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Sprott's Thoughts: Morgan Poliquin President & CEO, Almaden Minerals [AAU: NYSE]

In a recent interview with Jon Sebastian of Sprott, Jon and Morgan covered the past, present, and potential future of Almaden and its Ixtaca gold and silver discovery, including:

  • The geology of Almaden’s 5 million ounce Ixtaca gold and silver discovery in Eastern Mexico, including talking about the strong silver endowment in the deposit
  • The robust economics of the Ixtaca deposit highlighted in their recent Pre-Feasibility Study
  • The huge upfront capital savings from purchasing, and shipping from Alaska, a used mill for the project, rather than building a new one
  • The importance of their tight focus on de-risking the Ixtaca discovery during the long bear market from 2011-2015
  • How recent drilling highlights the substantial exploration upside to add gold and silver ounces to Ixtaca
  • Almaden’s budget for use of funds from the recent Sprott-led funding
  • How Almaden and Almadex owning their own drill rigs allows them to execute more effective exploration by drilling more holes for less money
  • And finally, how the mixed gold and silver content of the Ixtaca deposit likely opens up more potential suitors for a takeover offer
     

    Jon Sebastian: Hello, everybody.  This is Jon Sebastian with Sprott. And I am on the line here with Morgan Poliquin from Almaden Minerals and Almadex. Almaden is a platinum sponsor of our Sprott Natural Resources Symposium in Vancouver in late July.

    We’re very happy to interview a Platinum Sponsor and also a company that Sprott has been very close to for a long while. In fact, we at Sprott just led a private placement, a raise of about CA$17 million, with our clients into Almaden and we were very happy to make that happen. So thank you for that.

    Morgan Poliquin: Well, thank you.

    Jon Sebastian: So one impressive point for us looking at Almaden’s Ixtaca Gold and Silver Project in Eastern Mexico and one that stood out to our analysts, our geologists, and then our clients as well is the impressive silver endowments at the project.

    Would you explain the geologic reason for this high silver content and high silver recoveries at Ixtaca and why they occur at your deposit?

    Morgan Poliquin: Sure. Well, I think it is a great question. It gives me, if your listeners don’t mind, a bit of a longer answer. It allows me to really explain the geology of our deposit.

    I think what’s happened in the last 30 years in the ‘70s and ’80s heap leaching technology came to the forefront. And people started to do that. It’s a very cheap methodology. And people started looking at deposits that have been highly weathered near surface that are lower grade. Weathered silver minerals are very difficult to recover and typically in a heap leach, silver recovery is around 50%. So that has become the new normal since this technology came along.

    What can make silver a challenge is if it comes with lead and zinc. If silver comes with lead and zinc then you cannot recover it with a cyanide solution. You have to remove the silver from the lead and zinc usually with a smelter. That’s very common in Mexico; the high lead and zinc deposits that are being mined for silver [require the use of] a smelter. Not all the time.

    And so, we don’t have significant lead and zinc in our deposits at all. We have more of the very common as I was saying, gold and silver epithermal vein system. So, this was the sort of thing, is that had it been exposed at surface, it would have been long ago mined out by the Spanish. But our vein system, our gold and silver mineralization is not exposed at surface. We found it beneath some clay alteration which is why it’s still there to be discovered. This is a brand new discovery we made in 2010.

    And so like I say, if these veins had been exposed, I think the Spanish likely would have found them (or the pre-Colombian people) and would have mined them out. Luckily, they’re still there for us to put together here into a deposit. Hopefully, that’s a good explanation of what we have there.

    Jon Sebastian: We talked last year in our interview more about kind of the discovery under the clay cap and how that came about. And yeah, obviously, everyone can go back and listen to that interview from last year.  But it was your first drill hole underneath the cap that hit 300 meters I believe of gold.

