Torex CEO reflects on journey to first gold at Morelos

VANCOUVER — Nearly six years ago Torex Gold Resources (TSX: TXG; US-OTC: TORXF) consolidated a promising claim block 180 km southwest of Mexico City — called Morelos Norte — via a US$150-million deal with Teck Resources (TSX: TCK.B; NYSE: TCK).

Since then the junior has authored one of the few recent success stories in the gold space, and now stands poised to hit commercial production at its El Limon-Guajes (ELG) open-pit mine next quarter.

Torex’s success represents one of the final chapters in the previous bull run in commodities markets. The company raised US$800 million via debt and equity to build a bulk-tonnage gold mine at Morelos, and saw its market capitalization jump from US$400 million to over US$1 billion since mid-2010.

On Dec. 29 Torex announced its first gold pour from the ELG deposits, and president and CEO Fred Stanford spoke with The Northern Miner to look back on the company’s path to production.

“The best word to describe the experience would be ‘adventure.’ I’d say our timing was definitely fortuitous in terms of the market. We completed our equity raises fairly early … people tend to complete the debt portion first and the equity second,” Stanford said.

“We’re clearly blessed with a top-notch asset and a team that has a track record of executing on plan and delivering,” he said. “Our focus has been on strong engineering upfront, and we don’t change scope. So there’s been that drive to get it right the first time, and build it to that specification. We’ve been quite committed to our mine design for some time.”

The ELG operations will involve two open pits to extract ore from the skarn-hosted gold-silver Guajes and El Limón deposits. The pits will feed a centrally located, 14,000-tonne-per-day carbon-in-pulp processing plant, with dry stack tailings deposited west of the mill facility.

One feature that sets ELG apart from other open-pit projects is high gold grades. Proven and probable reserves at the mine total nearly 48 million tonnes of 2.69 grams gold per tonne and 4.36 grams silver per tonne, for 4.15 million  contained oz. gold and 6.72 million contained oz. silver. The current mine plan contemplates a nine-year operating life, with average annual production an expected 370,000 oz. gold at all-in sustaining costs of US$637 per oz.

The property sits within the Mesozoic carbonate-rich Morelos platform, which has been intruded by Paleocene granodiorite stocks. Sedimentary rocks within Morelos include basal crystalline limestone and dolomite, silty limestone and sandstone of the Cuautla formation and upper platformal to flysch-like successions of intercalated sandstones, siltstones and lesser shales of the Mezcala formation. Skarn-hosted gold mineralization has developed along the contacts of the intrusive rocks and the enclosing carbonate-rich sedimentary rocks.

“We’ve seen quite a range of gold prices over our development timeline at ELG, but there’s a physical, geological reason for our ability to stick to the plan. Our open-pit design essentially doesn’t bleed grade off into the hanging wall or footwall,” Stanford explained.

“Our cut-off grades don’t change the dimensions of the pit, so the orebody doesn’t lend itself to changing the size of the mine. And the economics have always been strong, so we could withstand whatever the gold price threw at us. A high-grade open pit is a wonderful thing.”

Torex met its goal of stockpiling 1.5 million tonnes of ore at ELG to smooth the transition into commercial production. Now the company can look ahead to its next project, which may involve an expansion at its nearby Media Luna deposit, south of the Balsas River. Torex tabled a preliminary economic assessment modelling an expanded ELG mill in mid-2015.

The Media Luna concept involves                underground mining at 7,000 tonnes per day, with mineralized material transported via a hybrid underground-aerial-underground rope conveyor to the ELG processing plant to produce both a copper-gold-silver concentrate and doré bars.

The expansion would entail adding a circuit for flotation and “concentrate handling,” and would call for US$109 million in capital expenses.

The mine plan is based on inferred resources of 52 million tonnes grading 4.48 grams gold equivalent for 7.4 million contained oz.

Torex will need to complete an underground drill campaign in order to upgrade certainty in the resource, but that will likely be deferred until after ELG hits production.

The company has timed development so that its initiatives wouldn’t need too much capital, so spending can be controlled until the main operation generates cash flow.

“The timing will actually work quite well. As we ramp up ELG, we’ll move through land acquisition and permitting for Media Luna, and that process is more time intensive than capital intensive,” Stanford said.

“We did have some geographic challenges in terms of mine design … there are two mountains and a river, and Media Luna has only been 30% explored, so we think it could add 150 million tonnes to the operation. We want to leverage our processing asset so we don’t have to build another mill. We were fortunate that the grinding requirements of both ores were similar … in the end, transporting ore over the river just makes sense.”

Assuming US$1,200 per oz. gold, the Media Luna expansion would feature a US$488-million after-tax net present value at an 8% discount rate, and a 24.6% internal rate of return.

At US$1,100 per oz. gold, ELG could crank out earnings of US$224 million in 2017.

Torex needs to avoid security problems in the often volatile social-political regions of Guerrero state, which has Mexico’s highest homicide rate.

In mid-2015, major Goldcorp (TSX: G; NYSE: GG), which operates the Los Filos gold mine near Morelos, had three employees kidnapped and murdered by a criminal gang.

In a bid to avoid such tragedies, Torex brokered an agreement with Guerrero’s state government and the Mexican federal government for a permanent police presence in the areas adjacent to ELG and Media Luna.

BMO Capital markets analyst Andrew Breichmanas recently boosted his price target on Torex by 25¢ to $2 per share, and has an “outperform” rating on the stock. BMO Research expects peak annual production at ELG in excess of 500,000 oz. gold, with life-of-mine, all-in sustaining costs under US$650 per oz.

“[ELG] appears to represent one of the last significant gold mines to be financed and constructed for the future,” Breichmanas wrote on Dec. 29. “Given the sector’s flattening mine supply, limited pipeline of development projects and lack of exploration discoveries, recognition of [the asset] should increase as production ramps up, operations are demonstrated and growth opportunities are defined.”

Torex has traded within a 52-week range of 85¢ to $1.65, and closed at $1.38 per share at press time.

The company has 785.5 million shares outstanding for a $1.1-billion market capitalization.