TGR: What were your impressions of Black Fox?
CM: There’s a lot of exploration potential there at depth. That mine was undercapitalized when Brigus Gold owned it. Primero has a lot of underground development work to do to get production up to 1,000 tons per day (1,000 tpd). Once it does, there is potential to go beyond that level. To go beyond 1000 tpd, Primero must first find more gold at depth and then develop underground. The company has the capital and it has committed to explore at depth to try to unlock that potential.
TGR: What stood out at AuRico’s Young-Davidson?
CM: The ore body is similar to Goldex and is amenable to low-cost bulk mining but the grade is a lot better than at Goldex. It’s a wide ore body with big stopes, so the company has put the infrastructure in place to allow the deposit to be mined cost effectively. The production shaft has been sunk; development work in the upper mine is mostly complete. AuRico’s goal is to go from 2,700 tpd to 4,000 tpd, and then eventually to 8,000 tpd once the lower mine is fully developed.
TGR: Young-Davidson produced about 120 Koz last year and AuRico has issued guidance that could be as high as 160 Koz in 2014. Is that realistic?
CM: Yes, that’s realistic. The ultimate goal is to get to around 230 Koz/year on a sustainable basis. Once AuRico gets there unit costs should decline to below $500/oz from around $700/oz because to get that incremental tonnage it won’t have to add as many underground miners. The mine should reach full capacity by the end of 2016.
TGR: What are some other equity positions currently held by your fund?
CM: One that we’ve been buying recently is Mandalay Resources Corp. (MND:TSX). That’s a company that is taking advantage of the downturn in the gold price. It has two mines that are generating cash flow. One is an epithermal vein system in Chile, the other is an underground mine in Australia. The company has done a good job of adding to the life of both mines through drilling. Mandalay recently bought a project from Silver Standard Resources Inc. (SSO:TSX; SSRI:NASDAQ), another epithermal vein system in northern Chile. And a couple of weeks ago Mandalay announced a friendly deal to buy Elgin Mining Inc. (ELG:TSX), which owns the Björkdal gold mine in Sweden.
TGR: Was that a good deal?
CM: I think so. This is an undercapitalized mine in Sweden that has a lot of exploration potential. If Mandalay gets the mine up to production capacity and then creates value through the drill bit again, we will look back on that as a good deal.
TGR: What else are you buying?
CM: Another one that we bought recently is Virginia Mines Inc. (VGQ:TSX). Virginia has a royalty on what should be one of the best gold mines in the world—Goldcorp Inc.’s (G:TSX; GG:NYSE) Éléonore deposit in northern Québec. It will become a high-grade, bulk-tonnage underground mine in a great jurisdiction with a lot of exploration potential on the entire land package. The gold deposit is getting bigger at depth and Goldcorp could find another economic deposit on the property. Virginia’s royalty would be attractive to any of the gold mining royalty companies, including Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) or Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX). Even if Virginia chooses not to sell, the royalty will generate lots of cash flow. Hopefully, the company will pay dividends, too. Then there is the potential that Virginia finds something else that’s minable.
TGR: How is Virginia putting its royalty cash to use?
CM: It has the Coulon base metals project that it believes has a very good chance to be feasible. Virginia is trying to define that project more completely and put economics around it so that it could eventually become a mine or perhaps another royalty stream. Virginia is one of the best explorers in northern Québec’s James Bay region.
TGR: What are some other small-cap gold equities that the Gabelli Gold Fund owns?
CM: We own Comstock Mining Inc. (LODE:NYSE.MKT). Comstock is primarily an exploration company, but it did a good job of bringing its Lucerne project into production so that it could weather this downturn relatively well. The company should be cash flow positive from Lucerne while it explores and defines the Dayton deposit in Nevada—still one of the most prolific gold and silver bearing regions in the world. We’re waiting to understand the economics of the company’s total mineral inventory in the region before taking a larger position.