    Morgan Poliquin: That’s right. Whenever you make a discovery of any kind, whether it’s the first hole or the 300th  hole, good fortune is shining your way. But the first hole, that was pretty lucky. We had our geologic reasons for drilling that hole nevertheless. And essentially you are quite right on what those reasons were. The way these hot springs type systems work is the hot fluid brings the gold and the silver up and deposits it in the cracks we call veins. Gases boil that off and near surface they condense to form these clay deposits. The gold and the silver don’t make it up to that level in the surface.  They drop out deeper down in the cracks.

    And so at surface, you get this clay without any gold and silver in it. But underneath that clay is the key and we had that reason for drilling that first hole. Very fortunately, we hit. But that’s the whole point. Geologically speaking, we’re in a completely preserved system and it was a blind discovery underneath that clay.

    Jon Sebastian: And so, you’d gone through exploration through a resource and now you're on to pre-feasibility. What were the highlights from that study?

    Morgan Poliquin: Well, I think the biggest highlight is the low cost of capital and the high IRR numbers that we published. After-tax IRRs (internal rate of return) of over 40% are pretty significant numbers. And what it relates to is our excellent infrastructure and location and good access – we have road access to the property and power. It’s a developed area, we are 20 kilometers away from an industrial park where Kimberly-Clark has a very large facility. We’re just excellently located in all those regards.

    We have a large near-surface deposit that doesn’t require a large amount of capital startup. But probably the biggest factor is that we were able to secure, in the autumn of 2015, a used mill. And when I say used, we mean by literally a matter of weeks, it was a brand new plant that was built for a mine in Alaska and unfortunately, the plant was built just before the crash of 2008 and it cost about $250 million to build that mine, another company’s mine, and it shut down before it really got started.

    So, the plant was all completely preserved and decommissioned properly and sat until we came along. We were able to purchase it for six and a half million dollars. That was the biggest aspect of the capital cost for a mine like Ixtaca - building a new plant. And fortunately, we’ve been able to secure one which dramatically reduces the capital necessary.

    You asked about what the real highlight is, and really it’s the low price of capital, about $120 million to get the project into production.  And of course, there is a very good production profile. A significant number of gold equivalent ounces are produced every year.

    Jon Sebastian: I believe the plan is a 2-step phase where you first used a lightly used processing mill and then built an expansion. Is that correct?

    Morgan Poliquin: Yes. The plant can readily be expanded into a larger production profile. So the best bang for your buck in terms of risk and whatnot, we believe is to – and that’s what our PFS outlined  get the project up and running for the smallest amount of capital possible and then the plant can then be expanded as needed.

    Our flow sheet is to have a large amount of gold gravity recovery which is very, very simple. You just crush and grind and separate it using the principle of density given that gold is heavy. A fair amount of the silver comes out that way as well. And then a very cheap and simple technology (floatation) separates the remaining gold and silver that didn’t come out in the gravity circuit, floats to the top on air bubbles and then [what we call] the combined concentrate (which is about 10% of the rock that you separate), you leach it and recover gold and silver on site. And that’s kind of one of the things that’s special, we think, about Ixtaca is that it’s very simple minerals.

    Electrum is just an alloy of gold and silver as the dominant gold mineral. And so, we’re able to create what we call doré on site, which is just a gold and silver product that we can sell. So there are no smelters or off-site processing required.

    I think all those reasons are the factors that provided the good economic numbers.

    Jon Sebastian: So beyond the PFS and the private placement with Sprott, this year you also have announced some nice wide gold drill intersections in January and then in February, 105 meters and 1.2 gram per ton, 40 meters at 1.5 gram per ton were some highlights. Were these drill intersections included in the PFS and what do these usually suggest about continued development of the resource and potential expansion of the resource at Ixtaca?

    Morgan Poliquin: Great question. Yes. First of all, yes, everything that we announced prior to PFS, we were able to incorporate into the PFS. But I think those intersections really speak to the potential. As I mentioned, it’s a blind discovery so you can’t see the mineralization at surface and there are many, many veins we think that that are parallel to the main zone that we’ve defined. But, we discovered this in August of 2010 and by the end of 2011, when we were ramping up our exploration program and had four drills going, the market was crashing.

