San Gold ups its gold discoveries and resources at Rice Lake

TEXT SIZE

By: Salma Tarikh

With multiple high-grade gold discoveries, two producing gold mines, a functional mill, and another mine in the works, San Gold (SGR-T, SGRCF-O) is establishing itself as a pure gold play in southeastern Manitoba and a company to watch for.

"Our strategy is to grow our production profile, it's to continue to discover new zones at the pace we have been discovering them in the past," says San Gold's CEO Dan Ginn. "And to bring the extreme high-grade zones at surface down as well as bring up the high grades from depth."

Thanks to its new geological model and aggressive drilling efforts over the last five years, San Gold has discovered seven high-grade zones at its Rice Lake property spanning along the Rice Lake Greenstone belt, where it owns or controls nearly 150-sq.-km of the region.

The new zones found typically include high-grade gold-bearing veins and broad breccia vein systems that require additional drilling to define. Among the recent discoveries made are the near surface L-13, Cohiba and 007 zones and the underground Deep West, 26 and 28 levels.

San Gold also discovered the near-surface, ramp-accessed Hinge deposit in January 2008, which it turned into a mine last November for $6.5 million.

More recently, the debt-free gold producer's underground drilling hit an 8th zone named RL East, beyond the eastern limits for the 28 and 26 levels of its deep underground Rice Lake gold mine.

One drill hole cut 37 grams gold per tonne over 8.3 metres, expanding high-grade gold mineralization into unexplored areas of the mine. The intercept included 140 grams gold over 2 metres and also contained visible gold. Another hole, above the 26 level of the mine, cut 23 grams gold over 4.1 metres.

The near-surface RL East zone, located 150 metres east of the high-grade "98" vein area which is currently under development, allowed the company to capture a deep extension of a surface deposit to support its hypothesis that the surface and underground zones may connect.

Though RL East isn't the first to indicate such a connection, Ginn says the discovery is "fantastic and great" because that zone projects upwards to some of the new surface zones, like the 007 and the Hinge. And provides a 5- to 7,000-foot continuous zone between underground and surface.

If the company finds other deeper extensions, it "may justify the consolidation of the Rice Lake mine, together with the near-surface zones into one larger, more efficient production centre," writes San Gold in a press release.

For now, Ginn says the focus is to build on and find very high-grade deposits that can be developed quickly. And San Gold is wasting no time in doing so.

Mine workers have already begun developing 007 that was discovered in November 2009, and since punched 16 holes for a total of 6,447 metres.

"We already have three-quarters of a million (indicated and inferred) ounces proven on a 43-101, with 16 drill holes," says Shawn Khunkhun, San Gold's spokesperson.

The company is looking for the first 10,000 tonne bulk sample out of the deposit in the second half of the year and expects to announce a third mine going into production during the latter half of 2010, Khunkhun says.

Aside from developing 007, San Gold plans to keep drilling. Since 2008, it has spent about $10 million per year on drilling, and in 2009 it explored about 122,000 metres. And with an exploration budget for the next two years of $25 million, San Gold will spend $12.5 million drilling this year, says Khunkhun. "What that equates to is 10 drill rigs all the time, ongoing, 20 hours a day per rig."

The drills will be turning property-wide this summer to see if the Rice Lake project is open to the east and west and at depth. The drills will be split between underground drilling at the Rice Lake mine, and surface drilling at the Hinge mine.

The Hinge mine is 1.5 km to the north east of the Rice Lake mine and mill and is accessible by a decline. Currently, the Hinge produces 350 tons of ore per day and along with the Rice Lake mine feeds the 1,250-ton-per-day mill, which will be expanded to 1,900 tons per day by late 2011, at an estimated cost of $5 million, says Ginn.

Currently, the company has $30 million in its treasury, which came largely from the closing of a private placement of 6.5 million shares at $4.05 per share for proceeds of $26 million in the end of March.

In that month, San Gold also released an updated NI 43-101compliant resource for the Rice Lake project. The total gold resources (in all categories) increased from 1,600,000 oz. gold at the end of 2006 to 8,685,900 tons grading 12.2 grams gold for 3,094,984 oz. gold. The Hinge and 007 zones in total added 1,494,432 oz. of ore grading 21.7 grams gold.

"Everything is trending in the right direction," says Ginn. "Grade is up, tonnage is up, basically (we'll be) keeping the trend going onwards from here."

Raymond James analyst Forbes Gemmell also forecasts the company is heading in the right direction and rates San Gold as an outperform. Gemmell writes in a March 29 research note that the resource estimates for the two zones (007 and Hinge) "removes significant valuation uncertainty in the stock," and that "San Gold trades at a cash adjusted NAV of 1.1x, a slight discount to the mid-tier producer average." Increasing, Raymond James' target price from $5.00 to $5.20 with the inclusion of the 007 zone in the DCF valuation.

With the 007 contributing to the company's gold ounces, along with the Rice Lake and Hinge mines, Khunkhun says San Gold projects to produce 100,000 oz. gold at a cash cost of $500 per oz. in 2010; 150,000 oz. gold at a cash cost of $250 for 2011;and 200,000 oz. gold at a cash cost of $200 in 2012.

Stonecap Securities analyst Eldon Brown's writes in a March 29 research note that Stonecap has lowered the NAV for San Gold to $3.00 per share from $3.24 per share "to reflect the lower production ramp up profile to the 200,000 oz. level and year end balance sheet items offset by our increased 2010 gold price forecast and the proceeds from the recently completed financing."

However, Stonecap maintains a 1.75x multiple to NAV, lowering its previous target price of $5.70 to $5.25, and also rates San Gold as an outperform.

The company has also expanded into Ontario's famed Timmins gold camp with its SGX spinoff, a Timmins-focused exploration subsidiary. It owns 31.5% of Davidson-Tisdale joint-venture gold property with the remainder owned by partner VG Gold (VG-T, VGGCF-O).

At presstime, San Gold share price was $3.44, trading in a 52-week range of $1.55-$4.55. It currently has 273.6 million shares outstanding.