Emerging Fast As Go-To Gold Story

Kyle McPhee, CFA , (416) 943-6736
[email protected]
METALS & MINING
August 6, 2014
GoGold Resources Inc.
Emerging Fast As Go-To Gold Story
Unless otherwise denoted, all figures shown in US$
Recommendation: Buy
Target Price: C$2.15
GoGold is an underfollowed and undervalued name among junior peers. We
believe the valuation is about to catch up to the attractive asset profile and it
should not take long for the best-in-class economics of the asset base to
Company Statistics:
Stock Symbol: GGD–TSX
Price: C$1.41
Shares Outstanding:
Basic: 147.8 MM
Fully Diluted: 159.5 MM
ITM Fully Diluted: 150.1 MM
Insiders: 37.9 MM
Market Cap: C$208 MM
Market Float: C$155 MM
Debt: C$31.7 MM
Average Daily Trading Volume: 50,000
High – Low (52-Week): C$1.75 - C$0.89
become increasingly apparent.
Specifically, the free cash flow generating power of the newly producing
Parral project will soon be backed by reported results, and the standout
economics of the past producing Santa Gertrudis development project will
be confirmed with a study in late Q3/14 ahead of the fast-track path to
production.
We believe the relatively low risk free cash flow profile of Parral is properly
reflected in GoGold’s share price, but with most Santa Gertrudis value
absent from the current market value. While the market appears to be taking
a wait-and-see approach, or is simply not aware of the GoGold story, we are
already comfortable with our estimates for both assets and we are initiating
coverage with a Buy rating and C$2.15 target price.
Company Description:
The 52% return to our target price reflects the upside we expect will be
GoGold is a Mexico-focused company that
owns the newly producing Parral silver-gold
heap leach project in Chihuahua and the
past-producing Santa Gertrudis heap leach
gold project in Sonora that is being advanced
to production for mid-2015.
driven by market recognition of the Santa Gertrudis base case. That said, we
believe a revaluation to reflect the base case of both projects is only the start
for GoGold’s share price performance. We see multiple sources of realizable
upside with the current asset base that could quickly justify a much higher
valuation, as early as this year.
YE Dec. 31
Disclosure statements located
on pages 29 – 32 of this report
2014E
2015E
2016E
2017E
2018E
Production (000 oz Au)
0.8
11.1
64.3
112.9
98.3
Production (000 oz Ag)
1,073
2,415
1,453
2,683
2,683
AISC ($/oz Au, net Ag)
NM
NM
$514
$356
$513
AISC ($/oz Ag, net Au)
NM
$7.89
NM
NM
NM
Spot FCF (post debt, C$)* ($5.4 MM) ($8.2 MM)
$14.4 MM
$72.0 MM
$53.2 MM
* Spot $1,295/oz Au and $20.25/oz Ag
AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
Solid Profile Is Underfollowed & Undervalued
Emerging Fast From
Under The Radar
GoGold is quickly emerging as a go-to story in the junior producer space. The company
has everything we look for, including low-risk free cash flow from the Parral project, a
viable and highly economic near-term development pipeline with the Santa Gertrudis
project, visible and impactful upside opportunities at both projects, and a proven
management team with access to capital. Additionally, the current market valuation is
noticeably cheap for what we see as an above-average quality story.
Parral Project:
Now In Production
& Looking Better
Than Pre-Feasibility
The Parral project (Chihuahua, Mexico) is as close to simple as it gets in the mining
space. Reserves are literally stacked on surface (historical base metal floatation tailings)
and are being excavated and hauled to GoGold’s newly constructed heap leach
processing facility for the recovery of silver and gold.
Parral attained maiden production in June 2014 and operating results have been
encouraging to date, including operating costs that are coming in materially lower versus
the already attractive pre-feasibility forecast. GoGold’s share price should benefit as the
impressive cost profile and steady nature of Parral are backed by actual results in
upcoming quarters.
Santa Gertrudis Project:
Deal Of The Year Secures
Attractive Past Producer
GoGold picked up the past-producing open pit and heap leach Santa Gertrudis gold mine
(Sonora, Mexico) after succeeding in a bidding war to acquire highly distressed Animas
Resources in early 2014. In our view, it is the deal of the year with the $11 MM purchase
price representing a tiny fraction of Santa Gertrudis’ value. With an updated resource
now in hand reflecting the substantial database of historical drilling and production data,
GoGold is fast-tracking the project toward production for mid-2015.
A PEA has not yet been reported by GoGold (expected in late Q3/14); however, we are
already confident enough with our project assumptions to characterize Santa Gertrudis as
a highly economic (94% IRR at $1,200/oz Au) and low cost ($30 MM capex, $711/oz allin cash cost) near-term producer that will drive GoGold’s share price higher as the market
increasingly recognizes the project’s economics.
Investors Are Getting
A Lot For Free, But
Not For Long
In our view, the base case at Parral is fully reflected in GoGold’s market value, but with
nearly all value associated with Santa Gertrudis and realizable upside opportunities at
both projects available for free.
As shown in Figure 1, Parral on a standalone basis generates mine life free cash flow to
equity holders that returns the entire fully funded market capitalization of the company. If
Parral was the only asset in the GoGold portfolio, we could consider the stock fairly
valued, given how other high quality stories trade relative to free cash flow (also provided
in Figure 1). With our base case Santa Gertrudis forecast added to the profile, GoGold
quickly appears to stand out as a deep value play relative to the free cash flow profile and
on an NAV basis.
2
AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
Figure 1
Implied FCF ROE (Cumulative LOM) (At Spot $1,295/oz Au & $20.25/oz Ag)
Total (C$ MM)
Breakdown Of GoGold’s Implied FCF ROE (Cumulative LOM)
Peer Comparison
C$700
Implied FCF ROE(1)
Total
Avg. Develop.
C$600
LOM
57%
54%
20%
19%
14%
12%
5%
4%
4%
3%
-24%
-31%
-37%
4%
C$500
Project
Upside
C$400
(See
Figure 3)
GoGold
Marlin Gold
FCF
ROE
195%
C$300
FCF
ROE
57%
C$200
Market Cap.
Base
Case
C$100
C$0
SilverCrest
Golden Queen
♦Teranga
♦Primero
Elgin
B2Gold
Timmins
Romarco
SEMAFO
Osisko Royalty
Cash
Parral
FCF
S. Gert.
FCF
Debt
Flows
Corp.
CF
Fortuna
Average (ex. GGD)
Cash To
Equity
Per Yr Stage (2)
6.5%
53%
5.0%
28%
1.9%
0%
1.2%
100%
2.1%
0%
1.1%
11%
0.5%
0%
0.3%
82%
0.3%
0%
0.2%
100%
-1.6%
55%
-2.3%
0%
-4.2%
0%
0.4%
NM
(1)
(2)
Implied FCF ROE = [(cumulative mine life free cash flow to equity holders) / (current fully financed market capitalization)-1] all at spot Au/Ag.
“Develop. Stage” refers to the portion of FCF that is attributed to development stage assets/resources.

During the past twenty-four months, Cormark Securities Inc., either on its own or as a syndicate member, participated in the underwriting of
securities for these companies
Source: Cormark Securities, Company filings
Figure 2
P/NAV (At Price Deck $1,200/oz Au, $20/oz Ag)
GoGold NAV Breakdown
Peer Comparison
C$450
C$400
Project
Upside
Total (C$ MM)
C$350
P/NAV
0.54x
(See
Figure 3)
C$300
C$250
P/NAV
C$200
Market Cap.
0.85x
C$150
Base
Case
C$100
C$50
C$0
Parral
NPV
S. Gert.
NPV
Cash
ITM
Cash
Debt
Total
NAV
(1)
(2)
♦Teranga
Romarco
Marlin Gold
GoGold
Golden Queen
SilverCrest
B2Gold
Timmins
Elgin
Fortuna
♦Primero
Osisko Royalty
SEMAFO
Average (ex. GGD)
NAV(1)
Develop.
