Written-down gold producers can win under inflation

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In the last segment of his latest Discovery Watch (February 20th), John Kaiser from Kaiser Research Online explains that, in contrast to junior miners who stand to benefit in a non-inflationary environment when the real price of gold is rising, some existing producers could win if the nominal price of gold is rising along with inflation.

Cheechoo project neighbourhood (click for larger)

The discussion begins with an overview of the Sirios Resources (SOI) Cheechoo project in northern Quebec.

The Cheechoo project originally caught Kaiser's attention due to its location near the Goldcorp (G) Éléonore mine. Kaiser reckons Goldcorp spent about $1 billion to bring the project into production. Last year, the mine produced 342,000 ounces of gold. However, with Goldcorp set to be gobbled up by Newmont (NEM) in an all-stock takeover, last week Goldcorp wrote off $1.6 billion related to the mine. The move took place as Goldcorp determined that the book value of the asset was less than the fair market value. Goldcorp also took impairment charges against Peñasquito, Cerro Negro, and Red Lake assets.

Nevertheless, despite these types of impairments, Mr. Kaiser suggests that mines like Éléonore remain profitable:

All of these mines that were just written-down are very profitable mines, they just haven't proved as profitable as assumed when the initial investment decisions were made to acquire and develop these projects.

Mr. Kaiser suggests that if inflation becomes part of the reason for gold going higher, that will be a positive development for mines such as Éléonore which have been written-down.

If inflation is driving the price of gold up, it is also driving the operating costs up. But if there is a profitable margin in place, the total amount of profit actually increases as a result of the inflation. Since capital costs have already been spent and written-off, they no longer matter. Now, this is good for all these producers that have good mines.

While an inflationary environment may be good for existing producers, for juniors like Sirios Resources, Kaiser believes that the real price of gold is key. This is a theme he outlined in his January 15th Discovery Watch episode when he explained how certain junior miners could benefit from a non-inflationary environment. Right now, Mr. Kaiser is in the camp that believes we are probably looking at a case of real gold price appreciation instead of an inflation-driven uptrend.

A $2,000 real price of gold, which Kaiser reckons would represent about a 40% to 50% advance from here, would have enormous implications for a project like Cheechoo. Initially, the project was positioned as a bulk tonnage type system. As the gold price sank towards 2016, Kaiser suggests that story fizzled. Three years ago, company geologists started thinking differently and started drilling in a southeast to northwest direction.

They did start getting better grades, and in 2016 gold ran almost to $1,400 and everybody got excited. Goldcorp made a 19.9% investment...and since then Sirios has spent $15 million on the project. But in 2017 it started to become apparent that they were not putting together an underground resource that hung together. So interest in the whole play fizzled.

Kaiser reports that Sirios CEO Dominique Doucet has told him that they have given up trying to develop an underground resource, and they are back to a bulk tonnage model and hope to have an initial resource estimate soon. Mr. Kaiser seems encouraged by this approach. He goes on to suggest that Cheechoo has a few things going for it:

It's back to the bulk tonnage model with a resource estimate by the second half of this year and gold is in an uptrend which could drag an asset like this into the money. And because it is fairly close to the Éléonore complex, if they end up coming up with a 200 million tonne resource of 0.7 gram per tonne gold, that is about 4 million ounces in the ground. It's $30 rock at $1,300 gold. It's not super spectacular, it's unclear how profitable it would be. But its location is such that once Newmont has absorbed Goldcorp, it may have to think we have created this enormous infrastructure development in this part of the James Bay region...we may need to acquire Sirios and just inventory this project and maybe turn it into future mill feed for this strategic investment Goldcorp made.

Kaiser believes Cheechoo remains a discovery worth watching and suggests that if gold continues on a sustainable uptrend, Sirios could disappear by early next year.

To start off the broadcast, Mr. Kaiser explains why the Minaurum Gold (MGG) Alamos project is taking longer than expected to advance. The middle segment deals with SSR Mining (SSRM)'s approach to the Taiga Gold (TGC) Fisher project where it currently holds an option and is drilling. 

This post first appeared on INKResearch.com.

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