Gammon Gold’s Next 3 Years

Gammon Gold (GAM-T, GRS-N) may have failed in its attempt to acquire Capital Gold (CGC-T, CGLD-O) and its coveted El Chanate gold mine in Sonora, Mexico, late last month, but it isn’t crying in its beer.

Instead, the Nova Scotia-based mid-tier gold and silver producer says in its 2009-11 operational outlook that it will bump up production of gold-equivalent ounces by 67-81% at the same time it chips away at total cash costs by 51-54%.

Mexico-focused Gammon has been struggling for some time to improve production and bring cash costs down at its existing Ocampo and El Cubo gold mines in Chihuahua and Guanajuato states, respectively.

Now it forecasts gold production will reach 200,000 to 220,000 oz. in 2011, a 29-42% increase over 2008. Silver production is estimated at between 9 million and 9.77 million oz. in 2011, a 56-69% increase over 2008.

Gold-equivalent production is predicted to rise to between 365,000 and 395,000 oz. in 2011, a 45-56% increase in gold-equivalent production over 2008, while cash costs will fall in the range of US$305-340 per gold-equivalent oz., a 35-42% reduction from 2008.

For this year, Gammon expects production will tally between 333,000 and 367,000 gold-equivalent oz. at a total cash cost of US$360-395 per gold-equivalent oz. and at a gold-silver equivalency ratio of 55:1. The company used a 2009-11 silver price of US$12 per oz., but did not give a gold price.

The three-year outlook does not assume any potential production contribution from its development property, Guadalupe y Calvo, in Chihuahua state.

Mill expansion efforts at its flagship Ocampo mine are expected to be complete by the third quarter of 2009, which will increase mill capacity by more than 165% over the 2007 actual processing rates, the company says.

Gammon believes this enables it to forecast a three-year growth profile that targets a 67-81% organic increase in gold-equivalent production over 2007 as well as lower quartile industry cash costs.

By the end of the first quarter of this year, 23,280 metres of exploration drilling and 2,160 metres of exploration and ore development were completed at Ocampo.

The first exploration drill hole in 2009 on the Altagracia target (east-southeast extension of the Ocampo Picacho open pit) returned 16.5 metres at 6.52 grams gold per tonne and 59.1 grams silver for 7.6 grams gold equivalent per tonne, including 9 metres at 11.32 grams gold and 90.7 grams silver for 12.97 grams gold equivalent, less than 40 metres below surface.

Last year, exploration drilling at Ocampo uncovered a new gold vein named San Amado in the northeast portion of the underground operation. The company says it appears to be an extension of the San Juan-Balmavera vein system, which is one of the highest- grade veins in the mine complex.

“Our organic production estimates demonstrate a compelling growth profile, which targets a 12 to 15 per cent compounded annual growth rate in gold-equivalent production over 2008’s actual production,” Ren Marion, Gammon Gold’s chief executive, said in a statement.

“What is equally impressive is the forecasted reduction in cash costs of 33 to 40 per cent from 2008’s actual results as Ocampo leverages not only the economies of scale, but also our continuous improvement initiatives launched in 2008, such as tying into the main power grid and increasing underground productivities.”

At presstime in Toronto, Gammon traded at $7.40 per share. The company has a 52-week trading range of $2.68-11.20 and 122.4 million shares outstanding.