Image via Inception Mining
The gold mining industry sector is a topic of speculation with what looks to be the early signs of the next cycle to take the precious yellow metal upward since trending downward from a record high of $1,923 in August 2011. While many analysts focus on major and mid-tier producers, some of the most interesting stories in the space are small producers that weathered the storm and came out the other end stronger for it.
This case is exemplified by Inception Mining (IMII), a diversified miner with producing, development, exploration and resource projects in its portfolio. When the gold market was sinking from its highs and companies were shuttering mines, unhooking drill rigs and in some cases, going out of business, Inception was growing into the agile company it is today. This was accomplished through the acquisition of Utah-based privately held Inception Development Inc. in May 2013 and then privately held Turks and Caicos company Clavo Rico Ltd. in October 2015.
Smart Acquisitions in Down Market
With the acquisition of Inception Development, the company brought the UP & Burlington Gold Mine under its umbrella. A classic case of a northern U.S. mining property, UP & Burlington was discovered in the late 1800s, mined in the early 1900s and went idle around the start of World War II. In many cases, once producing mines became dormant due to laws commanding a united war effort only to never return to their old ways. Moreover, most of these mines were never mined fully to depth or strike, nor were modern technologies used to explore the property or produce minerals, potentially leaving a lot of money in the ground.
A historical resource estimate from 1935 showed 71,179 ounces of gold contained within 122,600 tons of ore grading 18.14 grams per ton gold at UP & Burlington.
Inception manages development of the UP & Burlington project with fiduciary precision, using contract labor to keep capital expenditures at a minimum. The company continues to move towards a goal of commercial production by June 2018 by completing testing and updating feasibility studies, among other things.
Prospering While Others Fold
The small miner (market cap ~$15.5 million) is extremely rare in that it generates revenue through mineral production at its Clavo Rico Project in Honduras, which helps fund its development effort at UP & Burlington and expansion at Clavo Rico. Further, because UP & Burlington is operated through a fully outsourced model, Inception, in the words of CEO Trent D’Ambrosio, “Can turn the switch on and operate, or we could turn the switch off, depending on price and seasonality and other industry influences.”
Embracing the challenging mining environment as he got Inception going, D’Ambrosio told Equities.com in March, “We had to adapt, learn to do things slightly different with a very limited budget and operate very conservatively. We have always been forced to look at doing things and operating differently to make the most of what was at hand.”
That’s a savvy model to conserve capital and protect shareholder value.
Creating Cash Flow to Fund Development and Expansion
While Inception plugs away at development at UP & Burlington, the majority of corporate efforts are focused on the 200-hectare Clavo Rico in Honduras. A quiet gold-producing country that doesn’t receive much acclaim, Honduras hosts the oldest mine in Central America, Nyrstar N.V.’s (Euronext: NYR) El Mochito, and the epithermal gold deposits of the San Andres Mine of Aura Minerals (ORA:CA) and Goldcorp’s (G:CA)(GG) San Martin Mine that typically produced over 100,000 ounces of gold annually from 2001 to 2007.
Located about 55 miles south/southeast of the Honduran capital of Tegucigalpa, Clavo Rico positions Inception as an important part of the El Corpus community, employing over 110 people (92 full-time) and further taking an active role in supporting the community outside of its mining efforts. Home to a large northeast trending landslide deposit, Clavo Rico’s latest mining operations began in 2012, with then-owner Clavo Rico Ltd. primarily working historical tailings and open pit ore bodies that showed grades between 2-6 grams per ton gold. Since taken over by Inception, the mining strategy has remained the same.
Through the first 12 months of 2016, 170,509 gold equivalent grams were produced at Clavo Rico, compared to 138,099 in all of 2015. Even better, production costs dropped to $704.18 per ounce per ounce for 2016, versus $826.29 per ounce for 2015.
Higher revenue at lower costs and an $8 million one-time, non-cash gain related to convertible notes swung Inception to a profit in the first nine months of 2016 with net earnings of $8.66 million, or 18 cents per share, compared to a net loss of $27.16 million, or 11 cents per share for all of 2015.
Improved process modifications have been leading to increased material being processed each year. In 2014, 148 tonnes per day (tpd) of ore were processed, then, 211 in 2015 and 312 in 2016. At the same time, recovery rates rose from 48% in 2014 to 53% last year.
What to Look For
A National Instrument 43-101 resource estimate for the Clavo Rico Project is on the horizon through Inception’s engagement of Precision GeoSolutions. Precision will integrate drill data and other exploratory information to delineate oxide gold resources amenable the current production process, as well is identifying other promising drill targets. The technical report is expected by next month.
Scale is key for Inception and they’re holding that course. Currently, 300 tonnes of ore are being processed daily, which produces about 490 ounces of gold and 337 ounces of silver. With the addition of a new crusher and circuit, Inception announced on May 3 that it is in the process of increasing processing to a rate of 500-700 tpd. At 700 tpd, production should exceed 1,000 gold equivalent ounces each month. In the future, the plan is to increase to full capacity, processing 1,500 tonnes per day.
“The year over year increased production is expected to continue as we make ongoing operational improvements, and expand crushing and leaching capability,” D’Ambrosio stated. “The goal is to achieve this while maintaining grade and striving to increase recovery rates.”
The larger amount of crushed ore will go to bigger heap leach pads, which are being increased from approximately 500,000 tonnes to over 750,000 tonnes.
With an increased rate of ore processing, the elephant in the room for Clavo Rico is the underlying epithermal sulfide mineralization. The ore processed at the mine has been from the oxidized layer than is up to 30 meters thick in some places. Mining efforts throughout the years have nearly peeled away part of that layer, exposing the epithermal sulfide mineralization, which generally holds a significantly higher mineral resource than an oxide deposit.
Point being, things could just be getting ready to heat up at Clavo Rico, which should catalyze development at UP & Burlington in turn.
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