From Dust to Dollars: GoGold’s Mining Ventures Explored

Executive Summary

GoGold Corporation (“GoGold”) (NYSE:AGI) (TSX:AGI) is a Canadian gold mining company expressly focused on exploring and developing mineral properties in Mexico.

Incorporated in 2008 GoGold kissed a number of project frogs over the years before arriving at its current portfolio consisting of an operating heap leach mine and a set of exciting exploration prospects. In fact the management team are veterans of mine development and operation in Mexico, with experience together in previous companies and previous guises (Gammon Gold, MexGold). What this means is that the Company really knows how to operate in Mexico, and the team knows how to turn properties into producing mines, and its executives have created value for shareholders at various points in past cycles.

GoGold is led by Brad Langille, (President and CEO), and along with John Turner (non-executive Chairman) over the years they have raised hundreds of millions of dollars from the capital markets, and sold assets, including the Santa Gertrudis asset to Agnico Eagle in 2017 for US$80 million and a 2% net smelter royalty (NSR). In short, GoGold has operational and commercial credentials within its management team and as a corporate entity, both within Mexico and across the broader capital markets spectrum. Which is a Good Thing.

Before Crux Investor and you, dear reader, get too carried away, it is worth remembering that the resources space is difficult and not everything goes to plan. For example, since inception GoGold has bought five properties, of which it has sold one (bravo – thank you Santa Gertrudis), is operating one (the Parral tailings reprocessing, a bit ho hum as we shall see), is exploring one (Los Ricos – exploration with great expectations), and two that have sunk without trace (Rambler and San Diego). Succeeding in the resources space needs smart technical people, good management, great assets, and being at the right stage of the metal price cycle. Put another way it helps to be smart and lucky.

The current bull market in precious metals stocks, fuelled by a cocktail of rising metal prices and heady expectations for the sector, has enabled the market capitalisation of GoGold to reach C$446 million, or US$254 million. Adjusting for cash, warrants and options Crux Investor arrives at a fully diluted enterprise value of the Company is US$292 million, which needs to be ascribed to the Parral tailings recycling and the Los Ricos exploration project for the maths to add up. The questions for investors are not just whether these two assets are worth US$292 million today, but what they will be worth in the future. Balancing the likely outcomes, the risks and the rewards will affect anyone’s decision to buy or sell shares, and the conclusions we reached are as follows:

The analysis of the Parral heap leach operation (producing approximately 21,000 ounces of gold equivalent a year) gives a net present value of US$170 million at current metal prices. The heap leach project is reprocessing low-grade tailings. Like so many heap leach projects it has taken a number of years to reach operational stability and – thank you metal prices – it reported positive cash flow for the first time in H1 2020 six years after it started. This leaves an ascribed value of US$122 million for the exploration potential at Los Ricos. If one expects the resource at Los Ricos to reach a million ounces, then the valuation of those ounces is US$122 per ounce. A maiden resource statement out very recently shows an in-pit resource for Los Ricos South announced on 29 July 2020 just over 711,00 gold equivalent ounces in Measured and Indicated resources, putting the value at US$172/oz. While US$172 may seem too high a per ounce value to ascribe to these relatively early-stage assets, there are some other factors supporting the valuation such as:

• Open-pit constrained Measured and Indicated resources grading 2.3 g/t gold equivalent, with a predicted low strip ratio of around 2:1 makes for good economics. This should be a mine.
• Los Ricos North is the joker in the pack and could deliver future value

All of this adds up to a conclusion that GoGold has had a good price run recently, supported by news flow and metal price moves. The market capitalisation reflects the current assets and results, with further price movements very much dependent on what management can deliver in the form of fresh exploration results in Los Ricos North.

Introduction

GoGold Corporation (“GoGold”) (GGD:APH) (TSX:GGD) is a Canadian gold mining company lately expressly focused on exploring and developing mineral properties in Mexico.

In February 2010 the company began trading on the TSX Venture Exchange as a capital pool company and in July 2010 GoGold completed its Qualifying Transaction for trading on the TSX by acquiring the Rambler Property, a gold and copper project in Newfoundland and Labrador. After a limited drilling programme in 2011 yielded only sub economic gold grades no further activities have been undertaken on the asset and the value of the asset reduced to nil in 2013.

The Qualifying Transaction was followed by an acquisition in April 2011 of the San Diego property, but which proved unsuccessful and a write-down to a nominal value in 2016.

In May 2012 a business combination was concluded with Absolute Gold Holdings (“Absolute”), through an exchange of shares, giving the company effective control of the Parral Tailings Project. On the basis of a prefeasibility study completed in February 2013 the project was given the go-ahead and completed in 2014 with first gold poured in June and commercial production declared on 1 March 2015, defined as “the ability to maintain an average of 60% of designed tonnes stacked on the heap leach pad, 60% of designed Merrill Crowe throughput and 60% of expected metal recovery from the heap leach facility for a period of 30 days”. This is a very liberal definition for commercial production, and the detail is worth re-reading again. Oh my – 60% of the designed tonnes/throughput, 60% of the estimated recovery… which is obviously 0.6 x 0.6… which is 0.36, or about one third of the planned amount of metal out of the back end, but with largely the same development and operating costs.

Heap Leach

Heap leaching is one of the oldest and the most traditional mining process used to extract valuable metals from specific minerals. It is a tried and tested method that is known to work, and many developers and junior mining companies are attracted to the process because it is nominally very simple, with relatively low up-front capital costs, low water usage, and low operating costs.

The hydrometallurgical process of heap leaching is ancient and the basic steps have not really changed in 500 years. First, a leach

solution is used to irrigate the heap. The second step is interaction with the ore particles. Third, the precious metal leaches out of the solution. Fourth, the pregnant solution is collected, and finally, draining of the tailing areas is done for metal extraction.

In 1557 Georgius Agricola published his De Re Metallica, reporting that a heap leaching process was finished in a 40-day cycle, and the technique was practiced at that time in Hungary for copper extraction. In 1969, gold and silver heap leaching began in Nevada, spawning the modern industry. Currently, 37 different heap leaching operations are active worldwide for the production of gold, and over 50 for copper, contributing significantly to global supply of both gold and copper.

What is not to like? Low cost, proven, effective.

