I just came back from a trip to Mexico and one of the projects I went to see was the Los Verdas Mine controlled by Virgin Metals (V.VGM). Here are some of my observations from my visit to the mine:
The project is a long way from any major population center, and to get there you drive on a narrow, winding paved mountain road for most of the way. The last few kilometers is on a gravel road that is teeth-jarring. The company is building their own bypass road to the mine so that they do not have to send heavy trucks through the small town nearby. Most of the project staff live in that town.
The Los Verdes project is about 500 square kilometers of very mountainous property, with the prime asset being a past producing moly mine. A small open pit remains from historic mining activity, along with a couple of short adits into one of the mountains. There is a body of data from past drilling that outlines about 7 million tons of ore, but the company must go back and drill it all off again in order to be able to report the numbers as a resource. So far they have done a couple of holes and the numbers verify historic drilling data submitted by Teck and Penoles, two companies that are strong and usually know what they are doing when it comes to exploration.
Not much has been done at the property since the 1970s, but at $3 copper and $26 moly the historic resources amount to a very profitable mine. Once VGM has done the drilling required to prove up the historic resource, they will be able to demonstrate a very strong economic analysis to justify putting it all back into production, and the target date for the first phase is sometime around Q2 of 2007.
The first thing I noticed about the project area is the intensity of alteration that is visible from the hillsides all around the old mine workings. All of the exposed surfaces are heavily oxidized, and copper and iron staining colours the outcrops. Sonora has seen a very heavy rainy season this year, and the pools of water that remain on the surface are green with copper leachate.
The geological model for the region calls for overburden with lower grades of copper due to the heavy leaching, but that has resulted in a very rich zone at the water table where the leached copper precipitated out in the process of supergene enrichment. This zone is relatively continuous across a wide footprint.
An adit has been driven in from the lower edge of the old pit workings into the side of a mountain. From my observations in the open adit, I was able to see this high grade zone, which is laced with thick veining that is rich in secondary copper minerals, and massive molybdenum lenses. There were also calcite veining rich with pyrite. The entire deposit is expected to average about 0.16% moly which amounts to about $100 gross metal value, so its pretty rich by any standards. However, some of the ore I sampled is probably in the range of 20-30% moly, visible in fist-sized chunks and I would imagine on a per ton basis that enriched vein zone would be in the range of $1500 per ton across several meters, just considering the moly.
There is also a substantial Tungsten credit in the ore. Combined, the copper, moly, and tungsten averages in the range of $150 per ton for the entire deposit, if the ongoing drilling continues to verify the historic grades. The metallurgy work remains to be completed, but I would suggest that even under the assumption of moderate recovery levels, that ore will be hugely profitable in an open-pit bulk tonnage operation.
The company plans to build a small recovery plant and commence production at a rate of around 300 tons per day from the enriched zone of the deposit. That level of production will generate strong cash flow that will underwrite the expansion to about 3000 tpd, and if metals prices hold at the current levels, that would generate huge cash flow from operations.
I should also point out that I have met the president Chris Davie, and this guy has a resume filled with hard-rock mining experience. This is not a grass roots exploration play, but a development story, and the management is about running mines from the top down. I do not expect the company to fall on its ass during the difficult transition to building a real business after the deposit has been proven up.
There are about 55 million shares outstanding, which is a lot for a new junior story. At 30 cents per share the current market cap sits around $17 million, which is cheap for an advanced project which will probably prove up a large tonnage of profitable ore. The company has about $5 million in cash in the bank, enough to pay for the drilling program and get started on building the mill and recovery plant. There will be a lot of money coming into the treasury as warrants are exercised.
Given the aggressive timetable to prove off the deposit and get phase 1 production underway, I think that the company will earn a market cap in the range of $50-100 million within a year to put it on par with other junior mining operations in Mexico. I also think that moly stories are becoming sexy again in the market, and VGM is one of the better moly projects to be found anywhere at the current time. So I will not be surprised if the stock more than triples within the next few months as people figure out what they have on the go, and the company continues to prove up that the deposit is there.
I have a small position in this stock and I will continue to be a buyer. VGM paid for my direct travel expenses, but I do not have a relationship with the company and do not have any form of compensation or sponsorship for the comments that I post here. It is my own opinions and experience that I have based my expectations on.
cheers!
COACH247 |
