Production at the new Cannon gold mine 30km east of Kalgoorlie is set to be underway in August, and emerging miner Southern Gold is already looking to replicate its recipe for success.

The junior struck a deal with gold and tin producer Metals X in November, which sees the established miner funding, mining and treating the ore from Cannon with a 50:50 profit split.

Southern Gold managing director Simon Mitchell said the company was proud of its transition to producer.

“We’re doing so in cooperation with Metals X as our operator, we’re a modest-sized company but we’re just about to produce gold out at Kalgoorlie, and there aren’t too many junior exploration companies that achieve that,” he said.

“Once we’re in production and we’re able to use that cash generation to grow the business organically, we should see our value grow substantially from our current capitalisation of $A5 million.”

The Cannon open pit stage-1 mine is a modest-scale operation with capital costs well under $1 million and a forecast mine life of eight months, with ore to be processed at Metals X’s nearby Jubilee Mill. A stage-2 underground may follow but there are also opportunities to expand the open pit into a larger, longer-life operation.

Cannon’s grade is appealing, at 3.1gpt for 13,500 recoverable ounces at a C1 operating cost of $1053 an ounce. Southern expects first cashflow from the mine in December, enabling the company to investigate extending the pit life then mining the higher grades underground at Cannon, and defining and developing satellite deposits.

Mitchell paid tribute to his predecessor Nanette Anderson for the agreement with Metals X, saying it was a very good deal for a junior.

“Not everyone transitions successfully into a producer, and there’s a lot of risk that people just don’t recognise,” Mitchell said.

“In this case with our Metals X deal, we’ve been able to ride on their coattails if you will – they’ve got the right people to execute the project, they’ve got the plant so the ore can be processed, so for me, this is actually a way of keeping the capital cost down to a minimum.

“It’s a very good way of de-risking the project, not diluting our shareholders, and it enables us to keep a very small, highly professional exploration team, and we can channel our money into the right places.”

Investors are showing their support for the company, with a recent oversubscribed private placement raising $1.05 million.

“We had to make sure we’re in a pretty solid position, and I think we’ve done that,” Mitchell said of the March placement.

“It was also an opportunity for some investors in my personal network to come into the company that I had just joined. I’m hoping to build the investor profile of the company and expand the marketing offshore, and attract some institutional investors, something Southern Gold hasn’t done in the past.

“We’re obviously small at the moment, but over time, say in the next six to 18 months, our register will start to change, and I think our current shareholders will start to see the benefit of that.”

Mitchell has his gaze set firmly on the future and leveraging the cash generation to grow the company into a unique company: a tightly held and highly profitable professional exploration company with sustainable cashflow and a reputation for monetising gold deposits.

“When we do get into production and do get the cashflow, what we suspect is that the more holes are drilled, the more we’ll find and more opportunities will unfold in the district,” he said.

Cannon occurs in an ultramafic belt better known for its nickel prospectivity and Mitchell believes there are more economic gold deposits to be found. Initial RAB drilling barely grazed the surface of the high-grade Cannon deposit, with deeper RC drilling highlights include 22m at 10.05gpt gold and 7.6m at 19.05gpt gold.

“This is where the opportunity out there is huge,” Mitchell said.

“We’ve got two very obvious types of targets – one is extensional drilling below the pit and the other is investigating the satellite prospects close by. Once we open up the pit, we’ll be able to see the geology and structural context, and our understanding of the mineralisation and how it is occurring should go up 10-fold.

“That’s a really exciting thing for geologists – your average finance guy doesn’t get too excited about this sort of thing but it is very important because drilling becomes more targeted as you know exactly what you’re dealing with.”

Satellite prospects including Arsenal, Monument and Pinner are within a few hundred metres of Cannon while Tooting Bec and Railway are only a few kilometres away, and Mitchell is very optimistic of finding a second deposit. Further afield, Southern has a number of tier two and three regional targets in the Bulong project, which will receive attention in due course.

Cannon is on a 100%-owned tenement in the greater Bulong gold project, where the overall 114sq.km of tenements are either held wholly or 80% by Southern in a joint venture with Heron Resources. Beyond Bulong, Southern’s next frontrunner project is the 140sq.km Cowarna gold project, 50km to the southeast. The tenements include promising banded iron formations which have revealed rock chip sampling of up to 10gpt gold, according to historic data.

Southern believes Cowarna provides considerable scope for long-term growth potential to complement the Cannon mine and Bulong targets. Mitchell is keen to replicate the Cannon development success story at other deposits in the prolific gold-producing Kalgoorlie region.

“Once we’ve established the company with its cashflow and it’s in a very solid position financially, one of the things I’ll be looking at is other opportunities in the gold sector, in particular in and around Kalgoorlie,” he said.

“There may be those assets that may be capital constrained, and I’m aware there are other small deposits which are unloved which could make very good money with a bit of investment. I would like to push this model out into other areas, where we come in as Southern Gold and work on a project and get it to the point where perhaps the resource is of modest scale but the grade is very good and we’re able do a deal with a third party, like we did with Metals X, to monetize the resource.

“We’ll look at that in a number of different projects and start to build the company up over time.”

In the meantime, Mitchell is looking forward to the earthmoving at Cannon and the cash starting to flow as Southern settles into its new producer status.

*A version of this report, first published in the July-August 2015 edition of RESOURCESTOCKS magazine, was commissioned by Southern Gold.