Well, the reality is that many heap leach projects take several years to settle down. In Crux Investors’ experience, it takes this long for the metallurgical team to work out all of the complexities and idiosyncrasies of the site-specific factors. Or put another way, heap leaching needs a vast amount of proper testwork to be completed in order for them to function properly, and many projects end up doing that test work during ‘commercial production’.

The two basic processes in recovery from ore heaps are leaching kinetics and solution flow. This is intuitive. The solution has to be able to leach the metal effectively from the ore, and the now pregnant solution needs to be able to flow out of the bottom of the heap.

In technical terms, leaching kinetics describes the rate at which metals or other constituents are released from the ore and are transferred into the solution.

The key factor affecting solution flow is ore permeability and how it changes under compression, and when wet. All of this feeds into how the process is designed, and it requires proper heap building and ore evaluations, efficient comminution methods, and feasible approaches to control the heap leaching process.

Many of the issues related to leaching kinetics and solution flow are often overlooked in planning, and this affects the viability of operations. Not only that but it means that the metallurgical team ends up having to retro-fit a system that works. As they say in the British Army, “7P!” Prior Planning and Preparation Prevents Piss Poor Performance. Heap leach operations are great when they work, and a drag on the rations when they do not.

In February 2014 GoGold acquired 81.74% of Animas Resources Limited (“Animas”), owner of the Santa Gertrudis property in the Sonora State of Mexico, for a total consideration of C$12.96 million, of which C$5.5 million was settled in cash and the balance through the issue of 6.94 million shares. The project was a consolidation of 33 small deposits with declared total resources of more than 1.0 Moz at a grade of just above 1 g/t Au. The seven largest deposits contained 0.5 Moz at a grade of 0.66 g/t Au, but with metallurgical testwork pointing to difficult conditions for a number of these. Despite the less than marginal nature of the project, the company managed to do very well out of it finding a buyer in Agnico Eagle Mines Limited (“Agnico”). In September 2017 GoGold announced it had reach agreement with Agnico to sell its interest in the Santa Gertrudis gold project for US$80 million and a 2% net smelter return (“NSR”) royalty, subject to Agnico having the right to buy back half of this for US$7.5 million.

As a salient reminder of how difficult the resources sector can be, Agnico Eagle advanced the asset with a view to production but the asset did not get better the more that it was investigated. By 2020 Agnico Eagle had declared open pit resources of only 0.1 Moz at 0.64 g/t Au and underground mineral resources of 0.45 Moz at 4.58 g/t.

The Santa Gertrudis royalty was sold exactly one year later to Metalla Royalty and Streaming Limited (“Metalla”) for US$12 million, half of this amount settled in Metalla shares.

In March 2019 the company took first an option to acquire the Los Ricos project from “private Mexican owners” who had been awarded the concessions after years of litigation. The technical report on the project report Minera San Jorge S.A de C.V (“MSJ”) as being the owner which cancelled an option agreement with a company exploring the project, resulting in litigation. The nature and merits of the dispute are uncertain. It is therefore comforting GoGold superseded its option agreement with “a number of agreements for a total of US$9.9 million to obtain the rights to the project and the 2% NSR royalty on production from Los Ricos”.

At the distribution date of this report only two mineral assets are therefore relevant: Parral and Los Ricos. According to a corporate presentation dated July 2020 the strategy is for Parral to generate sufficient cash flow to fund G&A expenditure and contribute to the exploration programme. The Parral tailings retreatment has however until very recently been a cash drain of the company because of metal recovery that was far below forecast requiring a number of changes that required investments in leach pad, plant and equipment. Lately the recoveries have substantially improved, but the operating cost have shot up.

Figure 1_1 shows the share price performance of GoGold since over the last ten years on the Toronto stock exchange (“TSX”).

The initial sharp ramp up in price can be attributed to the San Diego project acquisitions coinciding with a rapid increase in the silver price. Thereafter the share price somewhat mimicked the silver price until early 2014 when the Santa Gertrudis acquisition was announced and the commissioning of the Parral Tailings project mid-year.

Optimism about the projects seems to have underpinned the share price until mid 2015, despite the silver price dropping further. However, since then the share price has underperformed relative to the silver price movements due to Parral underperforming and being a drain on cash requiring substantial additional funding, some of which was equity. When GoGold pulled a rabbit out of the hat with the sale of San Gertrudis allowing the repayment of loans to become debt free, the market still did not re rate the company. The turnaround only came with the acquisition of Los Ricos and the announced first drill results. From then the share price has gone from strength to strength, temporarily interrupted by the COVID-19 scare.

Historical Performance

Table 2_1 gives the historical production and financial performance since October 2010 for GoGold.

Table 2_1 shows for the operational performance:

• GoGold became a producer in the year 2014. Commercial production was declared in March 2015.
• Whereas it was a predominant silver producer, gold has become increasingly important as revenue contributor. The Au/Ag price ratio trend since start of operations has been in the company’s favour.
• The “recoverable ounces stacked” includes certain assumes on recovery which are speculative and the numbers should not be given much weight as was proved subsequently with the company requiring to write down metal inventory that is no longer expected to be produced. Unfortunately management does not report grade for Au and Ag what it stacks, a much more relevant metric. Moreover, it only includes metal for newly stacked tailings, not rehandled tailings.
• Section 3.7.2 of this report will attempt to get to a more realistic view on metallurgical performance.
• At a gold equivalent production of approximately 21,000 ounces per annum in the year ending 30 September 2019, Parral is finally cash flow positive, but the Company will need to source additional funding periodically to fund exploration and development.

Table 2_1 shows that with respect to financial performance:

• The company has raised by September 2017 a total of US$100.7 million (the C$ and US$ were close to parity during 2011-2013) since October 2010 to cover operating cost of US$30.5 million, invest US$65 million and increase the cash balance marginally to US$4.8 million.
• During the 2018 financial year the sale of Santa Gertrudis allowed for total substantial repayment of loans resulting in an investment outflow of US$53.5 million.
• The first 6 months of the 2020 financial year is the first period in the history of GoGold when cash from operations was positive. It falls short of what is required to further investment at Parral and to cover exploration expenses. The company raised US$17.4 million in equity finance during this period.

The Parral Tailings Retreatment Project

Background

The technical information on the Parral Retreatment Project has been extracted from two reports, which are both old. There are no more recent technical reports available.

