Gammon Gold’s outlook to 2011

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 management isn’t crying in its beer.

Instead the Nova Scotia-based mid-tier gold and silver producer says in its 2009-2011 operational outlook that it can still bump up production of gold equivalent ounces by 67% to 81% and chip away at total cash costs by 51% to 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 state and Guanajuato state, respectively.

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

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

For this year Gammon Gold expects production will tally 333,000 to 367,000 gold equivalent ounces at a total cash cost of US$360-$395 per gold equivalent ounce.

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

Mill expansion efforts at its flagship Ocampo mine are expected to be completed 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 Gold 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, a total of 23,284 metres of exploration drilling and 2,158 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 per tonne for 7.60 grams per tonne gold equivalent, including 9 metres at 11.32 grams gold per tonne and 90.7 grams silver per tonne for 12.97 grams per tonne 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% compounded annual growth rate in gold equivalent production over 2008’s actual production,” Rene Marion, Gammon Gold’s chief executive, said in a prepared statement.

“What is equally impressive is the forecasted reduction in cash costs of 33% to 40% 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 was trading at C$7.40 per share. The company has a 52-week trading range of C$2.68-$11.20 per share and 122.4 million shares outstanding.