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“It took us two-and-a-half years to consolidate the famous gold and silver district,” says Fred George, Gammon Lake’s president.
With gold reaching as low as US$254 per oz., many of majors had closed their exploration offices in Mexico during the latter part of the 1990s.
“I thought that was a perfect time for me to fly to Mexico, meet the government and make a deal to help consolidate the whole district,” explains George. “I was the only player there.”
Ocampo is a historic mining district in the Sierra Madre Mountains, with recorded production in the late 1800s of over 3 million oz. gold and 60 million oz. silver. The project is 235 km west-southwest of the state capital of Chihuahua or 310 km by road. It can be reached via Federal Highway 16 by a government-maintained, 27-km-long gravel road from Cahuisori. The town of Ocampo, with an estimated population of 500 people, lies at the eastern edge of the project area. Ocampo has recently been connected to the national electrical grid via a 33kV power line. The project area ranges in elevation from 1,600 to 2,200 metres.
To the end of June 2004, the company had outlined total resources of 7.5 million oz. on a gold-equivalent basis. The project contains 1.8 million oz. gold and 77 million oz. silver (or 3 million oz. gold-equivalent) in the measured and indicated categories, plus an inferred 2.6 million oz. gold and 128 million oz. silver (4.5 million oz. gold-equivalent). The resource estimate was calculated by Mintec of Tuscon, Ariz.
The total resource is split between two areas, the Northeast, which contains both underground and surface potential, and the PGR open-pit area. The mineral deposits consist of steeply dipping mineralized quartz veins, typically 2.5-3 metres wide in the underground areas, and 25 metres wide in the open-pit areas.
Gammon Lake is developing Ocampo as a combined open-pit and underground mining operation based on a positive bankable feasibility study completed in November 2004 by Kappes, Cassiday & Associates, which incorporates ore reserves developed by Mintec.
With proven and probable ore reserves containing more than 1.3 million oz. gold and 56 million oz. silver (2.3 million oz. gold-equivalent) in 33.6 million tonnes grading 1.25 grams gold and 52 grams silver per tonne, Gammon Lake is advancing the first phase of development that includes an underground mine and 1,500-tonne-per-day mill, as well as an open-pit and 11,400-tonne-per-day, heap-leach operation.
Annual production is expected to average 170,000 oz. gold and 6 million oz. silver (270,000 oz. gold-equivalent) for the first seven years at a cash cost of US$10 per oz. gold, with silver as a credit, or US$152 per oz. on a gold-equivalent basis.
In the open pit, the reserve consists of a high-grade core, bordered by a halo of low-grade ore material. The low-grade ore, comprising 16.3 million tonnes grading 0.27 gram gold and 8 grams silver, is equal to 142,000 oz. gold and 4.2 million oz. silver. It’s material that must be moved in order to mine the higher-grade ore, which stands at 14.2 million tonnes grading 1.67 grams gold and 62 grams silver, representing 760,000 oz. gold and 28.2 million oz. silver. The stripping ratio over the life of mine is 5:1.
The higher-grade ore in the pit will be subject to three stages of crushing, whereas the low-grade material receives only primary and secondary crushing. Recovery rates for the low-grade ore are expected to average 77% for gold and only 46% for silver; those numbers improve to 87% for gold and 72% for silver in the higher-grade portion of the pit.
Underground development
Gammon Lake has spent the past couple of years underground on the Northeast area developing ore reserves, which are currently defined on six levels of the mine at 3.1 million tonnes grading 4.49 grams gold and 236 grams silver, equal to 443,000 oz. gold and 23.4 million oz. silver. The Northeast reserve has been developed by driving a ramp from surface. As each 60-metre level is reached, drifts are driven along the veins. Initial production will come from four veins. More than 9 km of underground development has been completed to date.
Shrinkage stoping is being used for all ore development, with footwall drifts in waste and horizontal draw-points at 10-metre intervals. Mining will be done using jacklegs. All ore removal, hauling and transport will utilize end loaders and trucks.
Ore will be hauled from the stope areas to a production shaft and then hoisted to the surface. The hoist, with a 6,000-tonne-per day hauling capacity, will more than meet the requirements of a 1,500-tonne-per-day operation. The shaft collar is adjacent to the processing plant, which will employ a conventional agitated leach cycle with precipitation of gold/silver using the Merrill Crowe process. Recoveries are forecast at 96% for gold and 93% for silver.
“In order to keep (the) mill full with ore, you must have sixteen stopes ready; we will have forty stopes ready to pull from,” predicts George.
