Mexico Mike

Bandera Gold Ltd:  Just the tip of the iceberg

In the current bull market for junior resource companies, it seems like ‘the opportunity of a lifetime’ comes along about once a week. There will be no shortage of buying opportunities, in other words, but the smartest investors in search of those home runs would be well served to just wait with the bat on their shoulders until that real fat pitch comes across the plate, and buy only the best of the juniors. The companies that I look to add to the Mexico Mike Portfolio provide upside leverage to the bull market, yet trade at the lower end of the range in comparison to the peer group. Bandera Gold is junior miner that meets both criteria.  A recent visit to its flagship property provided the opportunity for a thorough tour through the historic workings and a review of recently completed infrastructure improvements in the area. I am convinced that tremendous resources remain to be developed at the project, and this is the kind of company that will shine in the model portfolio.

Bandera has closed a deal to acquire a majority stake in the advanced stage Cinco Minas Project in Jalisco State, with Mexican joint venture partner Minera San Jorge S.A. de C.V.  The terms of the deal require Bandera to fund the exploration and development expenditures in order to earn an initial 60% interest. While the property base controlled by the company literally stretches from horizon to horizon, the development plan is to focus just on the extensive resources identified in zones immediately surrounding the historical mine workings. 

For example, a large volume of material estimated to be more than 2 million tons with average grades above 1 gram per ton gold and 160 grams per ton silver lies near the surface and is suitable for open pit mining, at the El Abra Area. 

The same vein structure continues nearly a kilometer to the southeast of El Abra, where another priority target has been defined at the Cerro Colorado Area. There the vein system outcrops near the crest of the ridge, and it is therefore ideally suited for an open pit mine, owing to the lack of overburden material. Perhaps a million tons of lower grade material can be easily processed from this deposit, with economic grades averaging a gram of gold and 100 grams of silver per ton.

While the data for these deposits was compiled prior to the implementation of NI43-101 reporting requirements, the historical numbers have been verified by recent sampling efforts and found to be accurate. The project geologists have expressed an opinion that much of the material contained in these and other near surface deposits could be upgraded to compliance for reporting standards with a minimal amount of further exploration work as supervised by a qualified person.

It should be noted that these areas represent just the very tip of the iceberg in terms of the total resource that may ultimately be proven from this vein system. There are at least four other known deposits on the property with great exploration potential to add millions of tons to the total resource, including underground workings that extend some 800 metres below the surface. Past mine operators were only interested in extracting the highest grading ore shoots, and as a result extensive mineralization grading up to 1,000 grams per ton silver still remains in situ. More thorough exploration work to define resources at depth will be budgeted in future programs. In fact, the entire project area is so intensely mineralized that the problem becomes, where to start?

For Bandera, the immediate objective was to begin small scale production to process some of the material defined near surface that can be won through simply quarry methods. Remnants from past operations remain in stockpiles that will also be available as feedstock to be blended with the initial production run.

As many other newly producing junior mining companies in Mexico have demonstrated, there is a steep learning curve in the process to achieve efficient operations. Equipment and processing must be tuned to the characteristics of the minralization in order to reach optimum levels for gold and silver recoveries. By limiting its efforts to a small operation initially, Bandera expects to achieve efficiency through trail and error, and develop best practices that will sustain the company once the larger mill is constructed and it achieves full capacity operations. 

In addition, since the company is committed to employ a local labour force, a smaller test mining operation allows for training of personnel to higher standards of proficiency and enables greater safety to be maintained at the start up phase. The company is currently producing at a rate of 20 tons per day, and this will be gradually ramped up to over 200 tons per day before the end of the year.

Once the test mining and processing plant are operating efficiently, positive cash flow that is generated will be used to underwrite construction of the larger capacity mill and recovery plant.  It is estimated that the district could support operations with a capacity between 1500-2000 tons per day. Lower grade material will be crushed and processed through heap leaching, while the richer sulphide ores will be subjected to fine grinding and treatment by Pachuca Leaching to allow for the highest possible recovery efficiency. The company has secured the services of highly respected senior staff to manage the plant design, construction, and operations.

During several hundred years of operations, the mines of the Cinco Minas district once supported a vibrant community of over 20,000 people, before eventually succumbing to the economic challenges caused by a lack of capital funding and the severe slump in metals prices. The extensive mine workings currently sit dormant and the town has atrophied to its current population of perhaps 150 people who rely on subsistence agriculture to survive. The ambitious plan to restart mining in the area has strong local support, and the town will be a beneficiary of the wave of investment capital that will bring jobs, growth, and an improved standard of living for the entire community.

Government support for infrastructure improvements will reimburse the company for 66% percent of the capital expenditures, provided that local labour is employed. Road building will be necessary to allow access for heavy equipment and development on the mines. Much of the development work will be self-funding, as lower grade overburden material that must be stripped to gain access to the open pit deposits can be stockpiled and subsequently processed at a profit in a low cost heap leach operation. Waste rock will be separated and crushed, for use as aggregate material for road construction, and other infrastructure improvements.

There are intangibles to consider that also contribute to the strength of the play. The relationship between the JV partners is excellent.  Having the cooperation of both companies acting with the shared objective to develop the project into a mid-sized producer is enormously important. Minera San Jorge contributes the knowledge accumulated from many years of exploration and mapping work on the properties, and a stable local presence in Mexico with established contacts and a thorough understanding of doing business in that country. Bandera generates access to capital, and a strong management team that has demonstrated the ability to successfully build a business.

Bandera represents a rare opportunity in the junior mining sector. In closing this acquisition, it basically inherited a late-stage project, with the potential for rapid advancement to full production. The terms of the deal ensure that the company has not been forced to issue a large volume of cheap shares in order to fund the grass-roots stage.  Since Bandera has an exceptionally tight share structure, with only about 27 million shares currently issued and outstanding, there is greater leverage for shareholders as the value of the company grows. Most of the juniors that are currently in production in Mexico trade with market capitalizations in the range of $50 –150 million, so Bandera can certainly be considered under valued on the basis of that comparison point. If the company achieves their objective to establish low cost production, it could easily generate positive cash flow above $1 million per month, even with a modest operation. On a per share basis, that will translate into a hefty premium that should eventually be realized in the market value of the company, and there would still remain strong potential for growth well into the future.

We are in the midst of a powerful bull market for junior mining companies. Presented with the opportunity to cheaply accumulate a company with strong management and an exceptional project, the upside potential warrants consideration. Bandera Gold is exactly the type of company that I look for, a fat pitch! Case closed… I buy $10,000 of BGL for the model portfolio.