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There's Gold in Them Thar Hills!
Straight Talk on Mining #16
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Market commentary:
Gold is now sitting at a 2 year high and things
have never looked more golden.
Marshall McLuhan said "The medium is the message." Many commentators
overlook an extremely important factor in today's market reality
and that is getting your message out - not so much the content
and what is said, but where it is said and by whom. Public
relations and investor relations people know this all too
well. The "medium" in this case is the mainstream press, which
for years derided and poked fun at gold investments. Friday's
price rise caught the attention of the US Sunday papers, and
there are major articles in today's New York Times and Chicago
Tribune. I have said for some time that when the rank and
file cotton on to the gold market then watch out! While the
gold story remains confined to the back pages of some industry
publications it can't grow. For some months now it has been
the "stealth bull" - but with the aid of the popular press
all things become possible.
We surmise that the paper shredders at a number of brokerage
companies have been going into overdrive this past weekend.
The scandal which first erupted at Merrill Lynch April 8th
has spread like a contagion and now the Securities and Exchange
Commission have announced a formal inquiry. Added to this
are the first of we predict many class-action lawsuits aimed
at recovering some of the Bubble assets which vapourized over
the last year. The Boston law firm, Shapiro Haber & Urmy LLP
have filed a class action suit against Merrill Lynch & Co.,
Inc. and Henry Blodget, a former analyst, alleging securities
fraud. Merrill yesterday hired former New York mayor, Rudolph
Giuliani as legal counsel. Giuliani has not worked in a courtroom
in a decade. We can certainly be promised some high drama
and a media circus with this one. The initial inquiry by New
York Attorney General Elliot Spitzer reads like a Grisham
novel, and can be found at http://www.oag.state.ny.us/press/2002/apr/MerrillL.pdf
The vultures are truly circling. It is all an invitation for
black humour and I am already hearing jokes about it. The
alleged actions of Merrill analysts - that they publicly touted
companies while at the same time privately trashing them in
E-mails and other correspondence sent all over the show, sounds
like something from the Darwin Awards. The Darwin Awards website
is one of my personal favourites. It commemorates "those who
improve our gene pool by removing themselves from it in really
stupid ways".
There is another side this story that is important - the whirlpool
threatens to suck in a number of the firms who participate
in the Gold Carry Trade or in the gold derivatives market.
Already a number of the companies named in Reg Howe's lawsuit
have turned up again in the University of California class
action lawsuit over the Enron debacle. Should this maelstrom
cause the distress or collapse of any of the key players we
could see all hell break loose. When Drexel Burnham went under
a few years ago 17 tons of gold borrowed from the Bank of
Portugal went "poof". It is very difficult to get a true reckoning
of how much central bank gold has been lent in similar ways,
but one thing is sure that with rising bullion prices it will
be more expensive for borrowers to pay it back.
The Alto Chicama discovery
On last Tuesday the 23rd, Barrick Gold Corporation announced
a "significant gold discovery" of approximately 3.5 million
gold ounces in Peru. My last commentary decried the dearth
of new discoveries and hey presto! we have a brand
new deposit.
According to Barrick's press release, the company has calculated
an "inferred resource" of 61 million tons grading 0.057 ounces
per ton. This translates to a grade of 1.95 grams per metric
tonne. Randall Oliphant, CEO and president of Barrick is quoted
as saying "the similarities to our Pierina Property are striking,
in terms of grades, good metallurgy, gold-rich surface outcroppings
and the potential for expanding the resource."
Also according to the press release, "the mineralization is
disseminated and is hosted in volcanic and sedimentary breccias
and tuffs. The deposit is of high sulfidation type and is
similar in style to the mineralization at Barrick's Pierina
Mine."
There's not a lot of public domain information on Alto Chicama,
but here's what we were able to find:
Alto Chicama sits on the west flank of the Cordillera Occidental
in the Andean Mountain chain, in the districts of Usquil and
Quiruvilca in the provinces of Otuzco and Santiago de Chuco,
160 kilometres from the city of Trujillo and 550 kilometres
north of the capital, Lima. Elevation is between 1,950 m and
4,150 metres.
Barrick won the Alto Chicama property in a tender from Centromin,
the Peruvian government mining entity, in January, 2001. The
property itself is listed as held by Minera Peru S.A. and
we are not entirely sure what the Centromin connection is.
Centromin had been dealing off its properties in a privatization
drive. Barrick were the only bidders for Alto Chicama , and
came in with an offer of 2.51% production royalty. The mandated
minimum bid was 2.5%, hence the reason the accepted royalty
figure is not a round number. Barrick agreed to expenditures
of $US1 million in the first year, $US2 million in the second
year, and $US3 million in the third year. At the end of year
three Barrick must table a feasibility study and pay an advance
royalty of $US2 million credited against Centromin's net smelter
royalty.
