Cerro San Pedro could grow, New Gold says

In May 2007, New Gold (NGD-T, NGD-X) sold the first of its gold from the Cerro San Pedro mine in central Mexico. By December of that year the mine had turned cash flow positive and for the last two years running Mexico’s Chamber of Commerce has rated it the safest mine of its size in the country.

Cerro San Pedro, which Robert Gallagher, the company’s chief executive, calls the company’s best performing mine, is about 20 km northeast of the state capital of San Luis Potosí, an industrial city of about one million people.

San Luis Potosí has a long history of mining and offers a deep pool of local mining suppliers and contractors and skilled workers. “There are great miners in the country with a long history and we feel very welcome there,” Gallagher said in an interview from his Vancouver office. “Business tends to go where it’s welcome.”

The gold-silver heap-leach project is expected to produce 90,000 to 100,000 ounces of gold this year and between 1.1million and 1.3 million ounces of silver at a total cash cost of US$550-570 per oz. net of byproduct sales.

Over the life of the mine, the company expects to produce 95,000 ounces to 105,000 ounces of gold and 2.1-2.3 million ounces of silver annually at a total cash cost of US$390-$410 per oz. net of byproduct sales.

About 20% of Cerro San Pedro’s revenues come from silver.  The mine has proven and probable mineral reserves of 71.7 million tonnes grading 0.55 gram gold per tonne and 22.3 grams silver per tonne at a waste-to-ore ratio of 1.07:1. This represents 1.27 million ounces of gold and 51.4 million ounces of silver.

In the measured and indicated category the mine has 96.53 million tonnes grading 0.54 gram gold for 1.69 million ounces of contained gold and 20.4 grams silver for contained silver of about 63.38 million ounces. Its inferred resource sits at 1.65 million tonnes grading 0.47gram gold for 25,000 oz. gold and 24.1 grams silver for contained silver of 1.28 million ounces.

The Cerro San Pedro gold-silver bearing oxide deposit lies along the western margin of the Sierra Madre Oriental fold belt within a sequence of Cretaceous limestone that was intruded by an early Tertiary diorite porphyry that mineralized the surrounding limestone.

A larger zone of gold-silver-zinc-lead sulfide mineralization underlies the gold-silver oxide resource and is currently undergoing exploration.

“The ore body we’re currently mining continues at depth,” Gallagher notes. “It transitions from oxides, that we’re currently treating, into sulfides … What we’re looking at is the potential of expanding the open pit and extending the life of the mine beyond the nine years.”
The first phase of a 17,500 metre drill program that began last year will conclude next month.

Mining at Cerro San Pedro dates from the mid-1600s until the late 1940s, during which time an estimated 2.5 million ounces of gold and 40 million ounces of silver were produced from high-grade ore bodies mined primarily from underground.

Gallagher isn’t ruling out further acquisitions in Mexico — a country he says that offers mining companies not only a strong pool of local talent and excellent deposits but the strong political and fiscal regimes to match.

“Mexico is a great place to operate … there are no surprises,” he said. “When we talk about growing we are focusing on locations where we are now and certainly Mexico is one of them.”

And New Gold has the cash to make it happen. In September, the intermediate producer raised $115 million in a bought deal public offering at $3.75 per share. That money comes on top of the US$140 million the company already had in its treasury.

New Gold trades at about $3.65 per share. The company has traded in a 52-week window of 94¢-$5.77 per share and has 387.46 million shares outstanding.