Small Silver and Gold Miner Resists Buyout

Mark Bailey, CEO of Minefinders, breaks down his company's growth and exit strategy.
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is a small gold and silver producer with a big go-it-alone strategy.

Minefinders has a big gold and silver mine in northern Mexico which is scheduled to produce 1.7 million ounces of gold and 64.4 million ounces of silver over the mine's 15-year life span. The mine started production in November 2008 and marks the first big win for the junior trying to avoid becoming a take-over target.

Large-cap and mid-cap gold miners are desperate for gold as demand outpaces supply.

Kinross Gold

(KGC) - Get Report





Gammon Gold


all paid up for smaller companies as a quick fix to expanding their reserve base.

With one big mine already in production and three other exploration properties in New Mexico, this $622 million company looks ripe for the buying. The stock currently has eight buy ratings, two holds and one sell with an average price target of $13.34. Shares have actually fallen 11% year to date while

gold prices

have rallied 20%. The stock trades at a forward looking price-to-earnings ratio of 10.12, slightly above its peers.

I sat down with CEO Mark Bailey at the Denver Gold Forum to see what his exit strategy was and what the catalyst would be to shake-up the stock.

I want to first go over your last quarter. You had a net loss of 1 cent a share. How come



: Well, we are still in our ramp-up period in our mine, we're still growing. It's a heap leach operation so you mine, you process, you put the material on a pad and then you have to leach it

for a period of time; gold comes out fairly quick in about 90 days.

In the case of silver, it takes over a year to get our expected recoveries so there's a lag time. You spend a lot of money upfront

and then it takes a while to get steady state. We're not quite there yet, we did have positive cash flow but we also had some noncash items that caused the loss. We were actually profitable in the quarter but we had stock options that had to be accounted for, so they were noncash items.

So break that down for m -- you're producing, you're selling the gold but you're not selling it at the high price we are seeing today? There's a lag time


No, we are selling. We are capturing the best prices. We're selling the $1,260 an ounce for gold, we're getting $20 silver. It's just that our production is not at steady state. We expect to be producing around 30,000 ounces of gold a quarter and we're not there yet because of the lag time. We should be doing over 1 million ounces of silver a quarter and we're not there yet because there's big lag time for the silver, it just leaches slower.

Do you have an idea of when these growing pains will work themselves out


I had hoped they'd be worked out by now. It looks to me like we have another quarter of growth here in the fourth quarter. We had some problems this summer

but those are being rectified. We should have a good fourth quarter and next year we should be steady state.

I was looking at your cash costs for gold which were about $597 an ounce. That's pretty high. Are you trying to lower them at all


They'll come down. Our production costs are actually steady state and have been for the last year and a half but our production is not at steady state so our cost per ounce is higher right now. We expect it to come down and be $400-$450 next year and it should go below $400 by 2012.

So it looks like the rest of the year you will have growing pains. By the end of 2011, what do you think your production for gold and silver will be


Our target is about 120,000 ounces of gold per annum and 4.5 million ounces of silver per annum. That'll be pretty steady state for the heap leach life of the mine, which is still about 13 years left in the open pit. Then we're looking at enhancing that with the addition of a mill which will improve our recoveries from the high-grade portion and developing an underground operation at Dolores.

Underground will obviously be a high grade. With the mill already operational and paid for by the open pit production we'll have the addition of underground production, improved recovery of high grades from the mill and the ongoing open pit for the next 13 years. We're excited about the opportunities to grow our Dolores deposit but that'll take another couple years of work.

Now you also have three exploration projects as well


We do. Our most advanced is La Bolsa; it's a small deposit we just completed a prefeasibility on. Three hundred forty four thousand ounces of gold and about 5 million ounces of silver very profitable at these prices but not a very long mine life ... Do we want to build that or maybe monetize it and spin it out? It's only got a five-year mine life

and 40,000-50,000 ounces of gold per year production.

We're drilling down at La Virginia now. La Virginia is a new discovery we just made, big property, five very interesting prospects on that property, we're drilling on the first one ... high grade gold and silver, structurally controlled.