• A NI 43-101 compliant technical report by MDM Engineering Projects Ltd (“MDM”) reporting on the findings of a prefeasibility study dated 20 February 2013 entitled Independent Technical Report on the Parral Tailings Project, Chihuahua, Mexico.
• A NI 43-101 compliant technical report by P&E Mining Consultants Inc. (“P&E”) dated 2 April 2015 entitled Technical Report and Resource Estimate on the Esmeralda Tailings Silver Project, Chihuahua State, Mexico.

Unless specifically otherwise stated, all information, illustrations and wording in Section 3.1 to Section 3.5 have been extracted from these reports.

Figure 3.1_1 shows the location of the Parral project site in Mexico.

The Parral Project is located within the limits of the city of Hidalgo del Parral (“Parral”) in the State of Chihuahua in north-central Mexico. Parral is 1,060 km northwest of Mexico City and 190 km south of the City of Chihuahua.

Whereas the initial focus was on the Parral tailings, the company later added the Esmeralda Tailings to its portfolio. The Parral Tailings are owned by the town of Hidalgo del Parral and were generated between the 1920’s and 1990’s from material mined underground and treated in a flotation plant. In the opinion of GoGold the original flotation process was inefficient, resulting in significant amounts of gold and silver reporting to the tailings. For the right to re-process the tailings the town was originally entitled to a 12% net profit interest (“NPI”) after deduction of the costs and capital depreciation in terms of an option agreement executed in October 2011. However the Management Discussion and Analysis (“MDA”) for the year ending September 2016 mentions that the NPI was eliminated for a monthly royalty payment to the town, which varies from $30 to a $48 per month, but which increases based on the market average silver price, from a minimum of $48 per month to a maximum of $88 per month. The wording is opaque, but the financial statements show an annual provision of US$1.24 million for 2020 and US$1.05 million thereafter. All historical disturbances and environmental liabilities remain with the town.

In September 2014 GoGold also secured the rights to treat the Esmeralda Tailings from Promotora de la Industria Chihuahuense (“Promotora”), which were also generated by a flotation plant and under the same 12% NPI terms as for the Parral Tailings.

In terms of both agreements GoGold has full rights of access to the properties.

Figure 3.1_2 shows the relative location of the tailings deposits to the heap leach facility.

The Esmeralda tailings are at a distance of 12 km west of the heap leach facility and the Parral tailings at 5.4 km east-northeast of Esmeralda, at 9.6 km by road west of the treatment site.

Geology and Mineralisation

Being a tailings reprocessing project, the geology and mineralisation of the material from which the tailings have been derived are largely immaterial.

Mineral Resources and Reserves

Parral Tailings

The Parral tailings were sampled by means of auger drilling (58 holes), vertical channel sampling (295 sample points) and pit sampling, typically 2 m to 4 m deep, at a 50 m x 50 m spacing resulting in 188 sample points.

Figure 3.3.1_1 shows a map with the localities of the various samples with drillhole locations indicated in blue, vertical channel samples in green and pit samples in red.

The tailings have been subdivided in Zone 1 (the most northern dam) with an estimated content of 11.4 million tonnes (“Mt”), zone 2B (the westernmost circular shaped dam) with 2.9 Mt and Zone 2A being the remainder with 6.0 Mt.

Whereas the drill hole sample intervals ranged from 1 m to 3.55 m with an average length of 2.5 m, a composite length of 5 m was chosen. This is somewhat strange as the control of the grade is very much determined by the time period when the tailings were deposited and therefore strongly horizontally correlated. One can expect the greatest grade variation to be vertical. Sampling over a relatively large vertical extent, aggravated by compositing over an even larger vertical extent, smothers the effect of vertical grade variation from sequential deposition over time.

The block size of 5 m x 5 m x 5 m reflects the composite length of 5 m. Ordinary Kriging (“OK”) was used to estimate the gold and silver grades using a spherical search ellipse, which ignores the horizontal control on the grade distribution.

It is therefore not surprising that a section for the gold equivalent grade distribution does not show any horizontal control, but suggests that the best grades are present in the centre of the tailings in Zone 1 (see the two upper sections in Figure 3.3.1_2).

It should be noted that the vast majority of the sample points are around the periphery of the tailings dams and that the interpreted high grades are based on relatively few data points.

It should be noted that the vast majority of the sample points are around the periphery of the tailings dams and that the interpreted high grades are based on relatively few data points.

The resource statement, based on a cut-off grade of 0.4 g/t Au Equivalent (“Au Eq”) assuming a gold price of US$1,400/oz, cash operating cost of US$11/t treated and gold equivalent recovery of 56%, for the Parral Tailings is reproduced in Table 3.3.1_1.

The table shows Zone 1 and Zone 2 roughly contributing equally to the Au Eq. content in the mineral resources, but with Zone 2 having more attractive grades being approx. 21% higher for both gold and silver.

Table 3.3.1_2 shows the Reserve Statement for Parral Tailings, determined at a cut-off grade of 0.34 g/t Au Eq and using a conversion of the silver grade to gold by dividing it by a factor 50.

The total reserves are 0.9 Mt less than mineral resources, despite 0% assumed mining losses, but have the same average grades as for total resources as dilution has been assumed nil even for mining tailings at the bottom of the pad and the risk of over digging into the base.

Bizarrely, the conversion of resources to reserves assuming nil dilution and nil losses yields 13.3 Mt proven reserves (versus 4.0 Mt measured resources) and 7.1 Mt probable reserves (so 20.4Mt of reserves versus 17.3 Mt Indicated Resources). The figures may be old, but they are confusing for Crux Investor. Canadian reporting rules state that proven reserves should be a subset of a larger total, that of available measured resources. More clarity on the resource status at Parral would be helpful.

Esmeralda Tailings

Figure 3.3.2_1 shows the location of the 144 holes drilled in the Esmeralda tailings on E-W trending sections that were spaced 50 m apart and with drill station 25 m apart.

As 98% of the samples are 1.0 m in length no assays were composited prior to estimation.

Two horizons have been identified in the tailings, an upper brownish unit up to 15 m thick and a lower greyish coloured unit up to 20 m thick. The zones were considered to represent different sample distributions and were estimated separately.

