Pure Gold sees low costs at Madsen

Inside the processing facilities at Pure Gold's Madsen project in Ontario’s Red Lake camp. Photo by Matthew Keevil.Inside the processing facilities at Pure Gold's Madsen project in Ontario’s Red Lake camp. Photo by Matthew Keevil.

Pure Gold Mining (TSXV: PGM; US-OTC: LRTNF) has outlined a low-cost development scenario at its Madsen gold project in Ontario’s Red Lake camp, with analysts raising their price targets.

A recent preliminary economic assessment (PEA) envisions a 550-tonne-per-day underground operation at Madsen, with start-up costs of $20.1 million. Madsen benefits from existing infrastructure, including a 500-tonne-per-day mill — permitted to expand to 1,089 tonnes per day — as well as a 1,275-metre deep shaft, portal and decline.

“Twenty million bucks seems low, but it is definitely within the range of reasonableness,” Cormark Securities analyst Tyron Breytenbach says. “It is a PEA, so we might see those numbers creep up a little bit. But I don’t think they are out to lunch on those numbers at all.”

Breytenbach first pegged costs at $50 million, which assumed Pure Gold would expand the mill to 900 tonnes per day. Considering the study proposes using the existing mill capacity, the analyst forecasts a capital range of $20 million to $27 million to get the past producer back into action.

The study assumes Madsen — historically the second-largest producer in the Red Lake — could deliver 259,551 oz. gold over a 6.5-year mine life, at an average diluted head grade of 8.3 grams gold per tonne.

Annual production should average 47,191 oz. at life-of-mine cash costs of US$571 per oz., and all-in sustaining costs of US$692 per oz.

Macquarie Research analyst Michael Gray forecasts Madsen could enter production in 2018, and points out that even with his more conservative cost parameters — including start-up costs of $30 million and all-in sustaining costs of US$746 per oz. — the project has robust returns.

Pure Gold Mining’s Madsen gold project in northern Ontario.Credit: Pure Gold Mining.

Pure Gold Mining’s Madsen gold project in northern Ontario. Credit: Pure Gold Mining.

Incorporating a 5% discount rate and US$1,175 per oz. gold price, Madsen has a $76-million after-tax net present value (NPV) and a 62% internal rate of return (IRR). Payback should occur within 1.5 years.

Gray models a $94-million after-tax NPV and 71% IRR, using a US$1,332 per oz. gold price and his costs parameters.

The study considers extracting 25% of Madsen’s existing resource tonnes. The project’s resource sits within four zones: Austin, South Austin, McVeigh and Zone 8. The zones contain 3.2 million indicated tonnes grading 8.93 grams gold per tonne for 928,000 oz., plus 788,000 inferred tonnes at 11.74 grams gold for 297,000 oz.

Most of the estimated start-up cost would help refurbish the mill, as well as develop the ramp and surface. Anticipated sustaining costs are $39.2 million, with most of the costs associated with extending the ramp from 150 metres to 600 metres below surface.

The PEA “is more or less a platform to value the company and paint the picture of resource growth,” Gray reckons. He says the junior is on the brink of “documenting a significant zone at the McVeigh tuff target — potentially providing a material boost to the already strong Madsen economics through increased production scale, lower unit costs and a longer mine life.”

In April, drill results from the 16,000-metre program confirmed that the “McVeigh tuff is a fold repetition of the Austin tuff,” Gray notes. The Austin zone historically produced more than 2 million oz. down from 1,200 metres deep, while historical underground workings at McVeigh go down to 230 metres.

The analyst describes McVeigh as “potentially low-hanging fruit” to grow the high-grade resource downdip — potentially to 1,200 metres. They got a great piece of real estate. The PEA gives them the base they need to go forward and be more aggressive with the drill bit,” Breytenbach says.

He adds that Pure Gold will continue to drill until they make a bigger discovery.

“Pure Gold has always been about exploration,” Breytenbach says, adding that the company has “some of the best geological brains in the business.”

Director Mark O’Dea placed second in the 2000 Goldcorp Challenge, and the junior’s former chief geoscientist Christopher Lee was a semi-finalist. The competition revitalized the old mining camping, as it boosted understanding of ultramafic contacts and structural controls at Red Lake.

Pure Gold has put together a “fantastic package” and “are exploring it for the first time using the knowledge that was gained from the High Grade Zone discovery and the Phoenix discovery,” Breytenbach says.

Although Madsen is in the same camp as the Phoenix deposit, where Rubicon Minerals (TSX: RMX) ran into serious problems with mining and dilution control, both analysts believe Madsen boasts a “fairly simple geometry and good continuity,” as shown through its 38-year mining history.

“The existing resource is no different in character to what was mined before, so we have a massive, massive bulk sample,” Breytenbach says. “I don’t believe this is going to be a repeat of the Rubicon scenario.”

Pure Gold closed April 21 at 51¢, within a 52-week range of 7¢ to 55¢. It has a $64.1-million market capitalization.

After the PEA results, Breytenbach raised its 50¢ target to 80¢ per share and kept a “speculative buy.” Gray has bumped his target price from 80¢ to $1, and has an “outperform” rating.


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