Queenstake moves forward

Vancouver — As gold continues to lose its lustre, prospective miners are becoming more imaginative in an efforts to get their projects off the ground. Queenstake Resources (QRL-T), for example, has inked two separate deals designed to place its low-grade Magistral gold project into production.

“Although few gold projects have been developed in the past few years, management believes that development of a new mine at a low point in the gold price cycle is an ideal means to take advantage of any increase in gold price, while the downside is protected by the intrinsically low-cost nature of Magistral,” says Chris Davie, Queenstake’s president.

The first deal provides the US$6.125 million required to move the project forward. A private company, Midwest Mining, has agreed to supply the capital in return for a 50% stake in the Magistral joint venture and 15% of Queenstake’s U.S. subsidiary, Pangea Resources. Pangea owns the shares of the Mexican company that holds the Magistral property.

On closing, US$625,000 will be used for pre-construction activities (including the cost of the second deal) and permitting and detailed engineering. The balance will be used when a production decision is reached.

Midwest will receive preferential payback from 70% of the cash flow generated from the operation until its contribution and an initial return of 12% have been paid. A penalty clause is in place if the payback is not achieved in five and a half years.

A production decision must be reach within nine months or Queenstake will repurchase Midwest’s interest for US$750,000, which is payable in cash or stock.

In an effort to trim equipment costs, the joint venture acquired a six-month option over all the shares of Campbell Resource’s (CCH-T) Mexican subsidiary, Oro de Sotula, which owns the past-producing Gertrudis gold mine in Sonoro, Mexico.

Option payments are pegged at US$25,000 per month, with a total purchase price of US$2 million. Oro’s mining equipment at Santa Gertrudis is appropriate for use at Magistral, but there is a lack of secondary and tertiary crushing equipment.

With these deals under its belt, Queenstake feels that the project can be placed into production at substantially lower capital cost, relative to the feasibility study, and will generate positive cash flows at gold prices as low as US$260 per oz.

Last year’s feasibility study on Magistral defined a minable reserve, at US$300 per oz. gold, of 6.15 million tonnes grading 1.86 grams gold per tonne. The strip ratio comes in at 5.6-to-1. Recoveries average 73% over the first seven years of operation.

The ore will be mined from four pits — San Rafael, Samaniego Hill, Sagrado Corazon and Lupita.