321 Gold

Girls & Peak Gold Wheaton River Jr

October 30th, 2007

By Bob Moriarty

I was having dinner at yet another boring Gold Show in Vancouver last January when Ian Telfer, Chairman of Goldcorp, spoke. While there are dozens, perhaps hundreds, of speakers in the industry who can talk about mining, Ian is one of the few who thinks outside the box.

He casually mentioned that he didn't want to grow Goldcorp past a certain point. There was a loud collective intake of breath from all over the room just before 500 jaws fell to the floor. The effect was about the same as if the Pope announced to his Cardinals that he was getting circumcised and turning Jewish.

Not grow? That's heresy.

But it made a lot of sense if you though about it. Every organization has an optimum size. Bigger isn't always better. It's not the size of the wand that puts the rabbit into the hat; it's the skill of the magician.

Ian Telfer, of course, is the magician who took Wheaton River from being a no-asset company with $20 million in the bank in 2002 to an 800,000 ounce per year gold producer in 2006 just before being taken over by Goldcorp in a $2.09 billion dollar deal.

But every company has an optimum size and that's what he was trying to say when he spoke in Vancouver. Once you reach optimum size, it may make more sense to spin off assets. What he didn't say in Vancouver was, spin off assets and pull the same rabbit-in-the-hat-trick again.

So in February of 2007, Goldcorp and a shell predecessor to Peak Gold announced a deal. Goldcorp would sell the former Wheaton River Peak Mine in Australia and the Amapari gold mine at the mouth of the Amazon River in Brazil in exchange for $200 million in cash and $100 million in stock, some 21% of the stock outstanding.

It looks like a hell of a deal for both parties. The newly named Peak Gold got 220,000 ounces of yearly gold production for $300 million dollars and Goldcorp gets to keep 21% of the shares in the new company.

If you want to call Peak Gold, Wheaton River Junior, it might be a little cheeky but it's perfectly all right to think of it that way. Here are some of the players. Julio Carvalho, formerly Executive VP of South America for Goldcorp is the new President and CEO as well as a member of the Board of Directors.

The other Board members include Ian Telfer, CEO of Goldcorp and former CEO of Wheaton River, Frank Giustra, founder of Lions Gate and former Chairman of the Board of Endeavour Financial and Gordon Keep, former head of Corporate Finance of Endeavour Financial.

Julio is running the company and he led our tour to Brazil this last weekend but you may believe Peak Gold has Ian Telfer's fingerprints all over it.

The crown jewel in the crown is the Amapari Mine right at the mouth of the Amazon River some 200 km north of the city of Belem in Northern Brazil. The mine sits in the same greenstone belt that runs through Guinea in western Africa. Garimpeiro miners had worked the area for centuries so there a long history of gold mining at Amapari.

The Amapari mine was first advanced by Anglo American in 1994 and subject of a feasibility study by Anglo Gold in 1998. Wheaton River acquired the property in 2003 and in turn was taken over by Goldcorp before the mine was put into production in January of 2006.

The mine comes with a 2.4 million ounce 43-101 resource, recently restated. There is a 1.05 million ounce M&I resource grading 2.29 g/t Au and a 1.35 million ounce Inferred resource grading 3.22 g/t Au. It is mined via an open pit, using heap leach pads. The cash cost of production is expected to be $480 US an ounce of gold for 2007 and $360 in 2008.

I flew down to Brazil a week ago as part of the first analyst tour and I will say it was delightful and had nothing at all to do with the fact we had three beautiful women on the tour. Nothing at all. It was pure chance they were there and pure chance we had a great time as a result. I am told some guys even like being around beautiful women. I keep my mind on mining and nothing more.

We flew out to the mine site in a Beech King-Air; we got in late in the afternoon, too late to see much. After a stomach-filling Brazilian BBQ, we were the first people to use new cabins Peak Gold has had built for management. Town is 45 minutes away and Peak wants their team focused on mining, not driving to and from town.

The next day we toured the facility. And I want to say this, Amapari is the crown jewel of Peak Gold but it's a jewel that needs a lot of polish before it shines. The mine was only put into production starting 21 months ago and there are a lot of kinks left to sort out.

