US Gold gets edge in Mexico with Faust

US Gold‘s (UXG-T, UXG-N) El Gallo project in Sinaloa, Mexico, is often compared with Pan American Silver‘s (PAA-T, PAAS-Q) Alamo Dorado deposit, now an operating silver mine 240 km to the north. 

“We’ve been characterized as an Alamo Dorado look-alike from the standpoint that we’re going to be an open pit and primarily a silver mine,” US Gold’s new chief operating officer, William Faust, explains in a telephone interview from Mexico.

It was actually Faust who did much of the development work at Alamo Dorado between 2001 and 2003 while working as vice-president of operations at Corner Bay Silver, the exploration junior that discovered the deposit in 1997. Pan American Silver acquired Alamo Dorado through a merger with Corner Bay Silver in May 2002. The mine is expected to produce between 4.8 million and 5.1 million oz. silver this year at an estimated cash cost of US$5.30-$5.70 per oz. Alamo Dorado generates about 75% of its revenues from silver production and the rest from gold. Last year the mine produced 6.7 million oz. silver and 16.8 million oz. gold.

Faust’s track record in Mexico spans 13 years. As president of Pan American Silver’s Mexican operations, in addition to developing Alamo Dorado, he was responsible for completing a mine expansion at La Colorada in Zacatecas. Other work in Mexico included stints as vice-president of operations at Nevada Pacific Gold and vice-president of operations at Eldorado Gold (ELD-T, EGO-N) from 1997 to 2001, where he was in charge of two operating mines in Mexico and Brazil that together produced 180,000 oz. gold a year.

Prior to joining US Gold at the end of July, Faust was senior vice-president and chief operating officer at Crystallex International (KRY-T), which has been blocked from developing its Las Cristinas project by the Venezuelan government. Crystallex began arbitration proceedings in February and Faust says the timing of the job offer from US Gold was perfect.

“We had been held in abeyance by Chavez for the last two years,” he says. “A few months before I left the project it was completely expropriated and there was nothing for me to do there. It was a shame, it was a very nice deposit and it would have been a very nice mine.”

Faust is a Vietnam veteran and mining engineer who also holds an MBA from Western New Mexico University and has spent 32 years in the mining industry. He divides his time between US Gold’s two major projects, El Gallo in Mexico and Gold Bar in Nevada.  

“I’m spending a little bit more time in Mexico right now, simply because there’s a little bit more going on there,” he says. “I’m focused on getting all the studies done that are required to get the permitting, which is well underway, but we have more work to do.”

Work related to the feasibility study is expected to be completed in the second quarter of 2012. This includes additional metallurgical testwork, geotechnical drilling, infill drilling and mine design, production scheduling, process engineering and detailed pre-production capital and operating costs. Baseline environmental studies have been initiated and permitting for full mine operations is scheduled to be completed concurrently with the feasibility study. The company estimates the project can reach commercial production in 2014.

“We don’t really see any major obstacles to develop this mine,” Faust says. “We’re well on track.”

The company plans to mine silver and gold from the main El Gallo pit, as well as from a satellite pit about 15-20 km away called Palmarito. Conventional milling and heap leaching will be used to process the ore. The mill and heap-leach process facilities are scheduled to operate at 6,000 and 3,250 tonnes per day, with about 90% of the silver and gold production coming from the mill.

Ironically one of the things that might delay the timeline to production is that condemnation drilling is uncovering more interesting mineralization in areas that are currently proposed for future mine site facilities.

“In addition to expanding where the known pit limits are we’ve been doing some condemnation drilling where we would locate our waste dump areas and we’re finding some interesting values there that aren’t directly connected to the pit,” Faust says. “It’s hard to say whether it will develop into anything but it’s encouraging to find additional minerals that could be ore-grade.”    

A resource estimate released in November 2010 demonstrated that the main pit contains measured and indicated resources of 12.6 million tonnes grading 2.25 oz. silver per tonne for 31.24 million contained oz. silver and Palmarito has 3.7 million measured and indicated tonnes grading 2.08 oz. silver for 8.52 million contained oz. silver. 

In the inferred category El Gallo hosts 10 million tonnes of 1.52 oz. silver for 16.73 million contained silver oz., while Palmarito has 1.6 million tonnes of 1.69 oz. silver for 2.98 million oz. 

In February US Gold released a preliminary economic assessment (PEA) estimating production of an average of 5 million oz. silver and 50,245 oz. gold a year over a mine life of six years. Initial capital costs are forecast at US$149 million. The payback period has been estimated at 2.3 years with a cash cost per oz. silver, net of byproduct credits, of US$5.90 per oz.

The PEA calculated a base case pre-tax discounted (5%) net present value of US$155 million and a pre-tax internal rate of return of 27%. Metal prices used for the base case were US$18 per oz. silver and US$1,000 per oz. gold. The PEA, which was based on the November 2010 resource estimate, did not include the discoveries of six new veins or extensions to the known resource.  

Faust notes that the project has widespread support from the local and state government. “It’s an area that right now doesn’t have any industry – it’s agricultural subsistence farming – and they welcome a mining operation that will bring some good jobs in,” Faust explains.

He also says Mexico is a great place to work and is one of the few countries in the world that has a mining tradition in almost every state. “They’re reasonable and there are reasonable time-lines to receive responses from applications that you turn in for mining,” he says. “There are very clear-cut federal rules.”

In Toronto, US Gold was trading at $5.78 per share in a 52-week range of $4.83 and $9.44. In New York, it was trading at US$5.79 within a 52-week range of US$4.65 and US$9.87.