According to P&E: “Continuity analysis of the zone-coded sample data did not suggest any preferential orientation of the tailings mineralization, although the truncated nature of the data returned low-nugget downhole experimental semi-variograms. Au and Ag experimental semi-variograms were examined across multiple orientations and lag intervals, but did not provide conclusive results.”

The first sentence does point to strong vertical variation in the grade, whereas the second points to problems using a specific search direction and radius. It is probably for this reason that P&E used Inverse Distance Cubed (“ID3”) linear weighting of assay samples for grade estimation. By using a third power factor, the block grade is very much determined by the nearest assay value. For comparative purposes Nearest Neighbour (“NN”), was also used for the estimation. Again by not imposing a predominant horizontal component to the search, a large question mark should be placed behind the validity of the block grades. However, with two horizons recognised, there is less of a bias than for the Parral tailings.

Table 3.3.2_1 gives the resource statement based on a cut-off grade of 36 g/t Ag Eq assuming a silver price of US$18/oz and gold price of US$1,250/oz, cash operating cost of US$10/t treated and silver equivalent recovery of 50%.

The table shows that the Esmeralda tailings contain less than 24% of the precious metals content by value of the Parral tailings and at a slightly lower average grade.

No reserves were declared for the Esmeralda Tailings.

Mining Operations

The operation is a conventional dig (no blasting required), load and haul operation using 50 tonne trucks employing a contractor and renting equipment. The hauling distance is 9.6 km. The scale of operations was originally planned for treating 1.8 Mtpa.

The tailings were subdivided in five zones: Red Hill with the highest grade (1.39 AuEq), Zone 3, Zone 2, Zone 1A, Zone 1B and Parking Lot (see Figure 3.4_1), which are planned to be mined in this sequence to target higher grades earlier.

Table 3.4_1 shows the amount of mineable material per zone in order of planned mining from top to bottom.

The highest Au Eq. grade awarded to Red Hill is very much due to the low Au/Ag ratio of 50 applied to the silver grade. At the current Au/Ag ratio of 80, the Au Eq grade of Red Hill drops to 0.91 g/t and Zone 2 with the lowest grade to 0.62 g/t Au.

Metallurgy

Parral Tailings

Kappes Cassidy and Associates (“KCA”), an expert laboratory on heap leaching, carried out tests on 250 gallons of tailings material with a nominal particle size of 1.7 mm.

As the tailings material is too fine to be amenable for heap leaching (the permeability would be too low), agglomeration and compaction testwork was carried out using varying amounts of cement (up to 25 kg/t!), with percolation tested in very small diameter columns of 7.5 cm diameter and without compressive load. The prefeasibility study report does not provide the results of these tests, but refers to a KCA report that is not appended.

The column leach tests were on as-received material, agglomerated using between 10 kg/t and 27 kg/t cement as binder. Cyanide consumption varied between 2.01 kg/t to 23.32 kg/t, which is extremely high. Gold extraction varied between 62% and 79% and silver extraction between 43% and 96%. No averages for any of these three key ranges are provided in the technical reports.

KCA suggested that for commercial production purpose 30% of the laboratory cyanide consumption should be assumed. For plant design purpose a consumption of 3 kg/t was used, which is high, substantially adding to the operating cost. The high cement consumption rate would also impact negatively on keeping operating cost to a minimum.

For production modelling an average recovery of 65% for gold and 58% for silver was used.

In conclusion, the whole discussion on metallurgical results in the technical report does not give much confidence in the substantiation of production input parameters used. The worst shortcoming is the absence of a mineralogical investigation on how the precious metals occur and reveal why leaching at the 1.7 mm particle size should be successful for dissolving gold and silver.

Esmeralda Tailings

No testwork has been undertaken on these tailings.

Processing

Whereas the discussion in Section 3.5.1 mentions that the testwork material had a nominal particle size of 1.7 mm, the discussion in the prefeasibility study states that the plant feed particle size is P80 -0.225 mm and P100 -0.3 mm, therefore substantially finer is size.

The re-mined tailings are dumped at the plant site and later loaded and dumped by front-end loader into the feeding bin. Double handling of material is not conducive to minimising operating cost.

The material is subsequently prepared for leaching by agglomeration in a drum using 15 kg/t cement.

Stacking is by means of grasshopper conveyors and a radial arm stacker.

The extraction process is by conventional heap leaching by sodium cyanide. Recovery of gold and silver from cyanide solution is by zinc precipitation (Merrill-Crowe Process). According to the technical report, the “very high” silver content of the ore makes this process more cost effective than a carbon adsorption process. Cyanide consumption of 3 kg/t has been assumed, which is very high for the grade treated.

In the pre-feasibility study a copper leaching circuit was provided to remove the copper and produce copper as a hydroxide. This circuit would operate on a batching basis.

Valuation of the Parral Tailings Project

Metal Prices Assumed

The spot prices on 5 August 2020 of US$2,040/oz Au and

US$27.0/oz Ag were used as the base case prices. This valuation has assumed off-mine charges of US$7.0/oz Au for transport, insurance and refining, which covers the transport and refining of silver as well.

Production Schedule – Actual Versus Planned

Table 3.7.2_1 compares actual production achieved at Parral with the production schedule in the prefeasibility study.

The cells highlighted in purple are actual numbers reported. What does not seem to be provided by the Company are actual numbers are the grades of gold and silver stacked. Instead, GoGold reports “recoverable ounces stacked”, which assumes metallurgical recovery rates for Au and Ag. Unfortunately, when Crux Investor back-calculates the numbers, the actual recovery rates later prove to be different (lower) than the predicted recovery rates. For those that care, the cells in light-blue contain the amount of metal processed in newly placed material using the grades forecast in the prefeasibility study. Based on numbers for metal production the actual back-calculated recovery is around 40%

for gold and around 25% for silver from start of production until 30 September 2016. These recoveries compared with predicted recoveries of 65% for gold and 58% for silver that were originally forecast in the pre-feasibility study back in 2013.

Whereas the Management Discussion and Analysis (“MDA”) report for the year ending September 2015 still stated that “overall recoveries at Parral continue to be consistent with those in the prefeasibility study, although the time required to achieve full recovery has been longer than the metallurgical test work indicated”, recoveries were well below forecast as is show in Table 3.8_1.