P/NAV Stage (2)
0.63x
30%
0.70x
100%
0.70x
40%
0.85x
46%
1.10x
100%
1.11x
15%
1.20x
48%
1.21x
0%
1.31x
10%
1.41x
0%
1.51x
15%
1.54x
7%
1.69x
51%
1.18x
All NAVs based on Cormark price deck of $1,200/oz Au and $20/oz Ag.
“Develop. Stage” refers to the portion of NAV that is attributed to development stage assets/resources.

During the past twenty-four months, Cormark Securities Inc., either on its own or as a syndicate member, participated in the underwriting of
securities for these companies
Source: Cormark Securities, Company filings
3
AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
More Value For Free
Beyond Base Case,
And It Is Within Reach
In addition to the share price upside driven by inclusion of Santa Gertrudis in GoGold’s
market value, there are multiple sources of additional value creation. Details are provided
throughout this report, but the quick summary is provided below with the incremental
free cash flow and NAV potential beyond our base case forecast shown in Figure 3.
Parral scenarios that could play out include:
•
+0 MMt: Processing of only the existing 20 MMt reserve base with a low-cost
processing throughput expansion that results in a mine life of seven years.
•
+2 MMt (the Cormark base case): Processing of the existing 20 MMt reserve base
plus 2 MMt of additional nearby and similar tailings that could be consolidated by
GoGold. This scenario is also accompanied by a throughput expansion and results in
an eight year mine life.
•
+10 MMt: In addition to the +2 MMt scenario outlined above, GoGold is also
evaluating the opportunity to consolidate another 8 MMt of nearby tailings that
would take the mine life to 10 years.
Santa Gertrudis scenarios that could play out include:
•
+0 oz (the Cormark base case): Heap leaching of only the existing 601,000 oz of
non-carbonaceous oxide resources over an eight year mine life.
•
+250 Koz: Heap leaching of the existing 601,000 oz of non-carbonaceous oxide
resources plus 250,000 oz of new resources (low end of company target). Resource
upside could stem from multiple targets in close proximity to the multiple resource
pits, and/or conversion of existing global resources that currently fall outside the pit
shells. Drilling is already underway.
•
+500 Koz: Heap leaching of the existing 601,000 oz of non-carbonaceous oxide
resources plus 500,000 oz of new resources (high end of company target).
Of particular interest is the opportunity to consolidate another 8 MMt of reserves at Parral
that would imply GoGold currently trades at a FCF ROE (cumulative LOM) of 137% at
spot gold and silver (vs. base case 57% and peers at 4%) and 0.60x NAV (vs. base case
0.85x and peers at 1.18x). GoGold is actively performing due diligence (met work) on the
8 MMt pile that is owned by the state government of Chihuahua, and we believe it is
feasible that a deal could be struck later this year.
Figure 3
Upside To GoGold’s Free Cash Flow & NAV
Implied FCF ROE (Cumulative LOM)
NAV
C$700
C$450
C$600
C$400
C$350
FCF
ROE
195%
FCF
ROE
137%
C$400
C$300
C$200
Total (C$ MM)
Total (C$ MM)
C$500
Market Cap.
C$250
C$200
Market Cap.
C$150
C$100
C$100
C$0
0.54x
0.60x NAV
NAV
C$300
C$50
Base
Case
+10
+250
+500
MMt
Koz
Koz
Parral S. Gert. S. Gert.
Source: Cormark Securities, Company filings
C$0
All
Upside
4
Base
Case
+10
MMt
Parral
+250
+500
Koz
Koz
S. Gert. S. Gert.
All
Upside
AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
No Reason For
Big Discount
We see no reason for the heavy discount on GoGold’s shares, as the free cash flow
underpinning our valuation is not high risk, not long dated, and not associated with a big
financing overhang. The cash flow stemming from Santa Gertrudis does have less
visibility than Parral and most peers that are displayed in Figures 1 and 2, but the pastproducing nature of the project and the straightforward operating scenario being
contemplated for the project give us confidence in our Santa Gertrudis forecast ahead of
the upcoming PEA (expected during late Q3/14).
Initiating Coverage
With Buy Rating &
C$2.15 Target
We are initiating coverage on GoGold with a Buy rating and C$2.15 target (or a FD ITM
market cap. target of C$323 MM). Our target places GoGold’s equity value in a more
appropriate spot relative to peer valuations that were previously outlined in Figures 1 and
2. Our target is equivalent to the following metrics:
Attainable Upside Drives
Our Target Much Higher
Figure 4
•
P/NAV of 1.30x our C$1.65 NAVPS (using the Cormark price deck of $1,200/oz Au
and $20/oz Ag).
•
Implied FCF ROE (cumulative LOM) of 3% (at spot $1,295/oz Au and $20.25/oz
Ag).
Our target reflects no direct value for upside at Parral and Santa Gertrudis that we
outlined in Figure 3. Using the same approach to valuation as with our base case, our
target price could attain the following levels in the current gold/silver price environment:
•
C$3.20 per share (or an FD ITM market cap. of C$480 MM) assuming the upside
scenario at Parral (+10 MMt) and the base case scenario at Santa Gertrudis.
•
C$3.50 per share (or an FD ITM market cap. of C$525 MM) assuming the upside
scenario at Parral (+10 MMt) and some exploration success at Santa Gertrudis (+250
Koz).
GoGold Net Asset Value (Base Case)
Asset
Parral Project 5% NPV (Q1/14+; $1,200/oz Au, $20/oz Ag)
Santa Gertrudis 5% NPV (Q1/14+; $1,200/oz Au)
Exploration Projects
Total Mining Assets
Total Mining Assets
Cash balance (exit Q1/14)
Subsequent cash from early exercise of warrants
Subsequent cash paid for Animas
Cash from ITM options / warrants
(1)
Debt outstanding
Net Asset Value
P/NAV
Basic shares outstanding (MM; exit Q1/14)
Subsequent shares issued for Animas & Options
Subsequent early exercise of warrants
Outstanding ITM options / warrants
FD, ITM Shares Outstanding (MM)
Value ($MM)
$126.8
$98.6
$0.0
$225.4
C$248.0
$ Per Share
$0.84
$0.66
$0.00
$1.50
C$1.65
C$19.1
C$9.1
-C$0.9
C$2.4
-C$31.7
C$245.9
C$0.13
C$0.06
-C$0.01
C$0.02
-C$0.21
C$1.65
0.85x
138.8
2.3
6.7
2.3
150.1
(1) U.S denominated debt ($30 MM) bearing interest at LIBOR+6.5%, due quarterly over three years starting in
September 2014.
Source: Cormark Securities, Company filings
5
AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
The Valuation Gap
Should Close Soon
Potential explanations as to why GoGold’s solid profile is available at such a discounted
valuation include the following:
•
Underfollowed: No other sell-side analyst following. Additionally, Parral advanced
under the radar and fairly quickly through to production without GoGold accessing
the broad equity markets.
•
Parral is not yet a proven producer: While upfront capex is already sunk with no
spending surprises realized, the operation is still in ramp-up mode and a full quarter
of opex and recovery rate data have not yet been reported. We are comfortable with
the initial results as evidenced during our June 2014 site visit.
•
Pre-PEA nature of Santa Gertrudis: The economics for Santa Gertrudis have not yet
been communicated to the market with a formal study. While we are confident with
the economics reflected in our valuation on the back of our June 2014 site visit and
analysis of past production data, we do recognize that the market can be skeptical of
unsubstantiated forecasts. As such, the PEA release is a key event, but we foresee no
hugely negative surprises and encourage investment ahead of the study release
(expected in late Q3/14).
•
Misunderstood financing needs: While the capital to build Parral is already sunk, the
low capex nature of Santa Gertrudis may not be fully understood by the market. We
do not foresee a major financing requirement, and the external capital requirement we
expect under our fast-track project scenario (C$20 MM) can likely be satisfied with
additional borrowing from existing lenders.
Price Chart Helps
Confirm Our Thesis
As shown in Figure 5, it appears that GoGold’s share price benefited substantially from
the takeout of Animas, implying that the market does already recognize the value of
Santa Gertrudis. However, on a relative basis, GoGold has only performed in line with
peers. Since announcing the winning bid for Animas, gold is up 7%, silver is up 3%,
GoGold is up 29%, the GDX is up 25%, and the GDXJ is up 36%. In other words, despite
GoGold’s takeout of Animas, in what we consider to be the deal of the year, GoGold’s
share price has not yet benefited.
