Mexican Gold (CVE:MEX, FRA:4QW1) – Mexico’s Newest 1Moz Gold Deposit

Palisade Research August 2, 2017
Category: Research
As expected, Mexican Gold’s maiden resource was a barnburner. One million ounces is nothing to yawn at, especially since it only encompasses two of seven known zones. Thus, it is very simple to conclude that MEX is still cheap. But, by how much?

There are several transactional comps that can be applied to Mexican Gold’s intrinsic valuation; the most directly applicable is Torex Gold, whose ore is indistinguishable from that of MEX’s. See for yourself –
(On the left, Torex’s Media Luna core. On the right, Mexican Gold’ El Dorado core. Source: Rocks to Riches Equity Research Report)

From 2006 until early 2009, Torex Gold (then Gleichen Resources Ltd) was just a cashed-up shell searching for a project. On August 6, 2009, Torex finally found its flagship when it acquired 78.8 percent of the Morelos project from Teck Resource for US$150 M. On February 24, 2010, Torex acquired the remaining 21.2 percent of the Morelos Gold Project for $52.0 M from Goldcorp.

When it was all said and done, Torex was the 100 percent owner of the advanced-stage Morelos Gold Project, which at the time hosted an M&I resource estimate of 2.968 million ounces of gold averaging 3.20 g/t, and another inferred resource of 0.89 million ounces of gold averaging 3.2 g/t.

Just like Mexican Gold’s project, the gold mineralization at the Morelos Gold project is skarn-hosted. At time of acquisition, three gold deposits had been discovered on Morelos Gold Project – the El Limon, Guajes East and Guajes West deposits. Also like MEX, the area had seen significant artisanal, small-scale mining.

At time of acquisition, Torex paid C$55/oz. The project had 608 drill holes and 98,357 meters of work performed. Over the next eight years, Torex drilled another 1,211 drill holes and 292,493 meters. The Morelos Gold Project consolidated its deposits into two, now hosting the El Limon-Guajes (ELG) Mine and the Media Luna deposit. The ELG mine reached commercial production in 2016. It is slated to produce 350,000-380,000 ounces in 2017.

The open-pit El Limon-Guajes (ELG) Mine currently holds a resource of 4.48 million ounces of Au with an average grade of 2.59 g/t. The Media Luna deposit will be an underground mine, and currently hosts a resource of 7.42 million ounces of ounces AuEq at an average grade of 4.48 g/t AuEq.

Torex’s work increased the resource from 3.86 to 11.9 million ounces. During this time, the company has been able to generate considerable value for its shareholders:
Mexican Gold’s maiden resource came in at 303,000 M&I ounces at 1.90 g/t AuEq, and another 719,000 inferred ounces at 2.179 g/t AuEq, for a total of 1.02 million ounces at an average of 2.1 g/t AuEq.
As Mexican Gold continues to prove up its resource, its value will converge with Torex’s acquisition per ounce of Morelos in 2009 of C$55/oz.

While Las Minas’ grade is lower than Torex’s, it is important to remember that Las Minas will be majority open-pit with significant by-credits in copper and silver. Furthermore, Torex’s acquisition occurred when gold was trading at $960/oz., compared to today’s price of $1,270. Even at half the acquisition cost per ounce, Mexican Gold should be trading at more than double its current market cap.

Looking at the TSX Venture as a whole, Mexican Gold is in the top percentile in terms of cheapest per ounce:
Mexican Gold’s C$8.93/oz AuEq valuation makes it the 13th cheapest company on the TSX and TSX Venture. Triumph Gold, another major Palisade Global position, remains number one.

On a transactional and comparative basis, Mexican Gold is undervalued.

With the maiden resource finally on the books, we expect major financing on the horizon. The funds will be used to continue to prove up Las Minas and find additional gold zones. We imagine Las Minas is on the top of many Gold Major’s watchlist, and we are excited to see how they jockey to become involved.

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