and $13.56 silver Whittle pit.
In the fall of this year a 15,000 metres drill program will be commenced on the property. The program is designed to increase the resource and convert further ounces into the measured and indicated category.
| Category | Material | Tonnes | Au Grade (g/tonne) | Contained Ounces Au |
| Measured | Oxide | 3,805,000 | 0.42 | 51,000 |
| Sulfide | 406,000 | 0.50 | 7,000 | |
| Total | 4,211,000 | 0.43 | 58,000 | |
| Indicated | Oxide | 19,673,000 | 0.37 | 234,000 |
| Sulfide | 5,427,000 | 0.41 | 72,000 | |
| Total | 25,100,000 | 0.38 | 306,000 | The current Lincoln Hill Resource as reported in the May 2014 PEA. Source: Company Filings. |
The Company plans to systematically de-risk the project by completing the baseline studies started in 2014; finishing the next stage of metallurgical testing; advancing environmental permits, mine planning, engineering studies; and reviewing project financing alternatives that complement its royalty cash flow.
Conclusion
We consider Rye Patch and Goldsource Mines valuable assets in our portfolio because despite tough market circumstances they continue to make progress. When the market turns around for gold and silver stocks they will be among the winners.
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