Figure 5
GoGold Share Price Performance
C$1.80
GGD Share Price
Parral Construction
Update
Gold Price
C$1.70
First Pour
At Parral Santa Gertrudis
Resource Update
Share Price
C$1.50
$1,500
C$1.40
Close Acquisition
Of Animas
Ejido Agreement
At Santa Gertrudis
Bids To Acquire
Santa Gertrudis
C$1.30
C$1.20
$1,400
$1,300
Parral Pre-Feasibility
C$1.00
$1,200
C$0.90
C$0.80
1-Jan-13
Bid To Acquire
Animas
Parral Debt
Financing
1-Apr-13
1-Jul-13
1-Oct-13
Source: Bloomberg, Cormark Securities, Company filings
6
1-Jan-14
$1,100
1-Apr-14
1-Jul-14
Gold Price ($/oz)
$1,600
C$1.60
C$1.10
$1,700
AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
Balance Sheet
Supports The Plan
With the quick development timeline we expect for Santa Gertrudis (capex spending in
late 2014 and H1/15), there is not enough time for Parral cash flow accumulation to
internally fund Santa Gertrudis capex. We estimate GoGold will need C$20 MM in
Q1/15 with the capital coming from additional borrowings from Orion Mine Finance (the
existing lender).
Financial capacity to survive lower metal prices and cover debt repayment obligations is
illustrated in Figure 6. It is evident that GoGold has resilient projects and additional
borrowing capacity. Also, Santa Gertrudis capex spending could be delayed if market
conditions warranted, leaving GoGold with enough capacity to repay existing debt with
Parral cash flow, even at depressed metal prices of $1,000/oz Au and $15/oz Ag.
Figure 6
Balance Sheet Capacities At Range Of Metal Prices
Longer Term Annually
$450
$40
$375
$30
$300
$225
$20
Source: Cormark Securities, Company filings
7
2021
2020
2019
2018
2017
Q4/15
Q3/15
Q2/15
-$20
Q1/15
-$75
Q4/14
-$10
Q3/14
$0
Q2/14
$0
Q1/14
$75
2016
$150
$10
Q4/13
C$MMs
Near Term Quarterly
$50
AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
Parral – A Simple Cash Cow With Big Upside
Straightforward &
Well Located
The Parral project entails excavation and trucking of historical base metal floatation
tailings 9.6 km to a new agglomeration, heap leach and Merrill Crowe processing facility
developed by GoGold to recover primarily silver plus gold. The historical tailings are
located within the city limits of Parral in the state of Chihuahua, Mexico. Project access is
by way of a 2.5 hour drive from the state capital of Chihuahua city on paved highway
with a light aircraft strip also available near the city of Parral.
The municipality of Parral owns the surface rights spanning the project and GoGold holds
an irrevocable right to mine and process the tailings for metal recovery subject to a 12%
NPI payable to the municipality. GoGold did not inherit any environmental liabilities
associated with the historical disturbances that generated the tailings resource. GoGold’s
processing facilities are located on private land under a 15-year lease agreement that can
be extended.
Given that the project is classified as an industrial re-retreatment process, output is not
subject to the new 7.5% mining tax on EBITDA in Mexico; however, the project is
subject to the new 0.5% top-line environmental erosion fee. The project is also subject to
the 30% income tax rate in Mexico.
Figure 7
Site Layout (Top) & Aerial Photo Of The Reserves (Bottom)
Source: Company filings
8
AUGUST 6, 2014
GoGold Team With Parral
Project Since July 2011,
Prior To Acquisition
KYLE MCPHEE 416·943·6736
GoGold acquired the Parral project through the all-share acquisition of Absolute Gold
Holdings as announced in March 2012. The $75 MM all-share deal valued the Parral
project at approximately $45 MM with the remaining deal value attributed to $30 MM in
cash that was raised by Absolute Gold as a condition prior to closing of the acquisition.
Absolute Gold was a private company majority owned by Fred George (co-founder of
Gammon Gold and 16% shareholder of GoGold) and Brad Langille (co-founder of
Gammon Gold and Strategic Advisor to GoGold) that had already reached an agreement
with the city of Parral in October 2011 to develop and retreat the tailings. Absolute Gold
had also performed surface/drill testing of the tailings, outlined the existing resource
estimate, completed initial met work, advanced internal scoping work, and initiated the
permitting process.
Subsequent to closing of the acquisition in July 2012, GoGold hired Robert Harris as
COO, contracted MDM Engineering as lead consultant for a pre-feasibility that was
completed in February 2013 alongside more detailed met work, completed the permitting
process, secured $30 MM in project financing with Orion Mine Finance, and attained
maiden production on time and on budget in June 2014.
20 MMt Reserve
Sitting On Surface
The resource GoGold is exploiting at Parral consists of silver and gold bearing floatation
tailings from historical base metal operations (La Prieta underground mine) that occurred
primarily between the 1920s and 1990s under the ownership of Grupo Mexico. Starting
in the 1970s, the majority of the tailings were retreated by Grupo Mexico to recover
fluorspar with the resulting tailings comprising the existing resource at site today.
Tailings were stacked on dry ground to a height ranging from 15-50 m above ground with
a particle size distribution of 80% passing 0.255 mm.
Reprocessing of the original floatation tailings for fluorspar recovery resulted in the fairly
homogeneous (physical consistency, grade, metallurgical characteristics) tailings pile at
site today with the exception of the initial material at the Red Hill zone being processed
by GoGold (the red outline in Figure 7). Red Hill tailings were generated by a separate
mine (Veta La Colorado underground mine), from which some of the floatation tailings
were trucked to the Parral site for recovery of fluorspar.
The Parral tailings resource has been well sampled with vertical drilling spaced at 50-100
m, as well as pit channeling and perimeter channel samples. There was no use of any
grade capping given the lack of high grade outliers in the database (resource exhibits a
consistent grade distribution as evidenced by drill hole composite data).
Figure 8
Parral Reserve & Resource Estimate
Grade
Zone
P&P Reserves
Red Hill
Zone 1
Zone 2
Zone 3
Parking Lot
Total P&P Reserves
Total M&I Resources (incl. P&P)
Total Inferred Resources
Contained Metal
000 tonnes
Ag g/t
Au g/t
000oz Ag
000oz Au
2,950
11,887
535
3,571
1,428
20,371
68.90
30.80
32.70
39.90
37.70
38.45
0.07
0.37
0.33
0.30
0.34
0.31
6,534
11,771
562
4,581
1,731
25,180
7
141
6
34
16
204
21,300
0
38.50
0.00
0.31
0.00
26,400
0
214
0
Source: Company filings
9
AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
Cash Cow With Clear
Path To More Upside
Parral is very close to being a ready-made cash cow for GoGold. Upfront capex is
substantially sunk exiting Q2/14, maiden production has already been achieved, and
throughput is ramping up to the targeted 5,000 tpd rate for September 2014. Our base
case forecast is illustrated in Figures 9 to 12 and our model generates more favorable
economics relative to the February 2013 pre-feasibility, driven by multiple factors that
are discussed below.
Figure 9
Cormark Base Case Versus Pre-Feasibility
Cormark
Base Case
February 2013
Pre-Feasibility
Mine Life
Years
7.9
12.0
Mine Plan / Reserves
Ore
(1)
Ag Grade
Au Grade
MMt
g/t Ag
g/t Au
22.4
43.77
0.28
20.4
38.40
0.31
tpd
tpd
5,000
10,000
5,000
NA
%
%
58.7
64.7
58.0
65.0
000 oz Ag
000 oz Au
18,096
132
14,598
133
$/tonne
$/tonne
$/tonne
$/tonne
$2.47
$8.90
$0.35
$11.75
$2.76
$11.22
$0.28
$14.26
$/oz Ag
$/oz Ag, net Au
$10.02
$5.93
NA
NA
$MM
$34
$28
$MM
$MM
$MM
$MM
$85
$165
$236
$175
NA
NA
NA
NA
Througput Capacity
Upfront (2014-2016)
Expanded (2017+)
Ag Recovery Rate
Au Recovery Rate
Ag Recovered LOM
Au Recovered LOM
Cash Costs Per Tonne
Excavation / Hauling
Processing
G&A
Total
Cash Costs Per Ounce
Co-Product, Incl. Royalties
By-Product, Incl. Royalties
(2)
Sustaining Capex LOM
(3)
Cumulative LOM FCF After Tax
At $15/oz Ag, $1,000/oz Au
At $20/oz Ag, $1,200/oz Au
At $25/oz Ag, $1,400/oz Au
Spot ($20.25/oz Ag, $1,295/oz Au)
(1) Silver grade displayed is before the impact of positive grade reconciliation we expect for the Red Hill zone.