Whoever did the first 43-101 resource had included a sulfide portion under the Indicated category and since you can't recover sulfide gold ore via heap leaching, that's a no-no. In any case, the resource has been restated but it's actually gone up as a result of infill drilling going on.

Peak is using four rotating leach pads. Ore is stacked onto the pads with a mechanical stacker. Once the 3.5 month leach cycle is complete, it's removed mechanically and taken to a tailings area.

Whoever did the original metallurgy didn't do all that great a job. Column testing showed a 95% recovery in the lab but the lab cannot duplicate actual field conditions. The oxide ore is a saporlite material containing a lot of clay. When the ore was loaded on the pads and leached, gold recovery was about 50%. So Goldcorp incorporated a cement agglomerating process where they put Portland cement into slurry of the ore. It forms balls and in theory allows better percolation of the cyanide solution through the material. But it's just another theory and Peak has only improved leach recoveries up to about 70%, far short of planned recoveries.

When major mining companies unload properties it may be a two-edged sword. They create a lot of opportunity but they can unload a lot of headaches. When Ian Telfer suggested that there was an optimum size of operations, he was also suggesting that at some size, the major begins to lose control of operations.

The ore at Amapari is at the surface. It's a saporlite clay material formed as the acidic hard rock deteriorated under millions of years of heavy rainfall in the Amazon. You don't need to blast the ore; you can shovel it with a loader into 96-ton Caterpillar trucks for movement. It's the cheapest way to mine in existence.

Even Julio Carvalho, President of Peak, used the term, "Gold-plated," referring to how Goldcorp designed the mine and mill. It was expensive and continues to be expensive. The cash cost of mining is about $19.50 per ton, which is damned expensive for mining an open pit and processing via heap leaching. My guess would be that somewhere in the $10 a ton range should be possible.

I was dismayed by a couple of things and I would change them if it was my mine. Neither Julio nor any of his managers had a target cost for mining. If it were me, I could tell you to a gnat's ass just what it cost to mine open pit, heap leaching anywhere in the world. As a veteran of 6 years in the Marine Corps, I can pretty much predict you can't hit targets you don't aim at unless you are very lucky. If you don't have a pretty good idea of what your costs should be, you will never know if you have gotten costs down to their lowest.

And Jock Clark, who is consulting for them on metallurgy, used the term "guarantee" twice when predicting a 95% gold recovery. The cement agglomeration costs a bundle. Of the $19.50 cash costs, $4.50 is just for the cement and shipping. And since it hasn't done much for recovery, they have to change their process.

So Amapari is planning on washing the ore through a wash plant and separating the fines containing the clay from the coarse material. They will set up a CIL (Carbon-in-leach) or CIP (Carbon-in-pulp) plant just to process the fines comprising 35% of the total material and continue to heap leach the coarser ore.

I have seen similar type gold in the Amazon and it's pinhead size. They should try running the fines through a gravity separation unit like a Falcon Concentrator before processing through a cyanide system. My guess is they could save a lot of both money and time.

Guarantee? Hmmm ...when predicting a 95% gold recovery. That's the kind of term that gets people fired a year or so down the road when recoveries end up in the 85% range after spending tens of millions of dollars. Julio comes from a financial side, not a technical side. So when a technical whiz (Jock) tells you that he "guarantees" 95% recovery, you start to plan your numbers around it.

In addition 95% recovery is higher than I have ever heard from any ore in any heap leach. In mining, you are always balancing cost with benefit. Maybe it's possible to get a 95% recovery but the cost is almost always too expensive to justify it. I'm a lot more comfortable around technical types who don't "guarantee" things. Stuff happens and until Jock wants to back his guarantee with his own money, the guarantee is nothing but trouble.

The tour had some very serious and qualified mining guys (and a gal) with us. I was surprised that no one else had an issue with the term "guarantee" or with the suggestion that 95% recovery was possible or that the company didn't have a target cash cost. Half the benefit of doing tours is the cross fertilization which comes when you bring together people with varied levels of experience. I want to be learning on these tours, not teaching. I see a few issues that I think management needs to address to get costs down to where they should be.