    And so, the timing was unfortunate. You can’t time your discovery. But we made it really just before the market tanked. And the last – it’s 2017 now, and in those six years since the end of 2011, we’ve been really struggling as an industry and it has been a very brutal market as I’m sure your listeners will know.

    And so fortunately, we’ve had very good support from strong shareholders and the deposit speaks for itself of course, and we’ve able to get to the stage through that bad market by focusing and looking for opportunities like buying the Rock Creek Mill as I mentioned before. But the exploration program has been really a resource de-risking program. So our drilling is being directed, on the one hand, toward in-fill drilling to get the resource to be measured and indicated where we have it now. And then, on the other hand, we’ve been doing a lot of drilling that is engineering related to support the pre-feasibility and the feasibility studies – the feasibility study we’re working on now. And that includes foundation drilling, all the civil engineering things that you need to do, the slope analysis, engineering, drilling water wells for quality and measurements and flow and baseline work.

    There have been probably in the order of a hundred engineering holes. So, all those things put together, our philosophy was, “Look, it’s a terrible market. Let’s focus our efforts on de-risking the deposit.” And that kind of left exploration to one side, which we’re the exploration guys and so that’s been tough but that’s how we’ve gotten through this bad market. And I think that was the right approach here.

    Jon Sebastian: Yeah.

    Morgan Poliquin: But what we’re noticing is that the deposit is yet to be fully defined. There are veins immediately adjacent to the known deposit that we’re finding in these holes that we announced prior to the PFS. And we think the big zone of clay alteration, which is much broader than the deposit, could be concealing many additional veins potentially. So the exploration started in 2010 and then stopped and then the focus was obviously engineering drilling and resource drilling. So despite the fact – it’s a really a new discovery in many respects.

    Jon Sebastian: And now that you’ve raised this money from our clients here at Sprott and others, what is the plan for those funds including exploration as you say and what does your budget look like in terms of those funds raised from us at Sprott?

    Morgan Poliquin: So the priorities that we have in front of us here are number one: a feasibility study. And much of the engineering work has already been completed for that as I just mentioned. The second thing – which is going in parallel, it’s not second and timing  is permitting, full scale mine permitting. And we expect to submit our mine permits to the authorities in Mexico very shortly in the next couple of months.

    And then a big item is that our mill that I’ve been speaking about is located in Nome, Alaska. That’s where the mine was built that it was originally purposed for and we have a final purchase payment in June of 2018 of US$3.75 million and it’s about a $5 million ticket item to move the mill to Mexico. And the ideal time to be doing that would be between June and October – up in Nome, Alaska, the ocean freezes over there. That’s the Bering Strait. So we’ve got a program going on there right now to prepare to move the mill to Mexico.

    Jon Sebastian: In terms of use of funds for exploration, on top of the feasibility study, can you talk a bit about your top exploration drill targets in the area and why you might be targeting those areas to expand the 2-million ounce gold equivalent resource and kind of talk about where you’re going to be exploring?

    Morgan Poliquin: Well, just to back up. Our gold equivalent resource is much larger than the two million ounces. The two million ounces is actually the reserve in the mine plant at $12.50 and $18 silver. At higher metal prices we saw more of that resource in an earlier PEA mine plan. So we actually have a potential to expand right out of our existing resource.

    But that being said, yes, we think that the drilling we’ve started last year, and you were mentioning some results we were reporting earlier, and this year relate to parallel veins that are good grade immediately adjacent to the deposit. So obviously, the deposit can expand immediately. But we also see a much larger clay alteration zone beneath which we think there’s the potential for veins we’ve not yet discovered.

