This TSX junior's plans to become a gold producer could mean big money for investors
|The Cerro Prieto mine site operated by GoldGroup is adjacent to the property.|
By Peter Krauth
Gold prices have already staged a massive upside breakout in multiple currencies including the Euro, Japanese yen, British pound, and Canadian dollar. The moves have been reflected first in order of increasing risks from bullion, to royalty companies, large-cap gold producers, and so on.
Moreover, the concurrent oil price collapse has added to the positive environment for gold as lower energy costs decrease the cost of production while increasing profitability.
Unfortunately, lost in the dust are Canada’s mineral exploration companies, which for the most part, continue to find financing and maintaining a share aftermarket a struggle.
Given this reality, graduating from exploration to gold production, however small, can be hugely transformational, for both a company and its shareholders.
This is why one junior miner’s plan to become a gold producer makes for an exceptionally exciting opportunity.
Unique approach lowers risk, maximizes upside
This junior miner is Sonoro Metals Corp, (TSXV: SM, OTCQB: SMOF, FRA: 23SP) and their focus is on developing gold and silver deposits in Sonora State, Mexico.
A unique component of the company’s strategy is that it is in advanced discussions with Chinese engineering, procurement and contracting (EPC) companies for the development and financing of its flagship Cerro Caliche project.
The project’s financing is to consist of debt paid back from production, and the deal is expected to be turnkey, with the EPC company providing all aspects of the final engineering, equipment and eventual construction, together with the financing.
Additionally, because it is a debt financing, Sonoro would become a gold producer with little or no share dilution.
As Sonoro’s Chairman, John Darch, explains, this strategy makes perfect sense from the perspective of both the EPC company and Sonoro. He notes, “These EPC companies are experts in developing mines. This reality puts them in an ideal position to identify opportunities and de-risk project finance.”
“The reason is their direct involvement in the feasibility study, and later other critical components such as definitive engineering, equipment procurement and construction. This expertise and their control of the mine development process increases their confidence that the gold will be mined at a profit and that they will get paid back.”
He adds, “At the same time, the added profits they earn on their EPC contracts reduce their financial exposure and adds to their motivation to finance.”
Sonoro has been informed that a technical review of the project was successful and now discussions are advancing to cover details regarding engineering work and project finance.
The company’s plan to fast-track development to produce gold at its Cerro Caliche site over the next 24 months isn’t new; the company is modeling this initial strategy on the playbook of Glamis Gold.
Glamis turned out to be a multi-decade growth story, which culminated in its sale to Goldcorp for $8.6 billion in 2006, but the foundation of its success was a tiny heap leach mine called the Picacho, whose annual production ranged from 18,000 to 24,000 oz.
Granted, comparing Sonoro with Glamis may seem like a stretch, but Sonoro’s management team has a track record that indicates they are moving in the right direction. Collectively, management has either discovered or developed more than a dozen gold and copper deposits into operating mines.
One of these, La Cieneguita, was developed and operated on behalf of Glamis by a mining engineer named Jorge Diaz. Diaz is Sonoro’s Vice President of Operations in Mexico and has been with the company since its founding.
Ken MacLeod, President, CEO and Director at Sonoro Metals, notes, “Our technical team’s key management has been with us since Sonoro was founded. Prior to joining Sonoro, they spent more than three decades discovering and developing gold deposits or operating gold mines in the region.”
He adds, “They know the area intimately because they’ve spent most of their lives there. They are critical to our current Cerro Caliche project's success and also to Sonoro’s future growth.”
“I say future growth because not only are they expert mine builders, but over their many decades they have identified and have access to numerous promising gold deposits in Northern Mexico that have never been developed.”
|Sonoro's location map showcasing Cerro Caliche and San Marcial.|
Sonoro's flagship Cerro Caliche project covers some 1,400 ha and is in the midst of a gold-rich intensely mined region in Northern Sonora State. Nearby mining operations include Alio Gold’s San Francisco mine, Premier Gold’s Mercedes mine, Goldgroup’s Cerro Prieto mine and Agnico Eagle’s recently acquired Santa Gertrudis mine.
The company’s second project, San Marcial, is at an earlier phase of development and is also located in Northern Sonora state, where old mine workings harken back over a century. It’s 20 km east of Alio Gold’s San Francisco mine and has extensive surface gold mineralization.
Sonoro is targeting this project as a potential future oxide gold deposit similar to others already being mined in the area. But, for now, the focus is to develop Cerro Caliche, and if successful, use the cash flow for both projects.
Management: A storied past with an exciting future
Old but often true advice, the best place to find a gold deposit is near already existing gold deposits. Similarly, the best management is often built up of individuals that have discovered, built and managed gold mines many times in the past. With this in mind, Sonoro’s management has a successful track record that spans discovery through resource development and production, making them a powerful force for the company.
For instance, Sonoro’s Chairman, John Darch, founded a company called Crew Development, which, through its subsidiaries, operated and developed a handful of major projects including Greenland’s first gold mine, seven mines in South Africa, and Chibuluma South, the first mine to be developed since the 1970s in Zambia’s copper belt.
After making a fortune discovering and developing mineral deposits, Darch retired from mining and co-founded a coffee company in Thailand called Doi Chaang. For some people, success follows them wherever they go and for Darch that appears to be true.
Under his guidance, Doi Chaang went from an impoverished farming village to becoming an internationally recognized coffee brand and major success story which then went on to become the subject of a documentary and book.
In 2018, Darch returned to the mining industry, convinced that a major gold bull market was underway and that the depressed junior exploration companies were likely to provide an opportunity to acquire developable gold assets with which to build a gold producer.
In Darch’s estimation, Sonoro has the cornerstone asset at its Cerro Caliche project, which can provide a springboard for future growth just as Glamis Gold’s Picacho Mine did.
The real question is: How far will Sonoro get as its resources grow?
Several gold producers in the area have mines which will run out of ore and be forced to close in the next few years. Developing gold deposits in their midst will make Sonoro an ideal takeover candidate — They are no strangers to this scenario.
|A look at Sonoro’s properties, along with its proximity to surrounding projects.|
In today’s challenging junior gold market, Sonoro’s strategy of working with EPC companies to acquire non-dilutive finance and turnkey development is a critical component of what looks to be a winning strategy. Using targeted cash flow for future exploration and development also maximizes potential share price upside.
Sonoro looks like they could be in the right spot, with the right team in hand. With its growing potential as a takeover target, the ultimate exit strategy is no mystery. When asked, Darch explains, “While there is always a price one can’t refuse, if Sonoro has cash flow, we will be in a much stronger bargaining position.”
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Learn more about the company’s management and its projects here.