The recovery underperformance continued the following year, but MDA report for the year blamed the production shortfall on the drop in the amount of stacked material from 0.63 Mt in the June quarter to 0.33 Mt in the September quarter, which was blamed on a “significantly worse rainy season than previous years”. As the table illustrates, the total amount placed during the year actually outperformed plan by 35,000 tonnes. The MDA report only attributes the shortfall to the rains, glossing over any problems with metallurgical recovery. Yet, management’s remedial actions included:

• Adjusting heap height from a single 10 m lift to a multistage 4m lift to speed up the leaching process.
• Increasing the strength of cyanide solution.
• Addition of liquid air to the leach solution.
• Commissioning of a sulphidisation, acidification, recycling and thickening (“SART”) plant to recover copper to lower the cyanide consumption.

In 2017 a start was made of retreating material placed in 2016 by proper re-agglomeration using more cement, which slowed the process down, resulting in much less material stacked than in the previous year. The metals in rehandled tailings in the table above are based on the grade calculated in these tailings after recovery of 36.8% of the gold and 26.8% of the silver (highlighted in grey) in the 2016 financial year.

With experience the agglomeration process speeded up in 2018 and the addition of a stacker resulted in a production rate that was 39% higher than in 2017, but still below pre-feasibility study levels. However, the company was still learning as it found out that placing material on the uncompacted previous lift delayed the recovery of metal to such an extent, it was preferable to restack on compacted material. The change resulted in a write down of metal in inventory. We refer the reader to the teach-in box about Heap Leach operations and the challenges that lie therein.

The table shows that recoveries have improved considerably since 1 October 2018 with gold at around 55% and silver around 100%

(presumably because of recovery of “old” silver stacked). Cumulative recovery (= total amount of metal recovered since start of production / total metal processed since start of production) have stabilised at almost 50% for gold and 42% for silver. These are distinct improvements from earlier years, but still well below planned levels in the prefeasibility study. This valuation has used a recovery of 55% for gold and 50% for silver for future production.

The effect of differences between actual and forecast production is that theoretically 12.87 Mt remain to be placed at a grade of 0.38 g/t Au and 31 g/t Au. The introduction of process changes seems to have reduced annual capacity to 1.4 Mtpa from 1.8 Mtpa. At the revised rate the remaining life of mine (“LOM”) is slightly more than nine years from 1 July 2020 onwards.

Capital and Operating Expenditure

Table 3.7.3_1 compares the actual cost during the 2016 – H1 2020 period to estimated cost when using rates forecast in the prefeasibility study applied to actual process rates.

The table shows how in 2016 the company reported much lower cash cost than forecast using the cost rates suggested by MDM in the prefeasibility study. It seems the company tried to process the tailings cheaply and saved on cement for agglomeration and possibly cyanide. When this impacted metallurgical performance and remedial action was taken the actual cash cost moved upwards reaching in H1 2020 levels exceeding forecast when using prefeasibility rates. The explanation can be found in having to compact and lower stacking heights, both not envisaged in the prefeasibility study.

Based on actual H1 2020 cost this valuation has included an upward amendment of US$8.0 million annually to account for these activities.

Sustaining capital expenditure has dropped by H1 2020 to a negligible US$0.07 million and has been ignored for this valuation.

Working Capital

Being at steady state production, this valuation assumes investments in working capital have been fully incurred.

Royalties and Taxation

Apart from the commitment to pay the own a fixed fee no other royalties are applicable as the 0.5% environmental levy on precious metals does not apply for retreatment operations.

The tax regulations applicable for mining in Mexico include:

• A “Special Mining Tax” at 7.5% of the Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA). This charge is deductible for income tax purposes
• Amortisation of pre-production investment to a 10% rate on a straight-line basis, but allowing for accelerated depreciation when the LOM is shorter, resulting in full depreciation upon mine closure.
• The income taxes are currently 30%.
• Tax on expatriation of dividends a 10%.

The financial statements for the year ending September 2019 shows a balance of non-capital losses of US$35.8 million, which expire between 2022 and 2037. Without details on how much of this expires in any particular year this valuation has assumed these to be fully available for tax purposes.

Results

Figure 3.7.6_1 shows the forecast financial performance over the LOM.

The table above indicates that the operation will have atcurrent precious metal prices an excellent cash margin of almost 59%. With noto very low capital expenditure requirements the amount of EBITDA available fordistribution to shareholders is more than 60% at US$235 million, despite thehigh total government take of US$156 million.

Discounted at 5% the net present value (“NPV5”) is of US$190million. It should be noted Parral is the only operation and needs to carry corporate overheads in Canada, if these are not to becovered by continuous equity funding. The last two financial years thecorporate overheads were well in excess of US$4 million. This would amount to21% of net free cash flow and reduce the value of corporate net free cash flowto US$170 million.

Table 3.7.6_2 shows the sensitivity of the net present values (“NPV’s”) for various discount rates to the main input parameters.

The table illustrates that a one percentage point change in the precious metal prices (i.e. US$20.4/oz Au and US$0.27/oz Ag) increases the NPV5 by only 1.6%, again highlighting the very high margin earned at Base Case metal prices. The sensitivity to one percentage point changes in working cost (i.e. US$0.20/t) results in changes in NPV5 of 0.6%.

The Los Ricos Project

Background

Unless specifically otherwise stated all information, illustrations and wording in this section are drawn from a NI.43-101 compliant report dated 30 December 2019 by P&E Mining Consultants Incorporated (“P&E”), with some reference made to the very recent News Release regarding a new resource statement by the same consultants.

The Los Ricos Project is located in the Jalisco State, Mexico, 85 km northwest of the city of Guadalajara (Figure 4.1_1).

The project area can be reached from Guadalajara by car in approx. 2 hours by first following the federal road No. 15 and a further 20 km using a gravel road.

GoGold completed the acquisition in August 2019 the 29 concessions of Los Ricos measuring in total 22,108 hectares with the purchase price payable in instalments, each time with the concurrent transfer of title to five additional concessions. At the date of this report there are three transfer tranches remaining.

Figure 4.1_2 shows a map with the outline and extent of the various concessions. The yellow colour are for the concessions that were transferred on date of the agreement, the green colour for the concessions transferred on 15 January 2020 and blue transferred on 15 June 2020.