I hope I don't sound negative because I'm not. Amapari has 235,000 hectares of land to explore. All the creeks contain visible gold and they have already identified dozens of potential targets. For most companies 235,000 hectares would be far too much to handle. How on earth would you select drill targets? But I have seen this kind of deposit before in the Amazon. It's a shear-zone hosted system and once you have identified the regional structures, you pretty much know where the gold is. While Peak Gold had identified 2.4 million ounces of gold, I am very confident in saying they aren't going to run out of ore anytime soon. Peak anticipated ramping production up to 324,000 ounces of gold by 2012.

The high cost of production is one of those good news/bad news stories. They can and will lower the cost of production but the highest-cost mines gain the most benefit from a rising price of gold. I'd like them to set a target cost of production and then manage to achieve it.

I can't even go into any substantial discussion of their other operation, Peak Mine, in Australia other than to say I was exceptionally impressed with Jim Simpson, COO of Peak Gold and former general manager at the Peak Mine. They expect to produce 150,000 ounces of gold this year (2007) and have substantial expansion potential.

Peak Gold is going to be Wheaton River Junior. It is what Ian Telfer was hinting about in January. When Goldcorp gets to the point where they are at an optimum size, he will simply create more companies and find more deals.

I followed Goldcorp for the last 7 years and I wasn't nearly as impressed with Rob McEwen as Rob was. Goldcorp was a one-trick pony under his reign. In the midst of the greatest gold boom in history, he was running around to gold shows bragging about having $400 million dollars in cash and the lowest cost of mining in the industry. In a gold boom, you don't want to have anything invested in the US dollar and want to be operating the highest cost gold mine to get the most leverage.

Goldcorp under Ian Telfer may as well be on a different planet, it's that different. But it's near the optimum size. Peak Gold is his answer. The company is well managed, the Board of Directors is the strongest in the business. They are well cashed up and profitable. One comment I have heard from a number of investors is concern about the number of shares. I, too, don't like companies with 725 million shares outstanding which sell for pennies. This isn't a penny stock but it looks like it.

Julio and his team understand the issue and agree with potential investors. Due to the way the deal was set up in the first place, they can't roll the shares back simply because it makes sense. So they have to wait until a material change takes place such as an acquisition to address the issue. It will be addressed.

And I want to see them do something about their dollar exposure. The single biggest issue in mining today is US dollar exposure. Peak has lost the value of 15% of their cash in the last three months simply because they are sitting in cash in the US dollar. I think it's mandatory that they either get out of the US dollar or at the very least try to hedge their position.

Ian Telfer does deals. Expect more with Peak. The company has Endeavour Mining behind them which means virtually unlimited capital. You can compare their market cap to a couple of other deals done recently. Coeur d'Alene recently agreed to pay $ 1.1 billion US for Bolnisi and their Palmarejo project containing 3.1 million ounces of gold equivalent. Palmarejo isn't even in production yet. While everyone in the industry except Dennis Wheeler agrees CDE paid through the nose, it's a benchmark.

Yamana took over Desert Sun Mining in early 2006. Desert Sun's Jacobina gold mine, also located in Brazil, was producing about 105,000 ounces of gold a year. The deal was worth about $700 million. With a $525 million dollar market cap and 250,000 ounces of gold production, $85 million in the bank, Peak Gold looks pretty cheap to me.

I bought some shares as soon as I got back from my trip. I see this as an easy double or triple. Their IR is as good or better than any company I am familiar with. The tour had top-notch people attending and you can tell as much from who gets invited on a tour as the project itself. The website is great, communications are good. They have issues but they know about the issues and are addressing them. I don't like the number of shares outstanding but they don't either.

Ian Telfer is quite familiar with success in mining. Don't expect that to change anytime soon. Peak Gold is going to be on everyone's radarscope. I expect to be writing about them as a mid-tier gold mining success story not too far off in the future.

Do your own due diligence. If you have any questions about the wisdom of investing in gold producers, think of who is in the White House. The two words, "George Bush" should be enough to convince anyone that now is a great time to own a gold producer.

We are owners of Peak Gold shares, they are not advertisers yet but it would be a good move on their part and we are biased as hell.

By the way, I lied. I love looking at beautiful women. Just because you are on a diet doesn't mean you can't look at the menu.

Peak Gold Ltd
PIK-V $.71 Canadian (Oct 26)
725.7 million shares outstanding
Peak Gold website

321 Gold
http://www.321gold.com/

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