San Gold ups its gold discoveries and resources

With multiple high-grade gold discoveries, two producing gold mines, a functional mill and another mine in the works, San Gold (SGR-T, SGRCF-O) is establishing itself as a pure gold play in southeastern Manitoba and a company to watch.

“Our strategy is to grow our production profile, and to continue to discover new zones at the pace we have been discovering them in the past,” says San Gold’s CEO Dale Ginn. “We also want to bring the extreme high-grade zones we see at surface down as well as bring up the high grades from depth.”

Owing to its new geological model and aggressive drilling efforts over the last five years, San Gold has discovered seven highgrade zones at its Rice Lake property spanning the Rice Lake greenstone belt, where it owns or controls nearly 150 sq. km. The new zones found typically include high-grade gold-bearing veins and broad breccia vein systems that require additional drilling to define.

Among the recent discoveries made are the near-surface L-13, Cohiba and 007 zones and the underground Deep West, 26 and 28 levels.

San Gold also found the near-surface, ramp-accessed Hinge deposit in early 2008, which it turned into a mine last November for $6.5 million.

More recently, its underground drilling uncovered an eighth zone named RL East, beyond the eastern limits for the 28 and 26 levels of its deep underground Rice Lake gold mine.

One drill hole cut 37 grams gold per tonne over 8.3 metres, expanding high-grade gold mineralization into unexplored areas of the mine. The intercept included 140 grams gold over 2 metres and also contained visible gold. Another hole, above the 26 level of the mine, cut 23 grams gold over 4.1 metres.

The near-surface RL East zone, located 150 metres east of the highgrade “98” vein area, allowed the company to capture a deep extension of a surface deposit to support its hypothesis that the surface and underground zones may connect.

Though RL East isn’t the first to indicate such a connection, Ginn says the discovery is “fantastic and great” because RL East projects upwards to some of the new surface zones, like the 007 and Hinge. And provides a 5,000-to 7,000-foot continuous zone between underground and surface.

If the company finds other deeper extensions, it “may justify the consolidation of the Rice Lake mine, together with the near-surface zones into one larger, more efficient production centre,” writes San Gold in a press release.

For now, Ginn says the focus is to build on and find high-grade deposits that can be developed quickly.

The company is wasting no time in doing so.

Miners have already begun developing 007, which was discovered in November 2009, and since have punched 16 holes for 6,447 metres.

“We already have three-quarters of a million (indicated and inferred) ounces proven on a NI 43-101, with 16 drill holes,” says Shawn Khunkhun, San Gold’s investor relations representative.

The company is looking for the first 10,000-tonne bulk sample out of the deposit in the second half of the year and expects to announce a third mine going into production during the latter half of 2010, Khunkhun says.

Aside from developing 007, San Gold plans to keep drilling. Since 2008, it has spent about $10 million per year on drilling, and in 2009 it explored more than 122,000 metres. And with an exploration budget for the next two years of $25 million, San Gold will spend $12.5 million drilling this year, says Khunkhun. “What that equates to is 10 drill rigs all the time, ongoing, 20 hours a day per rig.”

The drills will be turning property- wide this summer to see if the Rice Lake mineralization is open to the east, west and at depth. The drills will be split between underground drilling at the Rice Lake mine, and surface drilling at the Hinge mine.

The Hinge mine is 1.5 km to the northeast of the Rice Lake mine and mill and is accessible by a decline. Currently, Hinge produces 350 tons of ore per day and, along with the Rice Lake mine, feeds the 1,250-ton-per- day mill, which will be expanded to 1,900 tons per day by late 2011, at an estimated cost of $5 million.

Currently, the company has $30 million in its treasury, which came largely from the closing of a private placement of 6.5 million shares at $4.05 per share for proceeds of $26 million at the end of March.

In that same month, San Gold released an updated NI 43-101 compliant resource for the Rice Lake project. The total gold resources in all categories increased from 1.6 million oz. gold at the end of 2006 to 8.7 million tons grading 12.2 grams gold for 3.1 million oz. gold. The Hinge and 007 zones in total added 1.5 million oz. of ore grading 21.7 grams gold.

“Everything is trending in the right direction,” says Ginn. “Grade is up, tonnage is up, basically (we’ll be) keeping the trend going onwards from here.”

Raymond James analyst Forbes Gemmell also forecasts the company is heading in the right direction and rates San Gold as an outperform. Gemmell writes in a March 29 research note that the resource estimate for the two zones (007 and Hinge) “removes significant valuation uncertainty in the stock,” and that “San Gold trades at a cash adjusted net asset value (NAV) of 1.1x, a slight discount to the mid-tier producer average.” Accordingly, Raymond James is increasing its target price from $5.00 to $5.20 with the inclusion of the 007 zone in the discounted cash flow valuation.

With 007 contributing to the company’s gold ounces, along with the Rice Lake and Hinge mines, Khunkhun says San Gold expects to produce 100,000 oz. gold at a cash cost of $500 per oz. in 2010; 150,000 oz. gold at a cash cost of $450 per oz. for 2011;and 200,000 oz. gold at a cash cost of $400 per oz. in 2012.

As for the gold production projections, Stonecap Securities analyst Eldon Brown writes in a March 29 research note that Stonecap has lowered the NAV for San Gold to $3.00 per share from $3.24 per share “to reflect the lower production ramp up profile to the 200,000 oz. level and year end balance sheet items offset by our increased 2010 gold price forecast and the proceeds from the recently completed financing.” Stonecap maintains a 1.75x multiple to NAV, lowering its previous target price of $5.70 to $5.25, and rates San Gold as an outperform.

In addition to the Rice Lake properties, San Gold owns 31.5% of Davidson-Tisdale joint-venture gold property with the remainder owned by partner VG Gold ( VG-T, VGGCF-O) in Timmins, Ont.

At presstime, San Gold share price was $3.44, trading in a 52-week range of $1.55-$4.55.