“We are far, far ahead on our underground mining,” concurs Bradley Langille, chief executive officer. “We will have no problems at all meeting our 1,500 tonnes a day.”
The project carries a capital cost of US$104 million, and with an impressive after-tax internal rate of return of 52%, payback is expected in just 1.6 years based on prices of US$400 per oz. gold and US$6.50 per oz. silver. The after-tax net annual cash flow is forecast at US$37 million.
“The robust economic projections demonstrate that Gammon Lake’s 100%-owned Ocampo project has the potential to become a very successful gold and silver mine,” the 2004 feasibility study predicted.
State support
Mexican federal and state government officials have demonstrated strong support for the Ocampo project by agreeing to provide 25 km of road paving between Cahuisori and Ocampo, and by bringing in industrial electrical power to the mine site. “These initiatives will cost the government US$25 million, and are going to reduce our cash costs per ounce,” said George.
Gammon Lake is strongly backed by BMO Nesbitt Burns, which has helped raise $163 million for Gammon in the last couple of years, including $110 million in January 2005 to fund construction and development of Ocampo. The company sits with 72.4 million shares outstanding, or 83.5 million fully diluted.
Gammon Lake began breaking ground in March 2005, after assembling a mine-development and operations team led by Chief Operating Officer John Thornton, formerly vice-president of Mintec. The engineering firm Kappes, Cassiday & Associates was hired to construct the mill and heap-leach facilities under an engineering, procurement and construction management contract.
All major earthworks are essentially complete, including the fresh water storage dam, heap-leach crushing facilities, 1.3-km-long overland conveyor, milling facilities, and leach-pad area for the first 10 million tonnes of ore. Six of seven staff hotels are finished and ready for operations staff to take up residence. The mine will create about 350 permanent positions. At the moment, there are over 1,000 people on-site during the construction phase.
All the major components for a heap-leach crusher have been delivered to site. The 1-year-old crusher was purchased from Battle Mountain, Nevada.
Site preparation on a 2-sq.-km area of the open pit began in June. A 13-km network of roads will provide access to three of the open pits. The open-pit area will eventually stretch for about 4 km and include five pits. Ore is being stockpiled next to the primary crusher and will be processed
and stacked following the commissioning of the crushing and heap-leach facilities, in the next few weeks.
January start
“We should be producing gold in January from the heap leach,” says Langille. “The mill will come on a few months after that.”
The lifeblood of this project is the construction a 35-metre-high dam, designed to hold just under 1 million cubic litres of fresh water. “This will be one of the largest lakes in the Sierra Madres,” joked Thornton during a Global Resource conference held earlier this year by BMO Nesbitt Burns. The fresh water dam will meet the needs of a 4.5-million-tonne-per-year heap leach and a 500,000-tonne-per-year underground mining operation.
Ore is also being mined from a sequence of selected stopes on two levels of the upper level of the underground mine, and stockpiled until the mill is up and running, which is anticipated to be in the first quarter of 2006. More than 40,000 tonnes of underground ore is stockpiled on surface. The production shaft has been completed, with work currently focused on the installation of the hoist.
In addition, all of the mining equipment has been procured, including the purchase of a fleet of 17 new Terex haul trucks, as well as six shovels and loaders, five dozers, six blasthole drills and road maintenance equipment. All of the major mill components have been purchased and some are already at the project site.
The project life of seven years is based on existing reserves, but development of known resources is expected to significantly extend the mine life. Existing ore reserves are based on drilling completed up until June 2004.
The company plans to incorporate any added ounces into a second phase of mine development. With that in mind, the heap-leach pad area has been designed so that it can expand to hold 55 million tonnes of ore, and the underground operation is capable of quickly doubling its output to more than 1 million tonnes annually. As well, the mill has been designed so that it can be easily expanded to 3,000 tonnes per day.
Gammon Lake has continued to mount an aggressive exploration drilling program aimed at expanding the resource and upgrading measured and indicated ounces to proven and probable. A total of 331 holes in over 40,000 metres of new drilling have been completed since the last resource update in June 2004. A revised reserve and resource calculation is expected before the end of the year. To date, the Ocampo deposits are defined by more than 1,000 holes totalling 177,000 metres of drilling.
“When we go into production, I feel pretty confident that we will be at about 2.5 million ounces contained gold for phase one and phase two,” predicts Thornton.
“Finding the gold is like fishing in a barrel,” says George. “If you think I have hit a wall and there is no more gold in Ocampo, think again. Watch out for that new updated resource because I am going to surprise everybody.”
Predicts George: “This district will have thirty or forty years of mine life.”
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