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TABLE OF CONTENTS May 26 - Jun 1, 2014 Volume 100 Number 15 - 0 comments

Goldrock's Matysek out to prove Argentina's a good bet

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By: Gwen Preston

VANCOUVER — Lindero is an economically robust gold mine project that is permitted for development. Its capital costs are reasonable, it has support from the local populations and authorities, and it is being driven forward by Paul Matysek, a mining executive with a record of getting the job done.

With money becoming available for good projects, it seems owner Goldrock Mines (TSXV: GRM; US-OTC: MFMNF) could find financing for its prime project. But one hang-up keeps getting in the way: Lindero is in Argentina. And the resource sector just doesn’t know what to think of Argentina.

The hesitation is understandable: Argentina’s prospective geology gets lost amidst the country’s ever-shifting politics and economic challenges. This is, after all, the country that defaulted on US$132-billion worth of international debts just 12 years ago, where rampant inflation seems to shatter the economy every decade or two and where history shows a pattern of populist leaders nationalizing private-sector holdings.

However, Argentina is also the twelfth largest gold-producing country in the world. The nation has seen 10 mines enter production in the last decade. Half a million Argentineans work in the mining sector and the population is generally supportive of mining projects, including indigenous groups. The government also supports mining and fast-tracks permitting processes once key boxes have been checked.

“All these people are pouring money into Argentinean oil and gas right now,” says Matysek, Goldrock’s president and CEO. “One of the best performing stocks on the Venture exchange this year is Madalena Energy (TSXV: MVN; US-OTC: MDLNF), a Canadian junior looking for unconventional oil and gas in Argentina. Yet people are too nervous to invest in mining in Argentina, even though the same regulations apply to both? It just doesn’t make sense.

“Every time we meet with potential investors, we spend the first 20 minutes explaining that things have changed, that Argentina wants mining,” Matysek continued. “And it really does want mining. Salta province is in love with Lindero.”

Matysek is used to telling stories others are not used to hearing. A proven mining entrepreneur, he joined Goldrock in 2012 when the company transitioned away from exploring Lindero and towards the next step: developing the project into a mine or selling it to a major. And Matysek is a perfect fit for that challenge.

Before Goldrock, Matysek was president and CEO of Lithium One, which in mid-2012 merged with Australia’s Galaxy Resources (ASX: GXY) in a $112-million deal. The merger was a success for shareholders and gave Matysek experience in Argentina, as Lithium One’s flagship asset was in the country’s north.

And before that, Matysek was president and CEO of Potash One, where he finessed a $434-million takeover by Germany’s K+S AG. Even further back, he founded and led Energy Metals, a uranium company that grew rapidly for three years before a Chinese uranium major acquired a controlling stake.

“I get into things early: uranium, potash, lithium and now, Argentina,” Matysek says. “I get in because I believe in the commodity and the project. And I invest personally in my companies and never sell my shares.”

So what is this project that Matysek believes in? Lindero is a gold project in northwest Argentina’s Salta province. It is permitted for development into an open-pit, heap-leach mine that would initially process 15,000 tonnes per day, expanding to 18,750 tonnes per day during the first year.

It’s a straightforward mine plan: open-pit mining; three-stage ore crushing; conventional heap leaching; and a carbon adsorption–desorption recovery plant. Life-of-mine gold recovery is projected at 68.3%.

During its first nine years of operation the planned Lindero mine would produce 109,000 oz. gold annually. It would cost US$703 to produce each of those ounces, as an all-in sustaining cost, which means the Lindero mine would generate a 33.4% after-tax internal rate of return based on a US$1,400 per oz. gold price and a 5% discount rate.

According to the April 2013 feasibility study, it would cost US$155.4 million to build the mine. The project’s anticipated high rate of return means the investment would be recouped in two years.

The idea is to start small. Lindero could support a bigger operation, but Goldrock wants a low capital cost, small-footprint mine initially.

Once the modest heap-leach operation is up and running, Goldrock would consider expansion.

The dioritic porphyry at Lindero hosts 128.7 million measured and indicated tonnes grading 0.52 gram gold per tonne and 0.1% copper, plus 59.7 million inferred tonnes averaging 0.37 gram gold and 0.09% copper. The reserve considered in the mine plan is considerably smaller: 65.5 million proven and probable tonnes grading 0.72 gram gold, for 1.5 million contained oz.

