go to
https://sites.google.com/site/goldandsilver2012/company-reviews-by-goldstocksdaily-com/gammon-gold
If Eldorado Gold is a darling among investors, then Gammon Gold is the exact opposite. But before we get into the reason behind that, let me first give a brief overview of the company.
Gammon Gold is a gold and silver mining company. It's currently has one mine in production(Ocampo), which is located in Mexico.
Ocampo Mine
Ocampo is one of the largest gold-silver mines in Mexico, and it did make up about 75% of Gammon's total overall gold and silver production(more on this below). Ocampo is actually two mines, an open pit heap leach operation and an underground mine with a mill and flotation system.
Ocampo put Gammon Gold on the map back in 2005. It was promised to be a very low cost operation, and combined with El Cubo, Gammon was going to produce over 400,000 gold equivalent ounces per year on average. Things were looking good for the company, and the stock price went from $5 to $20 as investors got all excited.
El Cubo
El Cubo is a smaller mine that Gammon owns. They became full owners of the mine when they purchased 100% of Mexgold in 2006. It used to make up about 25% of Gammon's overall production, that is until the mine was shut down in June 2010.
Exploration Properties
Gammon does have an interesting exploration/past mine property. Their Guadalupe y Calvo site has an inferred resource of 1.8M oz Aue and past production exceeds 2M oz Au & 28M oz Ag. They became owners of this property when they purchased Mexgold. They have started drilling on this site, and this year they plan to have a scoping study done.
The Problem
Ok, with that brief overview out of the way, let's get down to business. To put it bluntly, Gammon has been a huge disappointment for its investors. They have been over promising and under delivering for years now. The main problem is with Ocampo, the mine that put Gammon on the map. And now they have big issues with El Cubo, which is shut down. Let's start with Ocampo.
Ocampo has been plagued with issues for the last several years. You name it, it seems to have happened.
- Too much rain – check
- Problems with the Mill – check
- Hitting lower grade ore – check
- Mill shutdowns – check
go to
https://sites.google.com/site/goldandsilver2012/company-reviews-by-goldstocksdaily-com/gammon-gold
The latest "news" was pretty interesting:
"During the first quarter, while mining the Ocampo Picacho open pit, larger than anticipated voids were encountered from historical mining activities in the area. This resulted in reduced ore tonnages and reduced grades being directed to the mill and heap leach facilities for processing. After reviewing historical records and infill drilling results to date, the Company is confident that no further material voids will be encountered."
"Voids"? That sounds like good news. Mining investors love to hear about hitting voids.
Now let's move on to El Cubo:
"Gammon Gold announced today that due to continued illegal labour disruptions at its El Cubo operation as well as the untenable financial demands made by the union workforce, as reported on June 3, 2010, it has terminated 397 union workers as of June 16, 2010 and is in the process of filing criminal charges against seven union executives. Operations at the El Cubo mine have been suspended indefinitely.
Since acquiring the mine Management has believed that El Cubo is a modest sized operation with the potential to be reasonably economic, however its economic viability has been wholly undermined by a legacy of unacceptably low union productivity. This low productivity arises from an outdated collective agreement and an interfering union executive office that appears to have put its own interest ahead of the livelihood of its workers, their families and local communities. The El Cubo mine will be placed on care and maintenance until management determines its next course of action.
The ongoing challenges caused by the relentless distractions of union labour disruptions and sub-optimal performance have rendered the El Cubo mine uneconomic and any further investments, including management's time and effort, are not justified." stated Rene Marion, President and Chief Executive Officer of Gammon Gold. "Management and the Board are frustrated that the decision to close this mine was required and regrets the unwillingness of the union to work collaboratively with management."
So, Ocampo has been under-performing for years now, and El Cubo is now shut down. And as you can see from the chart below, investors aren't too happy.
While some of these issues are out of Gammon's control, the fact remains that they still aren't delivering on their production guidance. This is what they said in April of 2007:
"The Company is now focused on increasing its production profile from 200,000 gold ounces and 10-million silver ounces in 2007(400,000 geo), to 280,000 gold ounces and 15-million silver ounces in 2009 and beyond.(April 2007) "
In 2009 they had production of 230,000 oz gold eq., so they only missed guidance by 50% or so, no big deal(yeah right).
In July of 2009 they stated:
"While we have revised our 2009 guidance to address the production shortfall, our guidance for 2010 remains unchanged at 200 to 220 thousand gold ounces and 8.5 to 9.3 million silver."
Earlier this year they cut guidance to 150,000-180,000 oz of gold and 6.5 million oz of silver. Then El Cubo shut down and now they are projecting 180,000-200,000 oz gold eq.
Do you see a pattern here?
And in the other "not so good news department", a few months ago Gammon released updated reserves and resources. Gammon's total proven and probable mineral reserves at year-end 2009 decreased by 412,000 ounces to 2,546,000 gold equivalent ounces, versus 2,958,000 gold equivalent ounces at year end 2008, or a decrease of 14%. While that is still a lot of reserves, investors were surprised by this news, especially since Gammon was drilling on the property trying to expand reserves.
go to
https://sites.google.com/site/goldandsilver2012/company-reviews-by-goldstocksdaily-com/gammon-gold
Conclusion
So is all hope lost for Gammon? Well lets look at the facts. The company is producing a lot of gold and silver, and their cash cost aren't extremely high. They have had 9 consecutive quarters of positive operating cash flow. Gammon also has a strong balance sheet, with $125 million in cash and not much debt.
They have also fixed issues at their Mill at Ocampo, and they are mining in higher grade ore right now. They recently launched a $26-$30 million company wide exploration program, which hopefully will help increase reserves at both of their mines.
I also don't think El Cubo is shut down for good, I would actually be surprised if it was. But since Gammon has Ocampo, they can play hard ball here and wait it out if they want.
El Cubo does have a steady production of roughly 50,000 aueq per year, and it has enough in reserves to keep it going for a long time. However, it has a high cash cost, $709 per oz last quarter. If Gammon can re-open the mine with a lower cost structure then that would be really good news for the stock.
Probably the best news recently, Gammon announced the nominations of four additional independent board members including a new independent Chairman of the Board. I think the company really needed this. We will see if these new members as well as the new Chairman can get Gammon back on track.
As of right now, investors are using "wait and see" approach for Gammon. It needs to prove itself. Investors are tired of being disappointed. Is Gammon finally back on track? We will soon find out.
go to
https://sites.google.com/site/goldandsilver2012/company-reviews-by-goldstocksdaily-com/gammon-gold
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almamor
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