Argonaut project a bellwether for Mexico mining permitting

Argonaut Gold has demonstrated the economic viability of its Cerro del Gallo project in Mexico through a 2019 pre-feasiblity study (PFS).

But a permitting hurdle and political uncertainty – Mexico’s leftist President Andrés López Obrador (AMLO) won't allow new mining concessions – have cast doubt over the future of the gold-silver-copper asset.

BASICS

Cerro del Gallo – acquired by Argonaut in 2017 – comprises 13 mining concessions covering 20,270ha in Guanajuato state.

The December PFS indicated a 16,667t/d throughput open pit mine and heap leach processing plant, producing 64,000oz/y gold, 1.3Moz/y silver and 2,400t/y copper over a 15.5-year mine life.

Initial capex is estimated at US$134mn.

“Cerro del Gallo fits well within our team’s abilities as another open pit heap leach project in Mexico and is an asset that supports our transformation strategy from being a high-cost producer to a lower-cost producer,” Argonaut CEO Pete Dougherty said in a release.

RESERVES AND RESOURCES

The PFS is based on proven and probable mineral reserves of 91.8Mt at 0.56g/t gold, 13.3g/t silver and 0.09% copper, containing 1.64Moz gold, 39.1Moz silver and 85,782t copper.

Measured and indicated resources are 202Mt grading 0.44g/t gold, 12.2g/t silver and 0.09% copper, containing 2.86Moz gold, 79.1Moz silver and 187,000t copper.

LOW COSTS

Despite its low grades, Cerro del Gallo promises to be a low cost mine.

Average life-of-mine all-in sustaining costs are estimated at US$677/oz, with cash costs at US$597/oz, placing it among Mexico’s lower cost assets.

ECONOMICS

Argonaut’s PFS demonstrates that Cerro del Gallo is an economically viable asset – something previous studies by the former owners failed to confirm.

Post-tax IRR is 20%, compared to an industry standard minimum of 15% to justify investment.

This assumes gold prices of US$1,350/oz, with silver at US$16.75/oz and copper at US$6,000/t – all roughly in line with or below consensus long-term forecasts.

Returns fall to 16.5% at US$1,250/oz gold and 12.7% at US$1,150/oz, showing the project remains profitable at substantially lower prices.

At spot prices of around US$1,550/oz gold, the post-tax IRR rises to 26.3%.

PERMITTING HURDLE

Argonaut has hit a permitting hurdle at Cerro del Gallo, after environment ministry Semarnat rejected a unified technical document, which combined environmental impact and risk assessments and a change of soil use permit.

Semarnat has asked the company to make minor revisions and resubmit the application, which the company plans to do in Q1.

A decision from the ministry is expected within 60 days of resubmission.

OUTLOOK

While Cerro del Gallo’s economics fall short of those of Mexico’s highest-return gold projects, the long mine life coupled with Argonaut’s experience operating open pit, heap leach mines in Mexico work in its favor.

But the Semarnat ruling sparks some concerns.

While only minor revisions to the permit application are required, according to Argonaut, the company has faced repeated permit rejections at its San Antonio project in Baja California Sur state.

Argonaut is evaluating a write-down of San Antonio’s book value as a result of this uncertainty.

It is unclear whether the Cerro del Gallo permit rejection will be a short-term hiccup or a longer-term obstacle to development.

On the permitting front, the broader political backdrop is unfavorable.

AMLO has taken pride in asserting that his administration has not issued new mining licenses, and criticized his predecessors for handing out swathes of the country in concessions issued to mining companies.

The president has also pledged support for tougher environmental and social regulations for miners.

Industry insiders will be watching closely how Cerro del Gallo’s revised permit application pans out for an indication of how future rulings are likely to go.