GoGold refers to the two blocks of ground as Los Ricos South (= Los Ricos on the map) and Los Ricos North (= Monte de Favor on the map). In February 2020 GoGold purchased a 49% stake in five concessions in the Los Ricos North area with an option to obtain the remaining 51%. After this the company has 35 concessions (unknown when and how one concession was acquired) for 22,493 ha.

The original 29 concessions are subject to a 2% NSR royalty, which GoGold is purchasing for US$1 million in cash, paid in equal instalments over 36 months and 4.88 million shares delivered in equal numbers over 18 months. The additional 5 concessions come are subject to a 1% NSR royalty, which can be bought for US$1.0 million.

The surface rights at Los Ricos South have been secured by the original concession holders through a three-year access agreement, signed in 21 May 2018, with the Ejido of Cinco Minas. This agreement was ceded to GoGold in August 2019.

Geology and Mineralisation

The current Los Ricos South target is a quartz vein in volcanic and sub-volcanic host rocks, striking northwest–southeast and dipping approx. 65° to the west. The vein varies in width from 5 m to 30 m, outcrops on surface and has been mined down dip for 850 m. According to a description on the company’s website, the vein is not a simple fissure as it seldom shows clean-cut walls except where a fault of the regional fault zone forms its hanging wall. Fracturing varies from mere sheeting to intense shattering and crushing. Vein matter may consist of thin irregular stringers, or be present in large amounts, cementing jumbled host rock fragments, but in places a solid vein several metres wide occurs. The footwall shows the least shattering, consisting of closely-spaced stringers or massive quartz with or without calcite. Shattering increases towards the hanging wall, and the vein consists of host rock and quartz fragments cemented by quartz and calcite. Calcite is usually more abundant next to the hanging wall. Late cross-cutting faults have brecciated, cut and displaced the vein laterally and vertically.

Figure 4.2_1 shows a geological map for the area around the Los Ricos South exploration target.

Along a 4 km portion of the Cinco Minas epithermal quartz vein system seven deposit areas are recognised, which are, from north to south; the Aguila, the Magdalena, San Juan, San Pedro, Cinco Minas, Las Lamas and Cerro Colorado deposits. The subdivision is due to a post mineralisation phase of deformation which has chopped up the Los Ricos vein.

The Los Ricos veins system is associated with the Cinco Minas Fault system, the formation of which generated faults and breccias which provided the conduits for mineralising fluids responsible for the deposits. Figure 4.2_2 shows the structural model for the district with the Los Ricos vein system situated along the Falla Cinco Minas faults system and the Los Ricos North targets along the Monte del Favor fault system.

Two phases of mineralisation have been recognised at Los Ricos, one after the fault had been formed and another contemporary with continued movement along the fault causing brecciation of the veining formed during the earlier phase.

The deformation processes caused shoots of richer ore that plunge 65º to 70º to the northwest. Figure 4.2_3 is an old map of the underground workings of the “Main Mine” at the El Abra Zone showing the location and extent of the shoots. The lines in light grey are for horizontal tunnels with the ones to the southwest increasingly deeper as the vein dips in that direction. The plunge of the high-grade shoots show as shaded areas seems to have a plunging to the southwest and not northwest as per the technical report as they are stacked with the deeper outlines to the left.

Individually the shoots seem to have a strike extent of at most 150 m. It is noticeable that the shoots have not been identified beyond coordinate 150 N (at shallow level) and 550 N.

Pyrite (FeS2) and chalcopyrite (CuFeS2) are the most abundant sulphides with locally abundant galena (PbS), sphalerite (ZnS) and black fine-grained sulphides. The latter consist of argentite (Ag2S), native (= pure) silver, miargyrite (AgSbS2) and possibly some other silver sulphosalts +/ manganiferous minerals. Given these minerals it remains to be seen what the metallurgical amenability will be to upgrading the precious metals, what their recovery rates will be and in what form (concentrate or dore) it will be marketed.

GoGold Exploration Results

Upon acquiring control GoGold embarked on an exploration program that including trenching at all the zones identified in Figure 4.2_1 and underground mapping and sampling at El Troce at the southeast end of the El Aguila Zone.

The technical report gives little detail about trench sample results beyond maps with gold equivalent grade results as coloured dots. The dots indicating >5 g/t Au Eq seem to be clustered over short stretches of the vein, possibly indicative of shoots.

The 10 underground samples were taken over 14 m tunnel length and over a very short width between 0.6 m and 3.0 m, averaging 2.1 m with a weighted average grade of 2.07 g/t Au and 183 g/t Ag.

Evidently the trench and underground sample results were not attractive enough to include ‘First Pass’ drilling at the El Aguila Zone and Las Lamas Zone, because GoGold’s drill programme which commenced in 2019 focused only on the “Main Mine” in the El Abra Zone with a few holes drilled at the Cerro Colorado as well. Perhaps El Aguila and Las Lamas will be drilled in subsequent drill phases.

Figure 4.3_1 shows the drill collar location plan for the El Abra Zone for the 2019 drill campaign.

After the 2019 drill results GoGold was so much encouraged it started in 2020 a follow-up campaign, again focused on the Main Mine at El Abra, but including a number of holes elsewhere. Figure 4.3_2 contains a longitudinal section of the Main Mine area with pierce points of the drill holes, as updated by 22 July 2020.

The illustrations show that drilling was carried out over 1.1 km strike length with drill hole fences down to an interval of 25 m apart, but with the majority 50 m apart. The red dots indicate intercepts with a grade between 2.5 g/t and 3.0 g/t Au Equivalent (g/t Au Eq.) and the purple dots above 5.0 g/t Au Eq. What is noticeable is the concentration of the higher grades at and around the previously mined section of the vein system.

At the publication of the December 2019 technical report the results of the drillholes in Table 4.3_1 were available. The 62 holes drilled at the Main Mine area and 29 holes at the San Juan area further north have been placed in sequence of the north coordinate to allow for a better view of possible trends.

As the table is very busy, the averages were calculated to obtain a general impression of the results. Noticeable is the very similar averages for the Main Area (without the mined high-grade shoots) and San Juan which has been mined to a much lesser extent.

The technical report provided cross sections of the drilling at the Main Area between 0050 N and 0500 N with a spacing of 50 m. To illustrate the findings of drilling Figure 4.3_3 has been included with a cross section along 0300 N.