(2) Includes throughput expansion capex in LOM sustaining capex.
(3) Cumulative LOM FCF spans Q3/14 and beyond (i.e. after upfront capex is sunk).
Source: Cormark Securities, Company filings
10
AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
Figure 10
Silver & Silver Equivalent Production (Cormark Estimate)
Cormark Base Case Forecast (+2 MMt Scenario)
5,000
Ag
LOM Total
35,000
AgEq
30,000
Silver (000oz)
4,000
25,000
3,000
20,000
2,000
15,000
Cormark
Base Case
10,000
1,000
5,000
0
0
2014
2015
2016
2017
2018
2019
2020
+0 MMt
2021
+2 MMt +10 MMt
Note: AuEq production includes gold converted to silver equivalency using Cormark’s price deck of $1,200/oz Au and $20/oz Ag
Source: Cormark Securities, Company filings
Figure 11
Silver Cash Costs Incl. Royalties (Cormark Estimate)
Cormark Base Case Forecast (+2 MMt Scenario)
$12.00
Co-Product
LOM Average
$12.00
Net Au Credit
$/oz Silver
$10.00
Cormark
Base Case
$10.00
$8.00
$8.00
$6.00
$6.00
$4.00
$4.00
$2.00
$2.00
$0.00
$0.00
2014
2015
2016
2017
2018
2019
2020
2021
+0 MMt
+2 MMt +10 MMt
Note: Au credit based on Cormark’s base case $1,200/oz Au; royalties include the 0.5% top-line environmental erosion fee in Mexico
Source: Cormark Securities, Company filings
Figure 12
Parral Mine-Level Free Cash Flow After Tax (Cormark Estimate)
Cormark Base Case Forecast (+2 MMt Scenario)
$60
Operating CF
Capex
Taxes / NPI
$MMs
$40
$20
$0
tpd
expansion
-$20
-$40
2014
2015
2016
2017
2018
2019
2020
2021
$400
$350
$300
$250
$200
$150
$100
$50
$0
LOM Total FCF (Q3/14+)
dotted lines
show adj. for
spot prices
Cormark
Base Case
+0 MMt
+2 MMt
+10 MMt
Note: Cormark base case cash flow forecast uses $1,200/oz Au and $20/oz Ag; Parral cash flow is at mine-level only (ex. other assets and corporate)
Source: Cormark Securities, Company filings
Mining Is A Simple
Free-Dig Surface
Excavation
Mining entails straightforward free-digging (no drilling/blasting required) of the tailings
piles down to the original topography that consists of gradually undulating slopes. There
is essentially no waste stripping involved other than removal of a thin soil layer in some
areas that was put in place for re-vegetation purposes. Additionally, there is no need for
grade control drilling given the uniform nature of the deposit and lack of waste rock in
the resource envelope. Mining is utilizing hydraulic backhoe excavators that load 50
tonne highway trucks prior to the 9.6 km haul to the processing facility.
11
AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
The mining sequence sequentially exploits the five reserve zones as previously outlined
in Figure 8 and displayed in Figure 13. Mining commenced at Red Hill, which will utilize
all plant capacity until late 2015. Remaining LOM plant feed, in order of sequence,
includes Zone 3, Zone 2, Zone 1 and the Parking Lot.
Figure 13
Plan View Of Reserve Tonnage With Mining Zones & Active Mining Pictures
Source: Company filings
Conventional Heap
Leach & Merrill Crowe
Flowsheet
The 5,000 tpd Parral processing facility and related infrastructure constructed by GoGold
(practical completion was in May 2014) consists of an agglomeration and stacking
circuit, a heap leach circuit, a Merrill-Crowe plant, and an acid leach circuit for copper
removal. The ultimate saleable product is a silver-gold dore bar poured at site.
The tailings are a fine grain silt/sand and require substantial agglomeration (cement
consumption of 14.5 kg/t) before stacking on the single-lift (10 m height) leach pad to
ensure adequate permeability/percolation, as confirmed with met work completed by
KCA in late 2012. Cement is added to the tailings feed on a mixing belt prior to feeding
an agglomeration drum, at which point the cyanide leaching solution is also introduced to
the plant feed. The agglomerated and pre-leached tailings are conveyor stacked on the
pads followed by drip irrigation for a 60-day leach cycle. Pregnant leach solution reports
to the Merrill-Crowe circuit and the flowsheet also includes a copper leaching circuit to
separate the copper from silver and gold in the Merrill Crowe precipitate prior to
smelting.
The target LOM recovery rate is 58% for silver and 65% for gold; however, when Red
Hill material is processed early in the mine life, silver recoveries are targeted at 50-53%
(60-62% silver recovery target for all other zones). Gold recovery across all zones in the
reserve base is targeted at 65%.
12
AUGUST 6, 2014
Processing Results
Look Good So Far
KYLE MCPHEE 416·943·6736
At the time of our Parral site visit in late June 2014, approximately 40,000 tonnes had
been stacked on the pads with approximately 16,000 tonnes under active leach that had
generated an approximate 20% cumulative silver recovery. Of note, a full leach cycle had
not elapsed and initial commissioning material stacked on the pads was not properly
agglomerated (agglomerating drum was not yet commissioned) or pre-leached as per the
ultimate plan.
The full flowsheet is now commissioned and inspection of the material stacked post
startup of the conveyors and agglomeration drum indicates adequate and effective
agglomeration with no expected percolation issues on the single-lift pad. We await Q2Q3/14 operating results for further confirmation, but remain confident that silver
recoveries will reach the targeted 50-53% rate for Red Hill upfront in the mine plan.
Figure 14
Aerial Photo Of Processing Facilities and Initially Stacked Material
Source: Cormark Securities
Initial Capex Coming In
Below Pre-Feasibility
While the final payments for upfront capex will be sunk in Q2-Q3/14 (approximately $20
MM had been sunk exiting Q1/14), it is evident that the final bill is coming in
approximately 10% under the $35 MM pre-feasibility budget. Cost performance was
partially aided by a depreciated Mexican peso throughout the construction period versus
the pre-feasibility assumption.
Mining Cost Lower
Than Pre-Feasibility
GoGold is utilizing a mining/haulage contractor and has signed a five-year agreement at
$2.42/tonne, which is 16% lower than the pre-feasibility input of $2.87/tonne. Our mine
model assumption of $2.47/tonne as shown in Figure 9 is modestly higher given the 2
MMt of additional reserves that we include with a further haulage distance. If the 8 MMt
tailings pile was also consolidated, our LOM average mining cost would be $2.77/tonne.
13
AUGUST 6, 2014
Processing Cost Lower
Than Pre-Feasibility
KYLE MCPHEE 416·943·6736
Processing cost savings are also evident based on supply contracts, flowsheet changes
and preliminary operating results.
For the Red Hill material upfront in the mine plan, processing costs should be able to
reach approximately $6.00/tonne, which is materially lower than the $9.80/tonne for Red
Hill in the pre-feasibility study. The source of savings mainly relates to a weaker
Mexican peso, lower cost cyanide supply ($2.41/kg versus $3.30/kg in pre-feasibility),
lower cyanide consumption rates that were confirmed by KCA with optimized column
work completed in January 2014 (now consuming 0.6 kg/t NaCN versus the prefeasibility at +1.2 kg/t NaCN), and a switch to grid power ($0.14/kWh versus onsite
diesel generator cost of $0.24/kWh).
