Chesapeake a good target for Goldcorp: Hallgarten’s Ecclestone

An outcrop at Chesapeake Gold's Metates gold property in northern Mexico. Credit: Chesapeake Gold An outcrop at Chesapeake Gold's Metates gold property in northern Mexico. Credit: Chesapeake Gold

When Christopher Ecclestone says Chesapeake Gold (TSX: CKG; US-OTC: CHPGF) “looks like the turkey all dressed up for Thanksgiving,” readers of his latest research note might want to take his description with a pinch of salt.

The founder of research and consulting firm Hallgarten & Co. happens to hold a long position in Chesapeake’s stock and has a 12-month target price of $4.10 per share, about double its current trading price.

Nevertheless, he raises some interesting points, and his conclusion that Goldcorp (TSX: G; NYSE: GG) would do well acquiring Chesapeake is worth considering.

For starters, Chesapeake’s Metates deposit in northern Mexico, 160 km northwest of the city of Durango and 175 km north of the coastal city of Mazatlan, is one of the largest undeveloped gold and silver projects in the world with an enormous resource of more than 19 million oz. gold in the measured and indicated category. Ecclestone says that the company is also “well-padded financially, with over $30 million in liquid assets.”

Goldcorp already owns 9% of Chesapeake, Ecclestone adds, and has confidence in its CEO Randy Reifel, who has been a member of Goldcorp’s board for quite some time.

Before founding Chesapeake, Reifel was president of Francisco Gold Corp., where according to Ecclestone he was “key to the development and financing of the El Sauzal and Marlin gold discoveries and the sale in 2002 to Glamis Gold for $390 million,” before Goldcorp took it over. 

Reifel has other feathers in his cap, too, including his past presidency of Carson Gold Corp., where, Ecclestone writes, “his recognition of the Kilometer 88 gold district in Venezuela led to Carson being acquired in 1993.”

Goldcorp is not only familiar with Chesapeake’s management, but also comfortable operating in Mexico. And Metates is one of the few gold projects of its size not yet held by a major.  

“While comparisons might be odious it is relevant to draw attention to the size of Metates compared to such projects as KSM and Galore Creek in out-of-the-way, hostile environments, or even less fortunately to Tasiast or Pascua Lama,” Ecclestone writes. “Metates is a cakewalk compared to these ‘available’ alternatives.”

Chesapeake is developing a mine plan that would incur a lower initial capital cost and reduce the initial ore throughput rate from 120,000 tonnes per day to something closer to 30,000 tonnes per day, with staged expansions increasing to 90,000 tonnes per day and/or 120,000 tonnes per day.

The original prefeasibility study completed in January 2013 envisaged a conventional truck and shovel open-pit mining operation, with a nominal 120,000-tonne-per-day throughput that would cost US$4.3 billion in initial capex (including a US$631-million contingency), and exclude sustaining capital costs of US$584 million.

“Naysayers have zeroed-in on the capex issue, which is always a criticism that gains traction — rightly or wrongly — these days,” Ecclestone says. “In the company’s days of ‘build it and they will come’ thinking, the project was sized to attract elephant hunters with  $4.3 billion in capital spending and a 25-year mine life. As elephant hunting is out of fashion, literally and metaphorically, the company is working on ‘right-sizing’ the project to suit the tenor of the times.”

The initial prefeasibility study estimated that at a rate of 120,000 tonnes per day, Metates would produce an average of 659,000 oz. gold, 15.9 million oz. silver and 143 million lb. zinc each year over a 25-year mine life.

Proven and probable reserves stand at 1.2 billion tonnes grading 0.5 gram gold per tonne for 18.5 million contained oz. gold, 14.2 grams silver per tonne for 526 million contained oz. silver and 0.2% zinc for 4.2 billion contained lb. zinc. The reserve estimate used a cut-off grade of 0.35 gram gold per tonne and metal prices of US$1,350 per oz. gold and US$25 per oz. silver.

Ecclestone argues that it seems “somewhat inevitable that Chesapeake will be brought closer into the Goldcorp orbit” and notes that “in the size category where Goldcorp shops, there is not much on offer.”

He says that “compared to any of the other potential buys out there, Chesapeake represents the best way of Goldcorp plugging a production decline in its mid-term outlook. Other majors have more pressing production declines and thus need to outbid Goldcorp to plug those gaps. Goldcorp on the other hand has the time to develop Metates to fill a future need, if it moves in the next year to 18 months.”

Ecclestone is also in the camp that believes Goldcorp was correct in bowing out of the race for Osisko Mining and its Malartic mine in Quebec. Goldcorp declined to amend its $3.6-billion hostile takeover bid, and Agnico Eagle Mines (TSX: AEM; NYSE: AEM) and Yamana Gold (TSX: YRI; NYSE: AUY) acquired the company for $3.9 billion.

“The market is not rewarding Goldcorp in the way it should for walking away from a stupid transaction,” Ecclestone remarks. “Osisko was not the only fish in the sea and Goldcorp is not up against any imminent decline in production … it has the leisure of being able to look for bolt-ons that are synergistic, not merely opportunistic. Ideally, it can have its cake and eat it too at this point in the market’s desperation and capitulation.”


2 Comments on "Chesapeake a good target for Goldcorp: Hallgarten’s Ecclestone"

  1. A few observations:

    with a market cap of 90$M if G wanted this project they would have purchased it already.

    Sure there are a lot of oz’s at Mutates but grade rules, especially when gold prices are falling. Mutates was calculated using 1350 $/oz gold. Try recalculating the reserves at 1000$/oz and see how many are left.

    These low grade project need big volume in order to amortize the mostly fixed costs of the plant therefore going small does not work.

    This ore is refractory therefore one needs pressure oxidation to extract the gold. You could produce a concentrate and sell that but then you get about 85% of the value of the gold that is recovered. And typically only circa 88% is recoverable. So for 1oz in the ground, 0.95 ends up in the concentrate, and 88% of that is recoverable. 0.84oz is recovered and you get 0.85% of the gold price.

    Goldcorp already has too much Mexico exposure with Penasquito and Los Filos mines. If they are going to spend +4$B to develop a project they will do so on their very own Camino Rojo project located 50km away from Penasquito. It has grades of 0.76g/t gold and 15 g/t silver. Sure, it “only” has 7moz gold and 74 moz silver but it has 100km + of drilling since the last resource calculation.

    This project will have to wait for the next cycle, or as someone famous once said “it will be a nice mine once someone builds it and takes the writedown”

  2. Your comments are valid with respect to how the valuation was done. Yes we will have to see how things look at $1000/oz.and looking at a less capital intensive mining plan. Chesapeake’s management is aware of this. I am curious to see what the new plan will look like.

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