The interpretation of the vein structure, shown by the red outline, indicates a relatively constant width, but this is not the same for every cross section. In general there is a narrowing trend with depth together with dropping grade. Referring to the geological description, the vein does not have clean-cut walls and its definition is based on precious metal grade with a tendency for much lower grades around a high-grade core.

The block sections along the drillhole traces show where the vein has been mined, leaving lower grade material for possible future mining.

The press release for the 2019 drill results heavily emphasised a few high-grade results, which were especially obtained early on by drilling twin holes (e.g. holes 1,2, 9) next to known wide high-grade intercepts of historical reverse circulation (“RC”) holes. The above table shows however these results are not fully representative and are greatly determined by narrow high-grade intercepts adjacent to old workings.

Concurrently with drilling in the Main Mine area at El Abra, GoGold also drilled a few holes at Cerro Colorado much further southeast with generally narrow and disappointing results as is evident in Table 4.3_2.

As the encountered grades are uneconomic for underground mining, it is not surprising no follow-up drilling has taken place at Cerro Colorado.

After the excitement generated by the 2019 results, GoGold had no problem raising C$25 million in February 2020 to fund follow-up drilling at the Main Mine Area. Figure 4.3_3 shows that results for the 2020 drill campaign with results announced up to 22 July included. This time the number of holes drilled at San Juan and further west (47) exceed the number of holes drilled at the Main Mine area (44). It should be noted that the table has stuck to the 0600 N coordinate as delineating the start of San Juan, whereas the press releases of GoGold have moved this to 0700 N for the 2020 results.

The results compare less favourably than for 2019 with the Main Mine Area having a narrower average width (-18%), lower gold grade (-38%) and lower silver grade (-19%). For the San Juan area these numbers are very similar at respectively -5%, +5% and +10. It should be noted here these numbers are influenced by a number of excellent holes at Rascadero, but it is difficult to determine their significance. The company has not yet released any cross sections to put the results into context.

Instead of follow-up drilling at Cerro Colorado the 2020 programme has tested the La Lamas area with the results in Table 4.3_4 showing disappointingly narrow intercepts and low grades.

For all intents and purposes the Main Mine Area results are at this stage the key drivers. To make sense of the results and see whether there are certain trends the average width of the intersections and weighted average grades were calculated for the holes along drill hole fences. The width of intersections does not equate to true width of the vein along that coordinate as this is dependent on the angle of intersection and whether or not some of the vein has been mined. It does give however an indication of whether the vein changes as the angle of intersection will for many fences be similar and mining having been over limited width. Figure 4.3_4 shows the findings.

The average width of interception is between 15 m and 20 m, being slightly higher in the San Juan area north of coordinate 600 N, probably because of less mining there. The true width of the structure will therefore be around 15 m. Crux Investor can give itself a minor pat on the back here since the News Release from 29 July stated that “the average true thickness of the modelled Los Ricos Domain is 15.3 m”.

The grade shown is g/t Au Eq using the Au/Ag price ratio of 76. There is locally much variation in the average grade, but this is due to the grades at 0050 N determined by drilling a twin hole along a known good intersections. The peak in grade between 850 N and 950 N is due to the relatively high intersections at Rascadero.

When ignoring the local peaks the average grade is approximately 2.5 g/t Au Eq at Main Mine and slightly below 2.0 g/t Au Eq. at San Juan. Without the Rascadero results there is a clear dropping trend in the grade going north.

The average grade is not particularly attractive for underground mining and with mineralisation that may well prove metallurgical complex requiring recovery of a number of base metal concentrates. The highlighted grades over much shorter widths may well be economical, but it remains to be seen whether they constitute a consistent deposit as the results for the coordinates do not consistently report the presence of high-grade widths.

This was probably recognised by GoGold management and their July 2020 corporate presentation suggests open pit mining as evident from the cross sections on the right in Figure 4.3_5.

The cross sections on the right from the July 2020 corporate presentation only include legacy holes despite all the additional drilling results obtained since.

The suggested pit outline in the corporate presentation cross section have a down dip extent of the mineralisation of 190 m and 250 m. Work done prior to 29 July assumed a strike length of 1,100 m, a down dip extent of 200 m and average width of 15 m to give the prospective resources at Main Mine (assuming a rock density of 2.7 g/cm3) a total of 8.9 million tonnes. At an average grade of 2.2 g/t Au Eq this would give 0.63 Moz. In fact, the 29 July news release reported in-pit measured and indicated resources of 9.8 million tonnes, at a gold equivalent grade of 2.3 g/t, to give 0.71Moz. This is reassuring, as it shows that Crux Investor has taken a slightly conservative but largely accurate view of things.

Although there is no mention of Strip Ratios in the Resource Statement news release, Crux Investor eyeballing of the cross sections suggests that the prospective strip ratio would be around 2 : 1. An open pit of 0.71 Moz, with an average grade of 2.3 g/t gold equivalent? Very nice. This is likely to be a mine, providing the metallurgy does not throw up any curve-balls. Given the historic production in the region, with abundant recovery records, this seems unlikely.

Chasing more resource at depth would quickly push the strip ratio up, which should not be a problem if the grade holds up. However there is a distinct impression of quickly dropping grade with depth and it not being worthwhile to capture in a conceptual pit.

The table below shows the Los Ricos South mineral resource estimate. The Measured and Indicated in-pit resource is 711koz at a gold equivalent grade of 2.3 g/t. There is a further 118koz at an inferred grade of 1.6g/t gold equivalent. If one ascribes a value of US$172 for every ounce of Measured and Indicated resource that falls within the pit, one arrives at a total value of US$122 million for Los Ricos South. On some levels that is an over-full valuation, given that the asset is not yet at an advanced study stage. Mitigating factors are the likely metallurgical simplicity, the low strip ratio, the decent grade, and the fact that there has been no conversation so far about the value of Los Ricos North.

Los Ricos North

The Los Ricos North project was launched in March 2020 and includes the Monte del Favor, Salomon, La Trini, and Mololoa targets. The licences are 35km to the northwest of Los Ricos South, and GoGold is working on the assumption that the geological endowment at Los Ricos North is as good as or better than at Los Ricos South.

