Analysts gather during a 2014 Torex Gold site visit (Travis McPherson photo)
On February 13th last week, Torex Gold Resources Inc. (TXG. TO) a Canadian gold development company with operations in Mexico, announced that 11 of the 13 company workers who had been abducted the week before had now been safely returned. As a result, construction activities at Torex’s main gold development project, its El Limon Guajes Project, have resumed.
Almost a week earlier, on February 8th, Torex Gold had reported that 12 community members from the vicinity of El Limon had gone missing. One of the community members was an employee of Torex Gold and three others contractors. The group had been kidnapped on the public highway to Cocula, in the State of Guerrero. As a result of the kidnapping, operations at El Limon were restricted to give the Mexican army a chance to search for the victims and perpetrators.
To provide context on the event and the company itself, Torex has roughly 250 employees in the El Limon area and at least 1,000 more who are contract workers for the company.
It’s been calculated that Torex is trading at 1.03 times its Net Asset Value (TD Securities), which is slightly above junior producers and other similar development-stage companies. Torex’s projects also happen to be located adjacent to Goldcorp’s Los Filos mine.
To go back to the kidnapping earlier this month, the fact that a majority of the victims have been returned is certainly good news. However, despite the relative positive ending of the event, it’s important to note the kind of impact this, and other similar occurrences in the area of El Limon, have on production and construction schedules for the mine.
As of September 30th, construction at El Limon was approximately 20% complete, with initial production scheduled for H2/2015. El Limon is now at its most labor-intensive phase and needs to ramp up its team of contract laborers.
The kidnapping, not to mention the fact that the perpetrators have not been caught, certainly does not make it any easier for Torex to attract the labor force the mine needs.
Moreover, in anticipating that the company may have staffing issues as construction at the mine resumes, Torex commented that if staffing challenges continue, work that is not critical to construction would be delayed until after the first pour.
It shouldn’t be much of a surprise that in announcing the return of 11 of the kidnapped, Torex also announced that production at El Limon would be pushed back until at least Q4 of 2015.
After the kidnapping, Scotiabank downgraded its rating of Torex Gold. Meanwhile, while noting that social unrest may continue to be a significant issue at El Limon, Daniel Earle, a research analyst at TD Securities, reiterated his Hold rating on the company.
TD Analyst Dan Earle at the beach via Facebook
In early coverage on Torex completed in 2012, Daniel Earle made a point to highlight that social unrest in the area of El Limon could negatively impact budgets and the production schedule, writing:
"However, tensions with the local community may increase as the Morelos gold project moves from the relatively benign exploration stage to construction, with an increase in personnel on site, disturbance, environmental risk, etc."
At the time of the kidnapping, Earle went on to write:
"We like the Morelos project. However, before recommending the stock, we would look for either reduced risks via project advancement or a more attractive valuation relative to producers to compensate for the elevated level of risk at the current stage, with commercial production being approximately a year and a half away. We maintain our HOLD recommendation and our target price remains unchanged at $1.75.
Whether El Limon will see another incident like the kidnapping and how difficult it will be for the company to attract the labor it needs to move from construction to production are two questions that really need to be considered.
It’s been suggested that Torex Gold could make a good takeover candidate for Goldcorp. However, whether Goldcorp will be comfortable with the security risk and level of safety in the area is a question that should be asked first.