So all of our projects were grass roots. In the case of Dolores it's a grass roots discovery. We drilled the first hole in 1996 and went into production in 2008, so it gives you some idea of the time it takes to take a grass roots discovery from discovery to production.

In the meantime, what are your finding and development costs like


Finding costs are cheap. In the case of both La Bolsa and Dolores finding and discovering the deposits probably costs us less than $20 an ounce. We would expect that from La Virginia as well, but the development costs are a bit more. I mean when we built the mine at Dolores we spent $178 million building the mine so it ramps up dramatically from exploration to development, but it's a good mine life and at these prices it's a multi-billion dollar deposit so we'll get our money back and then some.

In the meantime, how are you for cash


We're good. We had about $20 million at the end of the quarter. We have $20 million cash and we have positive cash flow. We're taking some of that and doing sustaining capital enhancements to the mine this year. We have a $50 million undrawn line of credit that's available to us and obviously we have other avenues to raise capital so we're financially sound. The mine's producing profits so we do expect to live off our cash flow for Dolores for our future expansions.

So in terms of anything dramatic like an equity offering or selling an asset that's not in the cards for right now


It's not in the cards

but you never say never in this business so opportunities arise. We are looking for acquisitions. We are looking to expand Dolores with the mill and the underground

and that's going to cost money. We have to make a decision on La Bolsa ... It's opportunistically driven. If there's an opportunity that we feel we need to do, it could drive us to another financing or a debt component. It just depends on our needs.

In terms of growing though, it seems like you might be focused on organic growth rather than buying assets from smaller companies or buying small companies. Is that true


It's the best way to do it. I mean organic growth is obviously the cheapest and the most profitable for our company. To grow to the size we'd like to be at we're possibly looking at acquisitions of smaller assets that we think we can add value, so a small company that has a good drilled out resource. They're not obviously going to be miners, they don't really intend to take it to the next step and build the mine. If we think we can acquire that at a reasonable price and add value through additional exploration and our expertise on building and operating a mine then we might make that acquisition. We are looking only at the Americas, we're not going overseas.

Let's flip it around, what about an exit strategy. Would you consider putting yourself on the block to be sold


We've never done that. We've always had an intent on growing the company. Every company is for sale for the right price. Obviously, we've been looked at by some bigger companies. If someone was to come along and make an offer that's attractive to our shareholders, it's up to the shareholders at the bottom line ... I am not going to throw a good offer away.

It just seems with a $622 million market cap that's a pretty juicy target for a larger company especially when the big guys are running out of gold


We worry about that. We are undervalued. We're trading at discount to our NAV ... so obviously we're probably in the crosshairs on some companies. We try to stay focused on growing the company and adding that value and if someone does come along certainly we'd like to get fair value for our shareholders

but we're not for sale.

You did say your company is undervalued. What do you hope that catalyst will be that will shake the stock out of its range


We've had hiccups like every start-up does, every mine has issues when you start, we've had ours. I think the market waits for you to have a couple quarters of solid performance. We've yet to do that, we had hoped to do that the third quarter, the fourth quarter of this year. Our third quarter is not going to meet our expectations. We hope the fourth quarter does. I think if we get a solid fourth quarter and a good first quarter next year, the market will re-rate us as a producer.

The market is patient, they can be a little fickle sometimes but they wait to make sure you can meet your targets ... and we should go from a 0.9 NAV to a 1.4 NAV and that'll put us on par with our peer group. We only have 65 million shares out so we should have a lot more leverage to the gold and silver price than we are experiencing now.

What are some of the trends you are noticing out of Denver


I think you're going to see more consolidation probably because, as you pointed out, the big companies need to replace ounces and they're only going to do it through acquisitions. They don't have the patience to go out and make a grass roots discovery ... so I'll think you'll see that come down the pipeline. The big companies have to acquire, the mid-size companies have to acquire and even companies at our size if we want to grow quicker we have to look to acquire an advanced asset because, as I pointed out, it takes 10 years to make a new discovery and take it to production. If you want to get in production in five years or three years, you might have to acquire something to do that.


(SYMBOL) by Alix Steel in

New York.

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