Small-Cap Miner Is Bullish on Mexico

NEW YORK ( TheStreet) -- As gold prices stay above $1,000 an ounce, small-cap miners like Paramount Gold and Silver ( PZG) could be big winners.

I recently talked with Paramount Gold CEO Christopher Crupi about development of the company's San Miguel mine in Mexico and the miner's prospects.

Mining is a risky business. It can take as much as 10 years for a junior to start extracting metal, during which the company might have to undergo a series of equity offerings and asset sales to raise capital.

Mining stocks typically offer a 3 to 1 leverage to gold's spot price. The popular physically backed gold ETF, SPDR Gold Shares ( GLD), is averaging a year-to-date return of 27.12% while the Market Vectors Junior Gold Miners ETF ( GDX), a basket of large-cap miners, has a year-to-date return of 37.28%. Small-cap mining stocks could offer even more leverage.

Junior miners typically have a market cap of under $1.5 billion. They are also primarily in the exploration or developmental stage of production. As above ground gold supply tightens and investment demand grows, gold prices will keep rising, providing big opportunities for investors who can gamble with the juniors.

TheStreet: When do you expect to actually pull metal out of the ground?

Crupi: The project would be on schedule for three years from now. And we'd be looking for a partner to help do that. We're an exploration group so there are ample partners in Mexico looking for our type of project.

Do you have names?

You know pretty much all the major silver and gold producers that are in Mexico and many of them that are Canadian. And no, I can't reveal their names. We've signed confidentiality agreements with many of them so I wouldn't be able to tell you who they are.

Many other small-cap miners are hoping for the same thing, either a partnering or a buyout. But there are really only six major large-cap mining companies that have the resources to do that. So why does your company measure better than others?

Well first of all, there are actually dozens of them, but the thing is that Mexico has become the jurisdiction of choice. During the recent financial crisis in '08, '09 there was a lot of pullout from Mexico in the junior space so the few juniors that are left and who have actually raised money to develop mines to the next stage are the ones who are looking fairly bright.

When you start producing, what is your targeted reserves per share?

We don't measure that, we're building an asset. If you want to look at it that way, we're targeting a 5 million an ounce gold equivalent deposit, broken down into 2 million ounces of gold and 150 million ounces of silver, so that would be about 5 ounces per share.

I recently saw the news that the San Miguel project in Mexico has the potential to meet your targets, but that you recently abandoned your Vidette Lake project. Could you tell me about that?

We didn't believe the project would be big enough to cost-effectively build a producing mine there ... So we abandoned it in favor of investing into our project in Mexico. We did that, acquired some more concessions, raised some money ... and added some people. We really wanted to focus on one specific area and dedicate all of our resources there to get much more leverage for the shareholders.

How's it going in Mexico? Are there any geopolitical or currency issues?

Actually Mexico is going really well. There is an abundant supply of people right now. Energy prices are much lower than they are in the U.S. and Canada. There is a supply of drill rigs and geologists day it's very good compared to the rest of the world. We don't have any risk whatsoever. We're far south of the border, in a fairly remote area around five other producing mines, so the infrastructure is well built up. It's an ideal place. You can work there 12 months of the year without any climatic issues either.

So three years until production is considerably better than some other miners, but it's still three years. Are you going to need additional financing?

No, we've got more than enough financing. We've also got $12 million in warrants that are well in the money, so we've got $40 million to $45 million of capital, including what cash we have on hand. We've got more than three years of cash in the bank based on our current exploration burn rate.

Are you looking to develop any more assets?

Absolutely, we're always looking. We like jurisdictions like Nevada and some parts of Canada and Mexico. We want to stick in that sort of corridor, where people are known and where we can move in and out very quickly.

Do you anticipate buying any of those assets before those three years are up? Before you start producing?

We've been looking at a few projects and it wouldn't surprise me if we picked up some gold assets. ...Assets with already existing resources on them, so that we can get some real leverage and accretion. Leverage to gold is one of the big theories we believe in.

Would that bleed your cash?

No, because most of the assets that we would buy would be fairly well developed ... so we would only need to take it from the mid-exploration stage into the development stage. Effectively we can probably get some incredible leverage. There are some companies that are trading at sub-par valuation ... that could be extremely beneficial from a cash perspective.

What's your long-term exit strategy?

We have 450,000 acres in our project in Mexico, one of the largest in the country. We've only developed about 1% of that. We could effectively move along as an exploration company through our district and develop assets and partner assets or sell them off. We have a very long life as an exploration project generator.

Meaning that you would prefer to stay independent and go it alone?

Short of someone coming in tomorrow to buy the company, which I don't think anybody should ever bank on, our business plan is to develop assets. ...Our people are really exploration people and they're truly good at that. We're very happy to sell off pieces as we bring them closer to the production phase and let someone else bring them into actual production and let us keep an interest in it. That would be the kind of the ideal scenario I would imagine.

Gold and silver, which one is the more lucrative metal for the next 10 years, five years?

Well, absolutely gold. Gold is ... the investment metal of choice. Gold, particularly in Mexico, recovers better. It costs less on a per ounce basis ... and it's the one that everybody wants right now. ...Silver is a little brother that always seems to follow gold, but never seems to do better. ... But at the end of the day, we're mining both gold and silver.

Do you have an idea of what your finding costs would be?

Well, to date, we've had incredible luck. Our discovery cost has been less than a dollar per ounce. ...We're quickly expanding the size of the project so when we put out our next resource estimate update at the end of this year, there's going to be a significant increase in the size of the asset which will drive discovery costs fairly low. If you're looking at silver, it's in the cents per ounce and gold is several dollars per ounce, as low as $10 an ounce. ...It's very, very cost effective. ... The cost to mine in Mexico for gold is around $250-$300 an ounce.

Do you have a long term price target for gold and silver?

We're fairly cautious ... we're banking our projections on $850 an ounce and that's fairly low, but we just like to be conservative as a company.

How many more people do you expect to hire in 2010?

We'll probably increase our workforce by another 25 people. We probably have about 80 people in Mexico right now, 80 to 100 on any given day. We're running 24 hours a day -- so its three shifts a day -- so we'll increase that over the course of the year as we ramp this project up another 25 people.

The stock is speculative. What do you want to tell investors?

Well, my view is that if you're looking at our stock on a per ounce basis, we're trading somewhere at around $55 and gold is selling for $1,100, so that's a very reasonable price. As long as gold holds in that range, you're going to see stocks like this get a lot of attention. And as we put more ounces of resource on the books, you're going to see the value per share go up fairly substantially and very significantly. So not only do we get the price appreciation on the commodity, but you get the leverage in adding more ounces.

-- Written by Alix Steel in New York.

Alix joined TV in February 2007. Previously, she held positions in film and theater production, management, and legal administration. Alix has a degree in communications and theater from Northwestern University.

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