Drilling at Los Ricos North only began in June 2020 with one drill rig at the La Trini target. The first holes are twin holes, presumably aiming

to be “Directors’ holes”, intersect good mineralisation, and generate confidence for the prospect. Field geologists cutting their teeth on exploration programmes soon learn that a good drill intersection elicits more funding from Head Office, hence the art and science of “Directors’ Holes”.

Nothing wrong with that, and the area has some good historic grades to target. A full list of historic holes is available on the website, and it is expected that management will be aiming to replicate intersections such as 35m @ 5.6 g/t Au eq. in CMRC-34, and 20m @ 14.5 g/t Au eq in CMRC-20.

https://gogoldresources.com/images/uploads/files/Historical_Drilling_ Summary_20200707.pdf

Red Flags

GoGold is an interesting company, one of those overnight successes that has taken twelve years to build. The Company is doing many things right, but life has not always been easy, and there have been missteps along the way.

One of the most interesting aspects of the research into GoGold has been the salient reminder of how badly wrong Companies and Consultants can get it, whatever the reason. The heap leaching project at Parral proved to be much more challenging technically than anticipated, and it seemed that all of the cost-saving short-cuts ended having to be reversed and re-engineered. Companies often rail against consultant groups preparing independent Technical Reports saying that things are too expensive, or over-engineered. Arse-covering they call it. And yet, when short-cuts fail, the Consultants have a right to say “I told you so”.

Another challenging aspect of the resources sector is how difficult it is to find really decent assets. Geology can be a capricious science. The Rambler and San Diego projects presumably had their alluring siren calls before failing on further examination. Even the Santa Gertrudis deposit that was explored, drilled, brought into the resource category and sold to Agnico Eagle eventually disappointed (in terms of ounces and tonnes).

What this means is that it is good to see a Company with some exciting exploration potential, and that the learning experiences of the past twelve years have honed the team into an experienced unit.

• The Parral tailings project is not easy and may throw up a curve-ball at some stage in the future. Resource estimates for tailings are hard to establish, and Crux Investor struggled to evaluate what was there originally and what remains now
• The entire engineering approach at Parral is hopefully a lesson learnt in how not to build a project. No mineralogical report, under-engineered short-cuts, expensive ‘cost savings’. Ideally this harrowing experience is now a ‘Green Flag’ strength, but investors should be wary of any signs of these mistakes being repeated
• Not everything that management does ends in glory. Remember Rambler, San Diego, and technical outcomes at Parral (for years) and even Santa Gertrudis
• Los Ricos South is a decent resource, but the depth potential has yet to convince Crux Investor. Quite possibly more ounces can be added, but cross-sections indicate that mineralised intersections are thin and grade falls with depth. For significant addition of truly economic ounces - on the evidence shown to date - look elsewhere
• Parral covers corporate overheads and contributes to exploration, but GoGold will need to tap the equity markets ahead. Expect continued growth in the market capitalisation (shares issued). Only exploration success at Los Ricos North will see a commensurate growth in per share value.

Green Lights

• At current metal prices Parral is generating a 59% cash margin. Miners need to make hay while the sun shines, and with current metal prices the sun is shining.
• Parral has a value of US$170 million, including covering US$4 million of corporate G&A costs
• Santa Gertrudis was a windfall sale that transformed the Company. Kudos to management.
• Management experience in Mexico, on projects, and as a team is significant. They know how to work together in Mexico and have explored, built, sold, dropped, found, and delineated deposits. It is a solid body of work.
• The maiden resource at Los Ricos South supports the view that it will be a profitable open pit mine. Los Ricos North has some great exploration potential

Valuation of GoGold

The Enterprise Value of GoGold at C$1.75

At the share price of C$1.75 and with 222.43 million shares issued the market capitalisation of GoGold is C$389.2 million, or US$292.3 million.

At 31 March 2020 the company had 17.86 million warrants outstanding, all of which well in the money at an exercise price of C$0.85. In addition 10.83 million options were outstanding, also all well in the money with the highest exercise price at C$1.20 and an average exercise price of only C$0.59.

At 31 March 2020 the company had net current assets of US$27.5 million and no debt.

Based on the above the diluted Enterprise Value is C$388 million (US$292 million) as derived in Table 5.1.

Looking at how the diluted Enterprise Value of US$292 million is composed, we can allocate it to three key assets:

• Parral tailings operations
• Los Ricos South (resource estimate)
• Los Ricos North (exploration potential)

Conclusion

As we saw in Section 3, Crux Investor puts a value of US$170 million on the net free cash flow from Parral at corporate level at current precious metal prices. This NPV accommodates the US$4 million of annual G&A at TopCo level.

Subtracting the US$170 million from the EV of US$292 million leaves us with a residual value of US$122 million. As noted in Section 4, with 711koz in the Measured and Indicated category, if the market is valuing Ricos South at US$172/oz, to comprise that figure of US$122 million, then Los Ricos North is ‘in for free’.

The numbers can be adjusted how you like, really. You can ascribe US$50/oz to the 711koz resource, which would mean that Los Ricos South has an ascribed value of US$36 million. Parral (US$170M) + LRS (US$36 million) = US$206M, therefore the market is giving a value of US$86 million to Los Ricos North.

Crux Investor feels that a value of US$100/oz is probably about right for the Los Ricos South resource. The category (measured and indicated) is robust, the grade is decent (2.3 g/t Au eq.) and the estimated strip ratio is likely to be low (around 2:1). The resource stacks up and it is likely to be a mine. On that basis we are comfortable ascribing a value of US$100/oz or US$71 million for the project.

With a value of US$71 million for Los Ricos South, and US$170 million for Parral, then the balancing factor is an amount of US$51 million for Los Ricos North. Exploration at Los Rios North is yet to yield results, but the historic data is promising.

The Crux Investor conclusion is that GoGold has had a good price run recently, supported by news flow and metal price moves. The market capitalisation reflects the current assets and results, with further price movements very much dependent on what management can deliver in the form of fresh exploration results in Los Ricos North.

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These CRUX Reports are written for expert investors AND for people new to natural resource investing. But whether you are an expert or a newbie, we all have the same driver. We invest to make money. Sometimes investors get emotional about the investment. They actually think they own a mine. They don’t. They own shares in a company. So focus on your investment strategy, work out the best plan for your needs, stick to the fundamentals and remember that the only way you make money is if your shares go up in value… assuming you don’t forget to cash them in!