Resource World Magazine

Goldgroup offers low-cost gold play by David Forest Shares of gold companies are thought to be a higher-return way to invest in bullion. Goldgroup Mining Inc. [GGA-TSX] is a prime example of a producer holding significant gold resources and trading at a fraction of its indicated value. Take the company's Caballo Blanco gold project in Veracruz, Mexico. Three years ago, Goldgroup's Mexico-focused management recognized an opportunity here, when 70% owner NGEx Resources Inc. [NGQ-TSX] decided to depart the project for other parts of Latin America. Goldgroup bought out the interest in Caballo Blanco, originally identified by respected project generators Almaden Minerals Ltd. [AMM-TSX]. Then they got to work advancing the project. Eighteen months later – and with 30,000 metres of new drill core in the shed – the company reported a resource of nearly a million ounces gold along with four million ounces silver. Then just two months later, in April 2012, came the valuation. A Preliminary Economic Assessment showed a $284 million net present value for Caballo Blanco, with a 66% rate of return on a mine producing an average 95,000 ounces yearly for 7.5 years. This is where the company's valuation gets interesting. Goldgroup currently trades at a $32 million market cap, with nearly $8.5 million in cash and equivalents – representing just a $23.5 million enterprise value. Of course project values from PEAs are, as the name suggests, preliminary. But in Goldgroup's case, the estimated worth of Caballo Blanco is over 1000% higher than the company's net valuation in the market. That's a major disconnect. The reason, aside from soft gold market, has to do with permitting. Unlike other mining-intensive areas of Mexico, Veracruz has no major operating metal mines. The state is somewhat wary of a business it's unfamiliar with. This has made the Caballo Blanco permitting process more arduous than for projects in other parts of the country. Goldgroup was quick out of the gate on the permitting process, submitting an environmental impact study to the Mexican federal authorities in December 2011, even as the company was in the final stages of the Caballo Blanco drilling program. Four months later, in March 2012, the Ministry of Environment and Natural Resources told Goldgroup it needed more information on risk mitigation and environmental aspects of some areas of the proposed mining operation. The company promptly sent in the requested additions in June 2012. But the process continued to languish, complicated by a change of federal government late 2012. Amid the uncertainty, Goldgroup announced in September 2012 that it would defer the evaluation of its environmental impact study and wait for the government situation to solidify before pushing forward. M AY 2 0 1 3 Mining gold at Goldgroup's Cerro Colorado Project, Sonora, Mexico. Photo courtesy Goldgroup Mining Inc. Successfully investing in the company today thus largely comes down to one question. Will the Caballo Blanco permitting process eventually get finalized? Of course, there's no way to be certain. But at the current valuation, it's extremely cheap to bet on the permits coming through, in a country that's largely pro-mining. That's a bet that many share buyers, especially those who believe in gold, will likely take. Especially given that Goldgroup comes with additional upside from a portfolio of other Mexican projects. This includes gold production. The company's Cerro Colorado mine (in the mining-friendly state of Sonora) produced over 19,000 ounces in the year ended December 31, 2012. With mineable resources depleting, management is looking to extend the life of its Sonoran operations through a deal in January to acquire the nearby Cerro Prieto Project. The company intends to utilize its mining fleet and team at the new project. If that's not enough to confirm the company is undervalued, yet another of Goldgroup's projects, San José de Gracia, in Sinaloa state, provides a final bull flourish. The project hosts an underground-mineable NI 43-101 resource of over a million ounces at better than 5 g/t gold. Tellingly, Goldgroup's 50% partner here, DynaResource Inc. [DYNR-OTCBB], enjoys a current market capitalization of $35 million solely on its half of this project. That's higher than the valuation for Goldgroup which comes with the added upside of the Caballo Blanco and Cerro Colorado projects. Any way you look at the company, it would seem to provide a very affordable option on the gold market. Buyers may be skittish right now, but eventually this kind of opportunity will attract attention. n www.resourceworld.com 39

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