Beyond the Red Hill portion of the mine plan, cyanide consumption is also likely to
remain lower versus the pre-feasibility assumption, but still needs to be confirmed with
optimized column work (tests underway, results expected in Q4/14). For now, our
modeled mine life for non-Red Hill material uses processing costs of $9.10/tonne versus
the pre-feasibility assumption at $11.60/tonne for non-Red Hill material. The savings can
be attributed to potential for continued lower cost cyanide supply, lower cyanide
consumption (although not to the same extent given higher soluble copper content in nonRed Hill material), and the weaker Mexican peso since pre-feasibility costing (cyanide
and zinc supply are the only opex items denominated in US dollars).
Cormark Base Case
Reflects Positive Grade
Reconciliation Upfront
Column work completed by KCA in October 2012 confirmed that the two-acid digestion
assay method that is reflected in the Parral reserve estimate is likely understating the
silver grade, most notably at the Red Hill zone. As such, we expect positive silver grade
reconciliation in the early years of the mine life. More specifically, four-acid digestion
and gravimetric assay methods both returned on average a 20-30% higher silver grade.
Belt sampling of Red Hill material to the pad to date has confirmed this expectation
according to preliminary management commentary.
Cormark Base Case
Reflects Additional
Reserve Tonnage
Aside from the 20 MMt reserve base existing at Parral, our base case mine model
assumes consolidation of another 2.0 MMt of tailings for which GoGold is actively
performing due diligence. Similar to Red Hill material, the 2 MMt pile was generated
from floatation tails at the Veta La Colorado mine, but the tailings were never trucked to
the Parral site for fluorspar processing by Grupo Mexico. Assuming positive readings
upon receipt of final column test results, we believe GoGold will likely acquire the
tailings from the private owner.
We consider consolidation of the additional tailings as a base case given the 2 MMt
tailings pile is the same material as Red Hill (provides us with a good baseline for grade
and recovery expectations). One difference is a longer haul distance of approximately 20
km on existing roads versus the 9.6 km haul for existing reserves at Parral (we assume a
haulage cost of $0.20/t per km hauled).
The key risk to consolidating the 2 MMt relates to striking a deal with the private owner.
For now, we assume GoGold pays $1.0 MM and grants a 12% NPI to acquire the 2 MMt
pile.
14
AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
Cormark Base Case
Reflects Plant Expansion
The processing facility constructed by GoGold was installed with the foresight of a future
expansion beyond the current 5,000 tpd capacity. Steps that have already been completed
in anticipation of an expansion include installation of the foundations for a second
agglomeration drum. We estimate that throughput could be doubled to 10,000 tpd for $6
MM. Since the investment is value creating, even at much lower silver prices and in the
absence of additional reserve tonnage consolidation, we consider this to be part of our
base case scenario.
The “+10 MMt”
Upside Scenario
At Parral
In addition to the privately owned 2 MMt tailings pile being contemplated for
consolidation, GoGold is also actively performing due diligence on a nearby 8 MMt pile
owned by the state government of Chihuahua. The tailings were generated by the
historical Esmeralda mine floatation tails that were also never treated with cyanide. The
haulage distance would not be burdensome, as it appears to be only 50% further than
existing reserves at Parral. While the 8 MMt pile is at an earlier stage of testing and deal
dialogue, the opportunity to add 8 MMt (40% boost to existing reserves) for a minimal
capital outlay is a huge option that could trigger substantial value for GoGold
shareholders, as shown in Figure 15.
Figure 15
Incremental Production, Free Cash Flow & NAV For Parral Scenarios
+0 MMt
+2 MMt
+10 MMt
5,000
4,000
$ MMs
Silver Eq. (000 oz)
6,000
3,000
2,000
1,000
0
2014
2015
2016
2017
2018
2019
2020
2021
Source: Cormark Securities, Company filings
15
2022
2023
2024
$400
$350
$300
$250
$200
$150
$100
$50
$0
dotted lines
show adj. for
spot prices
NPV(5%)
LOM FCF
AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
Santa Gertrudis – Hidden Value Emerging Fast
Bidding War Success
Secured Advanced Stage
Past-Producer In Mexico
The Santa Gertrudis project is a past producer that was operated by Phelps Dodge and
Campbell Resources between 1991 and 2000. The mine recovered 564,000 oz from 22
open pits using heap leach processing. The property is located in the state of Sonora,
Mexico, 180 km north of Hermosillo. The most notable neighboring operations are
Timmins Gold’s (TMM-T, Market Perform rating, C$2.00 target) San Francisco mine
(150 km to the southwest) and AuRico Gold’s (AUQ-T, not covered) El Chanate mine.
GoGold secured ownership of the Santa Gertrudis project after winning a bidding war
against Marlin Gold (MLN-V, Buy (S) rating, C$1.85 target) to acquire Animas
Resources (deal closed in April 2014). The ultimately successful $11 MM cash and share
offer for 100% of Animas’ equity replaced GoGold’s first attempt (November 2013
announcement) at acquiring only the Santa Gertrudis project for $3 MM in staged cash
payments and a 3% NSR on gold production.
GoGold Paid For Small
Fraction Of Project Value
Despite the bidding war that upped GoGold’s ultimate purchase price for Animas, we
estimate that GoGold still only paid for a tiny fraction of the Santa Gertrudis project
value. Specifically, the $11 MM purchase price compares to our estimated project NPV
of $99 MM assuming our $1,200/oz gold price (or $120 MM at spot gold of $1,295/oz).
From a different angle, we estimate $40-50 MM would be needed to replicate the
historical project work already completed at the time of the acquisition (property
consolidation, drilling/sampling, resource estimation, met work, onsite road construction,
and the value of remnant infrastructure at site).
The highly accretive takeout valuation paid by GoGold was enabled by a number of
factors, including:
Sizable Database Now
Reflected In Multi-Pit
Resource
•
Animas’ distressed financial position (balance sheet carried C$483,000 in cash and
negative working capital of C$174,000 as at December 31, 2013) with no plan in
place to restart production at Santa Gertrudis ($11 MM takeout price was
approximately 6x Animas’ pre-bid market capitalization).
•
Historical issues with a specific Ejido covering a key part of the Santa Gertrudis
property package that likely deterred some competing bidders (Animas also failed to
reach an agreement); subsequent to the acquisition of Animas, GoGold reached an
agreement with the Ejido and now holds all required surface rights.
•
GoGold’s advanced stage of due diligence relative to competing bidders effectively
gave Management increased confidence in the ultimate value of the project;
specifically, GoGold had already been working with over 250,000 m of historical
drilling plus over 100,000 m of blast hole data, most of which was not yet reflected in
the reported resource estimate.
At the time of the Animas acquisition, Santa Gertrudis hosted a 557,000 oz inferred
resource grading 1.28 g/t that reflected 49,000 m of drilling in 574 holes (small fraction
of the historical drilling database). GoGold spent approximately eight months reviewing
over 250,000 m of drill hole data in over 2,500 holes to generate the pit-constrained
resource of 751,000 oz grading 1.12 g/t (M&I and inferred) as reported in June 2014 and
outlined in Figure 16. M&I resources are based on drill spacing up to 30 m.
With the exception of the Christina deposit, Santa Gertrudis in general comprises “Carlinlike” structurally controlled, sediment hosted gold mineralization that is further
16
AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
complicated by post mineralization faults and shears. Mineralization follows a northwest
trending belt that is 20 km long and up to 8 km wide with the host sedimentary units
exposed in the area of outlined resources, while areas to the northeast are covered by
volcanics and areas to the southwest are covered by gravels/unconsolidated rock. The
disseminated and fine-grained native gold is most profound at the intersection of
northeast and northwest trending faults, with the majority of mineralization in silicified
zones of quartz veining and stockworks. Mineralized zones are typically fully oxidized to
a depth of approximately 150 m from surface. Individual pits in the resource vary by size
and geometry, but the typical mineralized structure has a shallow to moderate dip, width
of 10-50 m, strike of 150-650 m, and length or down dip extent of 100-350 m. Historical
operations were focused on the shallow mining of mineralized outcrop.