According to an article dated 16th of January, 2001, in the
Peruvian newspaper Diario Gestión, which announced Barrick's
initial option agreement and winning bid, "recent studies
have detected anomalies that indicate the probable presence
of a disseminated deposit of gold in the Calipuy volcanics,
over an area of 4 kilometres long by 2 kilometres wide." Randall
Oliphant has claimed that this is a Barrick grassroots discovery.
The public record though would indicate otherwise.
Probably an unsung Peruvian geologist is ultimately responsible
for the discovery. The reason Barrick got this project so
cheaply - basically for a future royalty and a work programme
- was because Alto Chicama is known throughout Peru as the
country's largest deposit of anthracite coal! The project
was promoted by the Peruvian government as a potential source
of coal for electric power generation. That idea was nixed
by the go-ahead for exploitation of the Camisea natural gas
field, which will produce electric power much more cheaply.
Development of Camisea made Alto Chicama unsaleable. Centromin
then resorted to "plan B" and promoted the area as a potential
gold play. The idea sounded so outlandish that I doubt anyone
gave it credence. But according to "Economic Geology of the
Alto Chicama, Santa, Oyon and Jatunhuasi Basins", written
in 1998 by Procarbon, the Cretaceous coal deposits are indeed
partially overlain by younger Tertiary flows and breccias
of andesite, dacite and rhyolite Calipuy volcanics - certainly
the right type of rocks for a gold deposit, and in fact the
same host rock as Pierina. If the gold resides in brecciated
sediments and volcanics, as it would appear, then there is
potential that Alto Chicama contains some carbonaceous ore.
Carbon can be a "robber" of gold if it naturally occurs in
the rocks, because gold in the other rock types will tend
to bind itself to the carbon during heap leach processing.
It can knock down recoveries, or cause a greater consumption
of cyanide adding to costs. On the flipside, if Barrick indeed
own the coal rights they can perhaps vend that deposit and
offset their own costs. Once the infrastructure is in, the
economics of exploiting the coal deposit may become attractive.
Oliphant didn't mention any high grade resource numbers and
we have to assume if Barrick had found significant high grade
they would crow about it. Pierina had a high grade zone at
surface that became known as "Payback Hill", which made the
deposit so incredibly economically attractive. It had grades
>8 g/t, with spot grades up to 300 g/t Au. In December, 1996,
proven and probable reserves at Pierina were 67.7 Mt grading
2.98 g/t - a resource much more robust than currently defined
at Alto Chicama. A press story released by one of the wire
services last Tuesday morning, (and expunged by mid-afternoon!)
claimed that Alto Chicama could benefit from the proximity
of La Pierina - possibly even through use of the existing
mill. It was obvious nonsense, since the two are 175 kilometres
away from each other, in mountainous terrain. No one is going
to haul raw ore that kind of distance for milling. Whenever
you see these kind of statements its always a good idea to
do a back-of-the-envelope calculation. Using the numbers in
the press release the value of gold is less than $18 per ton
of rock - that's assuming 100% recovery. The resource numbers
so far are of low grade, but the exploration group must be
bullish about the gold price for the long term.
Obviously, someone within Barrick gave the order to check
out the Alto Chicama area and they deserve a lot of praise.
A $1 billion, ninety-two million dollar deposit acquired for
an exploration commitment and royalty is one hell of a coup!
Today, in the New York Times, Barrick was chastised for its
allegiance to hedging; contrasting Barrick's price performance
over the last few months with Newmont. Barrick has lost its
star performer status over the last several months. The discovery
announcement though gave Barrick a much needed shot in the
arm.
What a shame Alto Chicama wasn't found by a junior company!
The announcement would have sent them sky-high. Investors
who remember the La Pierina discovery, know it catapulted
junior Arequipa Resources into the big leagues. Arequipa Resources,
a tiny junior out of Vancouver found what would become one
of the world's best gold mines with +7 million ounces. Between
October, 1995 and end of October 1996 when it was bought out
by Barrick, shares rose from $1.15 to $30.00; a 2509%
increase! A price rise like that sounds like something out
of the tech boom, but it did happen, and it wasn't
a scam.
Which leads me on to two other news stories:
Golden Star Resources Ltd. and BHP Minerals
International Exploration Inc. have announced a 20:80 joint
venture over an area of 104 square kilometres in northwestern
Guyana. The "Cuyuni Property" as it is known, is being acquired
from the Barama Company Ltd. for cash, a royalty interest,
and other considerations.
Golden Star closed their Georgetown office a few years ago,
and BHP left Guyana back in 1999. They had formerly been joint
venture partners. Our guess is that BHP wanted to reinvestigate
this area but there may have been an existing agreement still
running, obliging BHP to take on Golden Star as a partner.
The Cuyuni property is due east of the Kilometre 88 gold area,
across the border in Venezuela, and there is a high probability
of gold and copper deposits in the large property holding.
