Where Gold and Silver Mines Go to Die

Christopher Barker, The Motley Fool
Updated

Somewhere outside their corporate headquarters in Halifax, Nova Scotia, AuRico Gold (NYS: AUQ) needs to build a cemetery to honor the memory of its dearly departed mines and development opportunities. To the long list of casualties, you can now add its former flagship operation: the Ocampo mine in Chihuahua, Mexico.

While the would-be mourners of Ocampo's departure are consoled by the allure of fast cash -- to the tune of $750 million -- a few years from now they may be singing a different tune. And although AuRico can now avoid the substantial near-term headwinds and headaches associated with a major overhaul required at Ocampo after the company's fumbled opportunity, I believe that a longer-term outlook designates Ocampo's buyer -- Mexican billionaire Carlos Slim through his company Minera Frisco -- as the real winner here. I don't suspect that Slim became the world's richest man by forging unattractive deals, and indeed I think he scored a golden bargain here!

Cash for gold
Back when it was called Gammon Gold, I celebrated AuRico's acquisitive victory when the company scored the El Chanate mine and the Orion development project for about $280 per gold-equivalent ounce of reserves at Chanate. Now, in disposing of its flagship, AuRico will receive just $315 for each ounce of reserves at Ocampo, while tossing in two large and highly strategic exploration properties adjacent to the mine and a 50% interest in the Orion project acquired from Capital Gold. For another frame of reference -- though Extorre's ultra-high grades make for a messy comparison -- consider that Yamana Gold (NYS: AUY) saw fit to pay $290 for each ounce of "Indicated" resource on a project where no mine has yet been built.


When I spoke with former AuRico CEO Rene Marion last year, he was quick to point out several attractive early discoveries on the Venus and Los Jarros properties, including the Gaby project at Los Jarros, and "...some very high grades within the La Balleza vein, located only 3km from the Ocampo property boundary" (on the Venus property). In concert with the El Concheno mine that Minera Frisco already operates within a land package that is surrounded by the Los Jarros property, Carlos Slim has built a major district-scale presence with this transaction, featuring two operating mines and immense potential for exploration upside. Suddenly, Agnico-Eagle Mines (NYS: AEM) must be feeling like the small fry on the block with its Pinos Altos mine flanked on either side by the Venus and Los Jarros properties.

As a long-standing shareholder and vocal supporter of AuRico Gold, it pains me to say this; but AuRico Gold is where quality gold mines and development projects go to die. Six years after acquiring the El Cubo mine and the Guadalupe y Calvo development project in a deal valued at $451 million, AuRico handed them over to Endeavour Silver (NYS: EXK) earlier this year for $250 million. Here again, the market may not know it yet because the full value of the assets has not yet been realized; but I've been to visit El Cubo in person, and I am confident that Endeavour Silver scored a precious deal there.

Cash for consolation
By opting to offload challenging operations rather than fixing them to realize far greater long-term value for shareholders, AuRico has proved a very major disappointment to this Fool. My selection of the stock to my top-10 list of gold stocks for 2012 was therefore misplaced, and I now intend to meaningfully downsize my holding over time. In its place, I'll look to build my stake IAMGOLD (NYS: IAG) because I consider that stock a far stronger mid-tier growth vehicle at this juncture. I strive to counteract my less fortunate calls with plenty of runaway successes like this one, and I invite you to follow my ongoing coverage by bookmarking my article list or following me on Twitter.

AuRico's Young-Davidson mine in Ontario remains an absolute treasure trove, and as long as former Northgate COO Peter MacPhail remains in charge of that operation, I may retain some modest exposure to the uncommon potential of that operation. Although I have removed the "top pick" designation from my bullish CAPScall on AuRico Gold, I will keep the pick open for now in hopes that I'll eventually be able to book even a modest gain as gold prices advance.

I am pleased that AuRico CEO Scott Perry intends to disburse a major portion of the proceeds to shareholders, through a one-time payment in the neighborhood of $300 million. After the stock has failed to deliver shareholder value over the trailing five years of a powerful bull market in gold, I believe AuRico's embattled investors well deserve the cash consolation prize.

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The article Where Gold and Silver Mines Go to Die originally appeared on Fool.com.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of AuRico Gold, Endeavour Silver, and IAMGOLD. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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