The Christina pit, which is a unique deposit in the district, is an epithermal quartz
stockwork vein-type deposit hosted in calcareous siltstone-shale. Gold mineralization is
also disseminated and fine grained with oxidation extending to depths of 100-150 m from
surface. The main mineralized zone at Christina is fault controlled and strikes northnorthwest with a shallow dip to the southwest.
Figure 16
Ore Type
M&I Resources
Oxide
Carbonaceous Oxide
Mixed
Sulphide
Historical Leach Pads
Total M&I
Inferred Resources
Oxide
Carbonaceous Oxide
Mixed
Sulphide
Historical Leach Pads
Total Inferred
Santa Gertrudis Resource Estimate & Plan View Of Pits (With Details For Key Pits)
Tonnes
000s
Grade
Gold
Au g/t
000oz
14,577
891
479
217
244
16,408
1.06
2.16
1.70
2.32
1.20
1.16
496
62
26
16
9
610
3,791
231
322
0
193
4,535
0.86
1.83
1.49
0.00
1.24
0.97
Becceros Pit
2.6 MMt / 1.21 g/t
(107,500 oz)
105
14
15
0
8
141
Dora Pit
Corral Pit
1.0 MMt / 2.13 g/t
1.1 MMt / 2.09 g/t
(68,500 oz)
(75,500 oz)
Christina Pit
6.9 MMt / 0.70 g/t
(155,700 oz)
Notes: Cutoff grades of 0.23 g/t for oxide, 0.70 g/t for sulphide, 0.34 g/t for mixed, 0.34 g/t for carbonaceous oxide; all resources are pit-constrained.
Source: Cormark Securities, Company filings
Haul Distances Are
Not Onerous
The resource comprises 29 separate pits (locations shown in Figure 16 as red dots and
yellow stars). While the resource is spread out across multiple pits, the site layout is still
fairly compact with the maximum pit distance to the currently contemplated processing
site being approximately 7 km. Additionally, a network of ore haulage and exploration
roads are already in place throughout the property and 54% of the resource is contained in
four key pits that are 2-5 km from the planned processing site.
17
AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
Figure 17
Key Resource Pits & Block Model Sections/Plan Views
Dora Historical Pit
Christina Pit Area
Resource blocks
Corral Historical Pit
Source: Cormark Securities, Company filings
18
AUGUST 6, 2014
Cormark Mine Model
Estimates Ahead
Of Upcoming PEA
KYLE MCPHEE 416·943·6736
Ahead of the PEA expected during late Q3/14, we have combined all available
information and findings from our June 2014 site visit to generate a mine model and cash
flow based valuation. Details behind all our assumptions are discussed below with a mine
model summary presented in Figures 18 to 21.
We suspect that GoGold will advance Santa Gertrudis to production without completing a
full feasibility study. That said, feasibility-level engineering and mine planning will likely
still be completed for the key open pits upfront in the mine plan (see Figure 16) that
capture over half of the total resource and primarily consist of M&I resources. This
strategy should allow a fast track to production with construction/commissioning
spanning Q4/14 and H1/15 for a production start-up in Q3/15.
Prior to a production restart, permits will need to be secured through the federal process
with SEMARNAT (land use change and environmental impact statement approval). The
process is well underway with ongoing PEA-type work and rainy season baseline
environmental work (dry-season work already done) feeding the final permit applications.
Permit receipt is expected by late 2014 and we see no environmental reason for permit
denial (especially given this is a past-producing site).
Figure 18
Cormark Base Case Santa Gertrudis Model
Cormark
Base Case
Mine Life
Ore Througput
Au Recovery Rate
Years
tpd
%
7.5
8,000
76.9
Mine Plan Resource
Diluted Ore
Diluted Au Grade
MMt
g/t Au
19.3
0.98
Au Recovered LOM
000 oz Au
462
$MM
$MM
$30
$22
$/tonne rock
$/tonne ore/km
$/tonne ore
$/tonne ore
$/tonne ore
$1.68
$0.20
$5.61
$0.60
$14.91
$/oz Au
$/oz Au
$663
$711
NPV (5%) After Tax
At $1,000/oz Au
At $1,200/oz Au
At $1,400/oz Au
Spot ($1,295/oz Au)
$MM
$MM
$MM
$MM
$53
$99
$144
$120
IRR After Tax
At $1,000/oz Au
At $1,200/oz Au
At $1,400/oz Au
Spot ($1,295/oz Au)
%
%
%
%
58.7
93.7
126.4
109.3
Upfront Capex
(1)
Sustaining Capex LOM
Cash Costs Per Tonne
Mining
Hauling
Processing
G&A
Total
Cash Costs, Incl. Royalties
Incl. Sustaining Capex
(1) Includes capitalized stripping
Source: Cormark Securities
19
AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
Figure 19
Santa Gertrudis Gold Production (Cormark Estimate)
Gold (000oz)
Cormark Base Case Forecast (+0 oz Scenario)
LOM Total
100.0
1,000
80.0
800
60.0
600
40.0
400
20.0
200
Cormark
Base Case
0
0.0
2015
2016
2017
2018
2019
2020
2021
+0 oz
2022
+250 Koz +500 Koz
Source: Cormark Securities, Company filings
Figure 20
Santa Gertrudis Cash Costs Incl. Royalties (Cormark Estimate)
Cormark Base Case Forecast (+0 oz Scenario)
LOM Average
$1000
$800
$800
$600
$600
$400
$400
$200
$200
$/oz Gold
$1000
$0
Cormark
Base Case
$0
2015
2016
2017
2018
2019
2020
2021
2022
+0 oz
+250 Koz +500 Koz
Source: Cormark Securities, Company filings
Figure 21
Santa Gertrudis Mine-Level Free Cash Flow After Tax (Cormark Estimate)
LOM Total FCF(1)
Cormark Base Case Forecast (+0 oz Scenario)
$80
Operating CF
Capex
Taxes / NPI
$300
$MMs
$60
$250
$40
$200
$20
$150
$0
$100
-$20
$50
-$40
2015
2016
2017
2018
2019
2020
2021
2022
dotted lines show
adj. for spot prices
Cormark
Base Case
$0
+0 oz
+250 Koz +500 Koz
(1) LOM FCF is net of the upfront capex of $30 MM
Note: Cormark base case cash flow forecast uses $1,200/oz Au and $20/oz Ag; cash flow is at mine-level only (ex. other assets and corporate)
Source: Cormark Securities, Company filings
20
AUGUST 6, 2014
Mine Plan Resource
& Sequencing
Assumptions
KYLE MCPHEE 416·943·6736
The initial years in our mine model are focused on key pits for which GoGold is
performing detailed mine planning ahead of a production restart. Relevant information
includes:
•
Dora pit (historical producer): fully oxidized 68,500 oz at 2.13 g/t with an in-pit
waste ratio of 3:1. Approximately 40% of the strip will likely be captured in an initial
pushback at a cost of $2.0-3.0 MM (top third of the pre-strip is in gravels). Pit
dewatering is necessary (water depth of 10-12 m).
•
Christina pit (no historical production): fully oxidized 155,700 oz at 0.70 g/t that
extends to surface with no significant pre-strip requirements and an in-pit waste ratio
of 1:1. This attractive pit is no longer encumbered by lack of a surface rights
agreement with the historically troublesome Ejido that GoGold reached an agreement
with in July 2014.
•
Corral pit (historical producer): fully oxidized 75,500 oz at 2.09 g/t with an in-pit
waste ratio of 6:1. Approximately 25% of the strip is likely to be captured in a prestrip with a $4.5 MM budget. Pit dewatering is necessary (water depth of 12 m).
Beyond the more detailed modeling of the upfront pits, remaining in-pit ounces and the
associated consolidated strip ratio and haul distances are flat-lined in our model. Of note,
the consolidated resource carries an in-pit waste ratio of 4.2:1. Our model exploits all
non-carbonaceous oxides in the resource (18.4 MMt grading 1.02 g/t for 601,000 oz) with
no credit for any exploration discoveries or other ore types in the existing resource.