As such the defined 3.5 million oz. resource offers potential for reserve expansion. In addition, Goldrock has outlined an initial resource at the adjacent Arizaro porphyry totalling 31 million indicated tonnes grading 0.34 gram gold, plus 27 million inferred tonnes averaging 0.26 gram gold. Lindero is the northwest end of the Arizaro intrusive complex. The Arizaro porphyry system is at the southeast end of the complex a few kilometres away, and in terms of surface expression, is twice the size of Lindero.

Goldrock is out searching for the US$155 million it needs to build Lindero. Matysek says they are considering all options, though the company’s goal is to secure US$100 million in debt, pull in US$30 million in equity, negotiate a US$35-million equipment leasing contract and sign a US$15-million royalty.

The equity component is small for a reason: Matysek orients all he does towards increasing shareholder value.

“I don’t believe in increasing market capitalization — that as a goal doesn’t make sense to me,” Matysek says. “All these companies in the last few years — they issue stock and raise money and say, ‘Hey look, we’re worth more now because our market capitalization is up,’ but in fact their share prices are lower. They just have more stock out. And that does nothing for the investor.”

The hunt continues, but just because Matysek and his team have not secured full funding does not mean Lindero’s development is at a halt. In December, with $9 million in the bank, Goldrock ordered the high-pressure grinding roller (HPGR) that will be the cornerstone of the Lindero mill. The HPGR is the longest lead-time item for the project, so the fact that it is scheduled to arrive on-site in early 2015 with $5 million — or 70% down against its price tag — derisks the project financially, and in terms of a timeline to production.

Another step in the de-risking process for Lindero came in March, when Goldrock entered into a gas pipeline-access contract with the owner of the regional gas pipeline. The contract concerns moving 38,000 cubic metres of natural gas daily, which is enough to power the planned Lindero mine.

The idea is not to connect Lindero to the gas pipeline, but to set-up a virtual gas pipeline consisting of a station at the source in Pocitos — a receiving station at the mine site — and four trailer trucks to transport the gas. The Salta provincial government built the pipeline that carries the gas to Pocitos so that it could encourage mining and other development in the Puna region.

The Salta government has also issued every permit needed to develop Lindero, often in record time. And so Goldrock and the Salta government are advancing Lindero towards production, despite pushback from the mining-investment community, which does not forget events so quickly.

One event overshadows all others when it comes to Argentina’s recent resource past: the government’s unilateral nationalization of a 51% stake in oil and gas major Yacimientos Petroliferos Fiscales (NYSE: YPF), or YPF, in April 2012. All of that stake came from Madrid-based oil and gas giant Repsol (OTC-MKTS: REPYY), which owned 57% of YPF at the time. The surprise move sent shockwaves across the global resource sector. Overnight, the political risk rating attributed to Argentinean resource projects skyrocketed.

The Argentinean government said it took the action because Repsol was paying out dividends rather than putting money into developing its Argentinean assets, robbing the government of tax revenue and forcing the country to become a net importer of oil and gas.

But last month Argentina’s congress approved a US$5-billion compensation payment to Repsol for the 51% interest. Repsol had demanded US$10.5 billion for its 57% stake, but the sizable settlement is still significant for a country trying to attract foreign investment to develop its shale oil and gas reserves.

(At press time, Repsol had just sold a 12% stake in YPF for US$1.26 billion, bring its holdings down below 0.5%, and effectively exiting Argentina.)

Most of those YPF reserves are in the Vaca Muerta, a shale formation in southern Patagonia that hosts huge amounts of oil and gas. The contained hydrocarbons position Argentina second in the world for shale-gas reserves and fourth for potential shale-oil reserves.

“The YPF case should not be [considered] a precedent for further expropriations,” Matysek says. “Our sources widely believe that the YPF expropriation, while unacceptable from a reputational and rule-of-law standpoint, was partly justifiable. Our sources further believe that the recent settlement with Repsol stemmed from the government’s recognition of its urgent need to regain credibility at the international level.”

The nationalization of YPF was the highest-profile hammer to hit Argentina’s resource sector in recent years, but it was not the only blow. In 2011, while facing a serious decline in Argentina’s once-bountiful trade surplus, president Cristina Kirchner enacted import controls to curb the flight of capital. The government also arbitrarily increased the range of products liable for import taxes.