It's a great area to look, though remote and somewhat swampy,
with poor access. Another factor which perhaps has enticed
BHP has been the prospect for diamonds. Diamonds can be recovered
from the Cuyuni River, and their source still hasn't been
found. BHP is a significant diamond producer with an operating
diamond mine in Canada. Golden Star identified 78 kimberlite-type
targets in northern Guyana on the "5 Stars Property" in something
they termed the "Piai Head cluster" in 1997. A "kimberlitic"
rock was later intersected in drilling. No doubt both Guyana
diamonds and gold are on BHP's radar. Golden Star is along
for a free ride until a bankable feasibility study is completed,
when presumably they will have to kick in some cash (maybe
their share of start-up costs?)
Barrick Gold has also just signed a letter of intent with
Rimfire Minerals, on their RDN Property, 40 kilometres south-southeast
of Eskay Creek. The RDN Property is 21 kilometres long and
occupies similar stratigraphy to Eskay Creek. We haven't done
an analysis of the area, but conceptually, determined exploration
for another Eskay Creek is certainly worthwhile.
With these three stories; one of which is a resounding success,
I want to underscore yet again that exploration can have really
big payoffs - if an exploration programme is well-conceived,
adequately funded, and staffed by experienced personnel. Sure
it is risky, but the "elephants" are not going to be found
in areas that have been pincushioned with drill holes over
a fifty year period. Exploration requires vision, innovation,
and a certain amount of "outside the box" thinking.
Steps in the Exploration Process
I promised an item on "area selection" for exploration, though
space constraints won't allow justice to the topic this week.
I'll borrow from the Society of Economic Geologists, Special
Publication #3, "Ore Reserve Estimates in the Real World"
(third edition). It is chocked full of goodies and I urge
anyone who wants to get into the nuts & bolts of deposit delineation
to get a copy:
(a) Conception (Idea) Stage: Selection of areas and/or district
in which to conduct exploration. Literature search with some
field investigation.
(b) Reconnaissance Stage: Broad-scale prospecting. Airborne
geophysics, regional geologic mapping, stream sediment geochemical
surveys, etc. Purpose is to screen a large area for existence
of potential targets warranting detailed work.
(c) Land Acquisition: Stake claims, lease large blocks of
ground with few or no known mineral showings.
(d) Detailed Exploration Stage: Detailed geological mapping,
geophysical and/or geochemical evaluation of specific target
areas. May include some reconnaissance drilling of anomalous
areas.
Quite often a company will be brought into an area by reading
a project outline submitted by a junior company or prospector.
There are of course a great many parameters that come into
play in selecting an area to explore in. First of all, what
country? Companies will choose to explore in areas that have
demonstrated good mineral endowment, are considered underexplored
and prospective, and that have governments favourably disposed
to granting secure tenure to mineral lands.
Exploration projects have two types of inherent risk factors:
geological risk (in other words the risk that through best-efforts
exploration does not identify an economically feasible deposit)
and country risk (the likelihood you can develop a mine once
you have identified the deposit). Sadly, there is no area
on Earth that can be presently considered "problem free" for
exploration. Every country has its own pros and cons. There
are many investors who refuse to invest in companies that
explore outside of North America. While the "rule of law"
is respected in North American regimes perhaps more so than
in other parts of the world, North America (the USA in particular)
has the dubious distinction of being the most litiginous society.
This factor has driven a lot of companies offshore to greener
pastures. Also large tracts of wilderness in Canada and the
United States have been permanently ruled off-limits to minerals
exploration by federal, state and provincial mandate. Projects
are often held up for years by environmental hearings and
appeals, aboriginal rights claims, and other factors.
Other factors in the decision making process may be personal
security concerns, corrupt governments or anti-Western governments.
For instance, Colombia is very prospective from a geological
standpoint, but a basket case to work in due to guerilla activity
and the kidnapping of foreigners. Company managers will often
use softened language to describe problem countries as "challenging
work environments". In reality it means that it may be 'bloody
difficult" to get anything done. In these cases, key timelines
for project development may be unattainable, it may be difficult
to attract or find qualified staff - there are a whole host
of problems. Individuals can sometimes be legally prohibited
by their country of nationality from investing in projects
in certain other countries. Though there are numerous interesting
mineral plays in the Muslim world it might not be the optimal
place for investment at the moment. Some of the more challenging
countries are Congo, Sierra Leone, North Korea, Kazahkstan,
Venezuela, Cuba, Iraq, Myanmar and Angola. There are mineral
projects underway in all these countries, but it needs perseverance
and a lot of hard slogging to make them work. Of course a
major consideration in the Third World is the likelihood that
your project may be expropriated and handed to friends of
the government once you have identified a resource. It's important
to examine the track record of a country.
Next week: some discussion of one of those favourite intangible
words in the lexicon of a mining promoter - "anomaly". We've
seen it plenty of times, what does it mean?
April 28 2002
Keith M. Barron Ph.D.
kmbarron@compuserve.com
© Copyright 2001-2002 Keith Barron
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