Mining Cost
Assumptions
Processing Cost
Assumptions
We assume a contract mining cost of $1.68/tonne rock plus a haulage cost per km of
$0.20/tonne ore. Given the weighted average ore haulage distance of 4.4 km in our
model, our combined LOM mining/haulage cost assumption equates to $2.53/tonne rock.
We believe this is reasonable for our assumed 30,000-60,000 tpd rock (8,000 tpd ore)
operation given the benchmark data points for active peer contract mining operations in
Mexico, including the following:
•
San Francisco gold mine: 80,000-90,000 tpd rock (24,000 tpd ore) open pit heap
leach operation in Sonora Mexico owned by Timmins Gold. The mine has a contract
mining rate of $1.80/tonne rock including ore haulage (distance <1 km).
•
Trinidad gold mine: 20,000-40,000 tpd rock (4,300 tpd ore) open pit heap leach
operation in Sinaloa, Mexico, owned by Marlin Gold. The mine has a contract mining
rate of $1.45/tonne rock (or $1.30/tonne rock for the free-dig portion of the mine
plan) including ore haulage (distance <2 km).
•
La Colorado gold mine: 40,000-50,000 tpd rock (7,000 tpd ore in recent results)
open pit heap leach operation in Sonora, Mexico, owned by Argonaut Gold (AR-T,
not covered). The mine has an approximate contract mining rate of $1.50/tonne rock
including ore haulage (distance <1 km).
Our Santa Gertrudis processing cost assumption is $5.61/tonne ore for our modeled 8,000
tpd ore coarse crush (single stage, four inch), heap leach and ADR flowsheet using grid
power. Given there are likely no issues with excessive cyanide consumption or onerous
crushing requirements, we believe our assumption is reasonable and may even be
conservative relative to the benchmarks provided in Figure 22.
21
AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
Figure 22
Company
Ticker
Project
Location
Source of Data
Benchmarks For Heap Leach Processing Costs
Production Stage
Timmins
Argonaut
TMM-T
AR-T
S. Francisco La Colorada
Mexico
Mexico
Marlin
MLN-V
Trinidad
Mexico
Castle Mtn.
♦CMM-V
Castle Mtn.
U.S.
Alamos
AGI-T
Esperanza
Mexico
Operations /
Cormark
Recent Q1
Operations
Operations /
Cormark
Apr. '14 PEA Sept. '11 PEA
(static case) (crush case)
Flowsheet Details
Ore Throughput (tpd)
Crush Size (inches)
Leach cycle (days)
NaCN consumption (g/t)
Agglomeration
Plant
24,000
0.38
90-120
300
No
ADR
7,000
0.50
120
380
No
ADR
4,300
0.38
60
300
No
ADR
17,000
0.38
NA
150
Yes
ADR
8,200
2.0
105
NA
No
ADR
Processing Cost ($/t ore)
$4.20
$4.11
$6.85
$5.73
$3.62
Development Stage
Midway
G. Queen
♦MDW-T
GQM-T
Pan
Soledad
U.S.
U.S.
Cormark Est.
(ROM start)
Atna Pan Amrcn.
ATN-T
PAA-T
Reward
La Bolsa
U.S.
Mexico
GoGold
GGD-T
S. Gertrudis
Mexico
Cormark Est. /
Sept. '12 FS
July '12
updated FS
Jan. '11 FS
Cormark Est.
15,000
13,000
ROM 1.4 + HPGR
80
200
340
195
No
Yes
ADR
M. Crowe
6,000
0.5
150
NA
No
ADR
8,000
1.0
60
NA
No
ADR
~8000
~4.0
NA
NA
No
ADR
$3.80
$4.04
$5.61
$2.55
$4.45

During the past twenty-four months, Cormark Securities Inc., either on its own or as a syndicate member, participated in the underwriting of
securities for these companies
Source: Company filings, Cormark Securities
Upfront & Sustaining
Capex Assumptions
Our upfront capex estimate is $30 MM with the main capex items consisting of initial pit
stripping and haul road upgrades ($6 MM), initial pad space for 3.5 years and the related
pond infrastructure ($5 MM), the crushing circuit ($3 MM), and the ADR plant ($5 MM).
Remaining capex covers mainly owner/EPCM costs and a 20% contingency.
We believe our $30 MM capex assumption is reasonable based on recent build-outs of
similar projects. Marlin Gold put the Trinidad mine into production in March 2014 for
upfront capex of $30 MM. Similar to Santa Gertrudis, Trinidad is a contract mining
operation (no mining equipment capex) and the bulk of upfront capex was dominated by
the same items as Santa Gertrudis. Despite Santa Gertrudis being a slightly larger
operation (8,000 tpd vs. 4,300 tpd at Trinidad), offsetting capex cost drivers at Santa
Gertrudis include existing remnant infrastructure (including plant foundations and haul
roads), limited crushing circuit investment, lack of conveyor/stacking equipment capex
(can use truck stacking), and minimal upfront pre-stripping.
LOM sustaining costs in our model total $22 MM, which should be more than enough to
cover pad space requirements for the 19.3 MMt ore in our model, plus ongoing road and
plant maintenance spending. Of note, the site identified for the new leach pad appears to
have capacity for 45 MMt based on preliminary design work.
Recovery Rate
Assumptions
Our model uses an LOM gold recovery rate of 77% for fully oxidized and noncarbonaceous ores, reflecting 80% at the Christina deposit and 75% at all other zones.
Our assumptions are based on the following historical met work and operating results that
will be firmed up with more met work done by GoGold ahead of the PEA:
•
Oxidized material (excluding Christina): Historical operations were focused on
exploiting the non-carbonaceous oxides with a realized recovery rate of 78-80% for
the 2,000 tpd operation (four-inch crush size). The reported recovery rate was also
confirmed by Campbell Resources after drilling and assaying the leach pad material
and reconciling the results with resource and production data. Column work done by
Campbell Resources in 1996-97 also estimated recovery rates ranging 78-89%.
•
Oxidized material at Christina: Limited column work completed by Phelps Dodge in
1991-92 utilized a bulk sample from surface trenches grading 0.82 g/t and a material
size of 2.5 cm with no agglomeration. Recovery was 82% after 84 days of leaching
with cyanide consumption of 0.9 kg/t. Testwork also indicated potential for ROM
leaching with recovery still hitting 65-70%.
22
AUGUST 6, 2014
Lots Of Exploration
Upside, No Credit In
Our Model Yet
KYLE MCPHEE 416·943·6736
Our mine model captures the non-carbonaceous oxides in the reported resource estimate
(601,000 oz grading 1.02 g/t) but there is also meaningful potential for additional
resources. Drilling is already underway (started in late May 2014) with some results
already reported that may feed a resource update alongside the PEA expected in late
Q3/14. As exploration work generates the data needed to back a more substantiated
upside estimate, we will revisit our model assumptions, but for now our base case
includes no credit for exploration upside.
As a gauge of the upside potential, we note that Management is targeting an additional
250,000-500,000 oz, coming from a mix of exploration targets in close proximity to
resource pits, as well as conversion of existing global resource ounces to the mine plan
(currently outside the reported pit-constrained resource). Some sources of the exploration
upside are discussed below.
Under-Drilled Areas Near
Existing Resources
Under-drilled areas between existing resource pits and below past-producing pits have
historically returned encouraging results, but additional drilling is required to prove up
resources. An example is at the past-producing Rueben pit where recent drilling has filled
a drilling gap between historical intercepts, down dip of the mineralized structure
orientation that is clear from historical blast-hole data (Figure 23). As reported in late
July 2014, GoGold returned 21.0 m at 2.22 g/t between the historical holes and some
additional drilling prior to completion of the PEA could feed a Rueben resource update.
Other priority targets of this nature include Vibora and Viviana that will likely be pursued
with drilling in the near term.
Similarly, gaps between existing resource pits have seen limited drilling and will be
followed up by GoGold, notably between the Mirador, Melissa and Sofia pits that are
located along the main northwest trending belt and host a combined 36,000 oz at 1.41 g/t
(Figure 23).