    We own our own drills, and our sister company, Almadex, owns the drills and gives drilling services to Almaden on the same basis as before which is basically when you operate your own drills, you are drilling for a much lower than market rate. So we feel that this is a bit of brute force and ignorance with the drill, meaning you’ve got to drill a lot of holes under this clay alteration to find these veins.

    I think a good example in many respects geologically and from an exploration point of view is the Waihi Camp in New Zealand. It was an epithermal vein system under clay alteration much like Ixtaca and it operated for over a hundred years when people found a brand new 2-million ounce high grade vein system under the mill.

    And now, Oceana is operating that mine and they found another new vein which is expanding mine life. So it goes to show that we’ve got a lot to explore for and we have the size and scale of the epithermal system to suggest that there are going to be more veins.

    Exploration drilling is going to be focus. We have lots of surface indications of where to drill those holes. And I hope that also explains why our focus was on engineering and resource drilling over the last seven years because you don’t know when you’re going to make that discovery. It might not be with the first hole. And in a very bad market where resources are limited, you have to focus.

    Jon Sebastian: In terms of the surface showings, are we talking about soil samples or what kind of evidence do you zero in on when you’re drilling exploration holes into this clay camp?

    Morgan Poliquin: That’s a bit of an art. Gold and silver typically don’t show up at the surface here. So you’re looking at other elements that are associated with gold in rock and soil samples you take from surface.

    You’re looking at alteration minerals that you can detect with an infrared spectrometer (which we own), which is an instrument that tells you precisely the type of clay which will give you indications on the temperature of formation which will then tell you where you’re hotter. So if you’re finding hotter clays, you’re maybe closer to fractures. And then you’re looking for faults. They might mineralize at depth and just be faults at surface.

    We have geophysical surveys. We have a huge array of information. We are experts in this high level clay alteration and we know a lot about it. I did my graduate work studying these things almost 30 years ago, 25 years ago.  So we know our stuff, and we know how to explore these things.

    But at the end of the day, you’ve got to drill. There is no other way to find them but drilling. And you hope that these techniques will focus your drilling. But as I say, Waihi is the camp where they found a nice 2-million ounce high grade vein underneath the mill. So obviously, you got to poke around.

    Jon Sebastian: Moving to what might be the end game for Almaden or for Ixtaca at least, we’ve seen, and our clients have enjoyed, some takeovers in the gold and silver space of some juniors with high quality projects as the markets heated up in the last year or two. Kaminak, Reservoir Minerals, Exeter, and recently Mariana, and a lot of people point to Almaden or Ixtaca as a potential takeover target. What type of producing or larger companies do you think might be interested in Ixtaca and kind of why would the project be of interest?

    Morgan Poliquin: Well, I think obviously, Mexico is a pretty good jurisdiction. On a world scale, there is not too many other jurisdictions that have a very well-defined permitting path like Mexico. There is not too many countries. So that’s the first thing.

    And the second thing is obviously the deposit itself is I think exploration that’s still a very early story. So anyone with a geologic mind will, I think, see that while we have around three and a half to four million ounce resource and a two million ounce reserve, we’ve got the opportunity to grow. And then the deposit itself is the economics and the marriage to the plant I think allow for a pretty low risk proposition.

    So I think all those things are attractive. But right off the top, you mentioned that we’re half gold, half silver or that we have significant silver, and I think that opens up the – again, I don’t know what other people are thinking of course, but it opens it up to a whole – a broader spectrum of companies. I think the companies that have more of a silver focus, generally speaking, silver companies would love to get gold with their silver and I think gold guys don’t mind it either.

    That kind of puts us into a spot where I think there is potentially more interest than you would have if it was just straight gold or straight silver.

    Jon Sebastian: Well, thank you Morgan. We look forward to seeing you speaking and at the Almaden and Almadex booths at the Natural Resource Symposium.

    Morgan Poliquin: Yes, looking forward to it.  Thank you.

     

    To learn more about Morgan Poliquin and Almaden Minerals visit their website http://AlmadenMinerals.com.

     

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