Those moves hurt individuals trying to protect their personal savings and a wide range of businesses reliant on imports.

But for resource companies, it was Kirchner’s next move that hit hard: in late 2011, the government forced companies in the extractive sector to repatriate their export revenues (i.e., convert all the revenues they wanted to take out of Argentina into pesos first).

To the government, the reasoning was straightforward: it was watching capital pour out of Argentina, and saw this move on mining revenues as a way to create some capital inflow. To resource companies, the requirement to convert revenues into a devaluing currency was not so palatable.

After the repatriation requirement, nationalizing YPF was too much. Investors of all stripes fled, from oil and gas majors to individual shareholders in Argentine-oriented explorers. Goldrock’s share price fell from $3 in early 2011 to 40¢ by mid-2012.

Matysek says investors always ask: Can mine developers import the equipment they need? And can miners get their profits out of Argentina? The answer to both questions is: yes.

“It took all of four days for Goldrock to obtain a licence to import the high-pressure grinding roller,” Matysek said. “It was not arduous at all. And just to prove it was possible, we applied to transfer funds out of Argentina — it only took one day for the central bank to authorize the transfer. They are not trying to stop these things from happening. They just want companies to buy domestically if possible, which was not for the HPGR, and they want to know how much money is moving out of the country.”

Even disproving those limitations is unfortunately not enough to convince many in the resource sector to believe in Argentina, because its list of economic challenges continues, with inflation near the top of that list. Rampant inflation brought Argentina to its knees in the early 1990s. In 2001, a similar crisis forced another government out of office and led to the largest foreign debt default ever. Now inflation is again on the rise.

According to the Foundation for Latin American Economic Research, inflation in Argentina totalled 26.4% in 2013. Other analysts peg it at well over 30%. The government figure is 10.5%, but there has long been widespread distrust of Argentina’s official inflation reports. Even the International Monetary Fund has weighed in, censuring Argentina in February 2013 for failing to divulge accurate inflation data to the public.

However, Goldrock does not see inflation as a major hurdle.

“Inflation is not an issue for companies that have revenues in U.S. dollars,” Goldrock chief financial officer Bassam Moubarak says. “Historically the depreciation in the currency has been consistent with the rate of inflation, thus insulating the company from inflationary pressures. The inflation in Argentina is also beneficial to companies in the mining sector as this lowers their costs over time, as increases in prices and wages tend to be a little less than actual inflation.”

Another factor weighing on Argentina’s financial reliability is a major drop in the central bank’s reserves, which fell almost 30% in 2013. This is not because of inflation or currency devaluation. This is because of spending. In 2012, the government approved a bill allowing it unfettered access to central bank reserves to pay public debts.

The measure also expanded the central bank’s capacity to lend to the treasury. Taken together, these moves eliminated the standard requirement for the central bank to hold reserves equivalent to the monetary base. The central bank now has less than US$28 billion in reserve, compared to US$47 billion in March 2012, when Kirchner’s government started spending reserve dollars.

Argentina’s challenges don’t end there. Rate freezes mean power companies are not investing in infrastructure, which has led to rolling blackouts throughout the country, including multi-day outages in Buenos Aires in the mid-summer heat.

Governments of all levels in Argentina are being pressured to increase public-sector wages. In December police in the city of Cordoba walked off the job to protest low salaries. Rioting and looting started almost immediately, forcing the province to grant a 30% wage hike. Police in 20 other provinces followed suit. Teachers, transit workers, trades unions and municipal workers have all also taken to the streets.

Then there are the allegations of corruption against Kirchner and her top officials, a general and alarming growth in crime, and interrupted leadership when Kirchner underwent surgery last October to remove a blood clot in her brain.

Matysek takes it all in stride. He believes in Argentina, just as he believed — correctly — in uranium, potash and lithium. And he believes Lindero is a good gold project.

Now Matysek just has to convince everyone else. Thankfully for him, his track record should give people reason to listen.

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Goldrock Mines' Lindero gold project in northwest Argentina's Salta province.  Credit: Goldrock Mines
Goldrock Mines' Lindero gold project in northwest Argen...
A road at Goldrock Mines' Lindero gold project in northwest Argentina. Credit: Goldrock Mines
A road at Goldrock Mines' Lindero gold project in north...

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