Figure 23
Notable Sources Of Upside Below/Between Resources & Past Pits
Rueben Section
Mirador
MELNW-109 4.5m. @ 0.71 Au
Melissa NW
RB-116 8.5m. @ 42.0 Au
Melissa
RB-106 22.0m. @ 2.28 Au
GGRU-002 21.0 m. @ 2.22 Au
SOF-122
4.5m. @ 1.86 Au
Sofia
Source: Company Filings
Christina Strike Extension
The Christina resource is open along strike for 450 m northwest along trend beyond the
existing 550 m strike. Drill pads and exploration roads were put in place by the previous
operator on the back of positive surface sampling, but the strike extension was never
drilled prior to shutdown of the mine.
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AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
Conversion Of Global
Resource Ounces
While not explicitly reported by GoGold, we estimate that the global resource at Santa
Gertrudis is approximately double the size of the reported pit-constrained resource with a
similar grade profile. A large portion of these global resource ounces are located downdip of pit-constrained zones and in lesser-drilled parallel structures. Filling of some drill
hole gaps in the resource database could allow more ounces to be captured in a pit
outline.
Historical Data
Confirmation In
Southeast Area
In the southeast area of the property, approximately 7 km from the planned processing
site, historical air hammer drilling with 105 close-space holes at the Greta Ontario target
hit high grade at surface in a shallow dipping structure over a 2,000 sq. ft. area with an
average width of 4 m and grade of 8.5 g/t. However, data will need to be confirmed with
additional drilling to qualify under NI 43-101 standards.
Figure 24
Exploration Targets Across Property
Source: Company Filings
24
AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
Appendix A: Management & Directors
Brad Langille
Co-Founder &
Strategic Advisor
Previously co-founded and served as Director & CEO of both Gammon Gold and
Mexgold Resources. Brad also served as Strategic Advisor for Nayarit Gold.
At Gammon Gold (now known as AuRico Gold), the Ocampo mine was developed from
grassroots to a 200,000 oz/year producer under the leadership of Brad as CEO. After
leaving Gammon Gold in 2008, Ocampo was subsequently sold to Minera Frisco (Carlos
Slim) in 2012 for $750 MM.
At Mexgold, the producing El Cubo mine was acquired and refurbished under the
leadership of Brad prior to the Gammon Gold acquisition of Mexgold in a $350 MM deal
in 2006 (while Brad was President of Mexgold and CEO of Gammon). El Cubo has since
been sold by AuRico Gold to Endeavour Silver in 2012 for $200 MM.
Nayarit Gold discovered and advanced economic studies at the Orion project, which lead
to the takeout of Nayarit Gold by Capital Gold in 2010 (Capital Gold was subsequently
acquired by Gammon Gold in 2011) while Brad served as Strategic Advisor (and major
shareholder). A 50% JV interest in the Orion project now lies with Minera Frisco (sale of
the JV interest was part of the $750 MM deal mentioned above).
Terence Coughlan
Co-Founder, President,
CEO & Director
Geologist and QP under NI 43-101 who previously served as a VP and Director of
Gammon Gold from 1997 to 2003 during the build-up of the company from grassroots.
Also previously served as VP and Director of Acadian Mining from 2003 to 2010 and
was a Director of Royal Roads from 2008 to 2010.
Robert Harris
COO
Engineer with over 20 years of mining experience including responsibility for
development of the Youga mine in Burkina Faso that attained production in 2008 under
the ownership of Etruscan Resources (subsequently acquired by Endeavor Mining),
where Robert served as Technical Director and VP Operations for 12 years. Robert was
also responsible for evaluation and initial development of the Samira Hill mine in Niger
(subsequently sold to SEMAFO) and multiple other projects while with Etruscan.
Dana Hatfield
CFO & Director
CA who previously served as CFO of Brigus Gold, Senior VP Finance for AuRico
Gold, and Director of Finance with the Eastern Canada division of Sysco Corporation.
Sean Tufford
VP Corp. Development
Formerly served as Director of Investor Relations with Linear Gold and Brigus Gold. He
was also involved with shareholder communications for Linear Metals Corporation.
Phillip Gaunce
Director
CA who has been the long serving President of insurance brokerage Alfred J. Bell and
Grant. Also formerly served on the board and audit committee of IWK Health Centre and
IWJ Foundation, as well as RediShred Capital.
George Waye
Director
CA and retired partner of Ernst & Young, where he worked for 39 years.
 During
the past twenty-four months, Cormark Securities Inc., either on its own or as a syndicate member, participated in the
underwriting of securities for Brigus Gold
25
AUGUST 6, 2014
Terrence Cooper
Director
KYLE MCPHEE 416·943·6736
Active lawyer and former solicitor with the Nova Scotia Department of the Attorney
General prior to co-founding law firm Cooper & McDonald. Also formerly served on the
board of AuRico Gold. Currently serves with law firm Boyne Clarke.
26
AUGUST 6, 2014
KYLE MCPHEE 416·943·6736
Appendix B: Risks
Geopolitical Risk
This risk deals with policies or the perceived stability surrounding issues such as
permitting and tax laws that are managed by governments. These policies can greatly
affect mining companies, and in some cases prevent mining from occurring. Generally,
developing countries are seen as being more risky because of the potential of a quick
change in power to drastically change policies. Developed countries have their own
geopolitical risk issues, and jurisdictions with powerful environmental lobbies can also
make mining or exploration difficult.
Financing Risk
Mining and exploration companies may require external capital, particularly when
building new mines. In order to finance these endeavors, equity or project dilution may
be taken to fund the equity portion of the capital costs if the project is to be developed.
Shareholders may also be subordinated by lenders to finance a mining project.
Commodity Price Risk
Our short- and long-term commodity price assumptions are viewed to be reasonable
based on current information. However, the timing and magnitude of commodity price
fluctuations are always a significant risk that, in most cases, strongly affects the value of
mining and mineral exploration/development companies focused on a specific
commodity. Currently, the primary metal exposures for GoGold are gold and silver.
Technical Risk
Mining operations are subject to unforeseen risks such as labor strikes, rock bursts,
geological interruptions, and equipment failure, which may negatively affect a company’s
performance. Ore reserve and resource risk is another technical risk that is derived from
the subjective nature of geological interpretation. Competent, qualified personnel
calculate ore reserves and resources, and in most cases have a high accuracy, but any
significant variation on reserves could drastically impact the company’s operations and
the value of its shares.
Exploration Risk
In some cases, the market may build in expectations for exploration success before the
actual exploration work has taken place. In the event that results do not meet with the
market’s expectation, the company’s shares may be negatively affected.
Cost Risk
Both capital and operating costs may be affected by changes in input prices (fuel, steel,
chemicals, etc.) and by relative currency changes. The company may be at risk of
unexpected cost escalation as a result of these potential threats.
27
AUGUST 6, 2014
Recommendation
Terminology
KYLE MCPHEE 416·943·6736
Cormark’s recommendation terminology is as follows:
Top Pick
Buy
Market Perform
Reduce
our best investment ideas, the greatest potential value appreciation
expected to outperform its peer group
expected to perform with its peer group
expected to underperform its peer group
Our ratings may be followed by "(S)" which denotes that the investment is speculative
and has a higher degree of risk associated with it.
Additionally, our target prices are based on a 12-month investment horizon.
Disclosure Statements and
Dissemination Policies
A full list of our disclosure statements as well as our research dissemination policies and
procedures can be found on our web-site at: www.cormark.com
Analyst Certification
I, Kyle McPhee, hereby certify that the views expressed in this research report accurately
reflect my personal views about the subject company(ies) and its (their) securities. I also
certify that I have not been, and will not be receiving direct or indirect compensation in
exchange for expressing the specific recommendation(s) in this report.
28
AUGUST 6, 2014
Figure 25
KYLE MCPHEE 416·943·6736
GoGold Resources Inc. – Disclosure Chart
Source: Cormark Securities
29
AUGUST 6, 2014
Figure 26
KYLE MCPHEE 416·943·6736
Marlin Gold Mining Ltd. – Disclosure Chart
Source: Cormark Securities
30
AUGUST 6, 2014
Figure 27
KYLE MCPHEE 416·943·6736
Timmins Gold Corp. – Disclosure Chart
Source: Cormark Securities
31
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