Andean Advances Cerro Negro

SITE VISIT

PERITO MORENO, SANTA CRUZ, ARGENTINA — The name Andean Resources (AND-T, AND-A) conjures images of snow-peaked mountains, but in reality, Cerro Negro, Andean’s advanced gold-silver exploration project, rises above Patagonia’s pampas at a moderate elevation of 300- 1,000 metres in Argentina’s mining-friendly Santa Cruz province.

Having been at work drilling the 250-sq.-km project since 2005, Andean has discovered a high-grade, low-sulphidation epithermal gold-silver deposit on Cerro Negro in two zones: Eureka and the Vein zone. And with a resource estimate, as well as a prefeasibility study projecting solid returns, Andean’s objective now is to move Cerro Negro to development.

Andean’s operation would not be the first mine here in the northwestern corner of the Deseado Massif. That honour belongs to Minera Andes (MAI-T, MNEAF-O) and Hochschild Mining’s (HOC-L, HCHDF-O) San Jose silver-gold mine, 27 km to the north.

“This is really a gold area . . . on a global scale, which still is very much underexplored,” says John Clifford, Andean’s consulting geologist.

And the geology of Cerro Negro itself is remarkable. “The mineralization here is really classic epithermal- style mineralization. And in fact I would say that, in years to come, this area — Eureka in particular — will end up in the geology textbooks,” Clifford says.

The reason Clifford says that is that the full spectrum of the epithermal system is visible at Cerro Negro. On hills a few kilometres southeast of the Eureka main vein exposure, there are exposures of silicious rocks with evidence of hot spring activity, he says — exactly the type of geological features you would expect at the paleo-surface above these epithermal systems.

The mineralization usually starts at 50-75 metres depth. Clifford says that, in the Deseado Massif, the pay zones normally have a vertical extent of 250-300 metres.

Andean hopes to complete permitting at the end of the year, and to follow it with construction. A bankable feasibility study is also expected by year-end, but it will be based on different parameters from those used in the prefeasibility study. The changes are intended to lower capital costs, raise head grades, and enhance returns.

To achieve this, the new study will halve the anticipated mill’s throughput, and also locate it near the Eureka West zone, instead of near the Vein zone as proposed in the prefeasibility.

The Vein zone was the site of the first discovery on Cerro Negro back in 2005, but the focus has now shifted 12-15 km west to Eureka, where resources, as well as grades, are higher, with good vein continuity.

“The Vein zone veins cross in ignimbrites and tuffs — they are a lot more difficult to follow. The continuity is a much greater issue than it is at Eureka,” Clifford says. “The reason Eureka is different, we think, is that you have an andesite in the hangingwall, which is possibly an intrusive andesite, and the vein is developed at the contact of that andesite with a footwall sequence which includes ignimbrites, tuffs, and also some andesitic flows. So it’s that geological contrast that gives you the focus on vein development.”

The bankable feasibility study is expected to be based on a smaller mill initially fed from an underground mine at Eureka West, where Andean projects that the higher resources and grades will deliver robust returns, despite a lower throughput.

The prefeasibility study assumed that the larger mill would process material from an underground mine on Eureka West simultaneously with material from an open pit on the Vein zone. But with the lower-capacity mill envisaged on Eureka West, mining from the proposed open pit on the Vein zone would have to wait until Eureka is mined out.

In addition, the bankable feasibility study numbers will probably be based on using second-hand mill equipment, and on contract miners using their own mining equipment.

Using assays from 341 holes totalling 84,000 metres, Andean has compiled a resource estimate for Cerro Negro. Indicated resources on Eureka include resources from three zones: Eureka West (with the largest resource by far), Eureka Main, and the 721 vein. At a cutoff grade of 3 grams gold per tonne, indicated resources are 3.6 million tonnes grading 12.3 grams gold and 179 grams silver, for 1.4 million oz. gold and 20.8 million oz. silver.

Inferred resources at Eureka stand at 962,000 tonnes of 7.6 grams gold and 79 grams silver, for 235,000 oz. gold and 2.4 million oz. silver. (The indicated and inferred resources include dilution from mining.)

The Vein zone only holds about half as much, and at far lower grades. At a cutoff grade of 1 gram gold per tonne, indicated resources on the Vein zone are 4.6 million tonnes of 3.7 grams gold, for 554,000 oz. gold, and inferred resources are 4.3 million tonnes grading 2.7 grams gold, for 367,000 oz. gold. Silver resources in the Vein zone are not significant.

Although the prefeasibility study is no longer current, a look at the numbers is still instructive, because they give an idea of the project’s scope.

The study combined indicated resources from the Vein zone and Eureka West, estimating probable reserves of 7.2 million tonnes of 6.4 grams gold and 75 grams silver, for 1.5 million oz. gold and 17.3 million oz. silver. Total production was estimated at 1.4 million oz. gold.

The study was based on an operation delivering 2,000 tonnes per day from an open pit on the Vein zone, and another 2,000 tonnes from an underground mine on Eureka West, a combined 1.35 million tonnes per year, for a six-year mine life. For the first three years, it was anticipated to produce 350,000 oz. gold per year and 3 million oz. silver at a cash cost of US$198 per oz. gold after byproduct silver credits and provincial and federal royalties.

Initial capital expenditures were estimated at US$281 million. Based on a gold price of US$800 per oz. and a silver price of US$13 per oz., the internal rate of return (IRR) was 40%, and the payback period was two years. The net present value (NPV) was $203 million at an 8% discount rate. For the first three years, the projected free cash flow was US$170 million per year after royalties and taxes. Gold recovery was estimated at 92%, and silver recovery at 67%.

The prefeasibility study included US$17 million for a 100-km electricity supply line from Las Heras; US$7 million for a 27-km gravel road from the San Jose silver-gold mine; and water supply from a number of wells.

(The electric power available at Las Heras could be inadequate or unreliable. However, the San Jose mine is also in the process of connecting to Las Heras, an indication that power supply may be adequate.)

The bankable feasibility study will be based on a mine with half the throughput, or 2,000 tonnes per day. But it would still manage to produce 275,000-300,000 oz. gold per year during the first three years, close to the 350,000 oz. projected in the prefeasibility study, because of the higher average head grade from Eureka. Mine life is projected to at least double to 12 years.

The smaller scope would require initial capital spending estimated at less than US$180 million, or US$100 million less than in the prefeasibility study. Because of the higher head grade, cash costs during the first three years are expected to come in at only US$100 per oz. after byproduct silver credits, compared with US$198 per oz. in the prefeasibility.

The company is currently working on detail engineering for the access road. Detail engineering for the decline construction on Eureka West has already been completed, and permits to start construction of the exploration decline are in place. The company is starting with the bidding process for the construction.

The decline is envisaged to be 2.7 km long, with six switchbacks, and would take 1.5-2 years to complete. The Eureka vein averages 8 metres in width, and with good continui
ty, it is amenable to bulk mining.

Andean has conducted metallurgical tests on samples from the Vein zone and Eureka West. Eureka material, for example, returned gold recoveries around 90% and silver recoveries in the 64-74% range.

An environmental impact study is in progress, as is a baseline monitoring program. Company representatives have met with government, local residents and landowners to familiarize them with the project.

Andean believes that both the Vein zone and Eureka warrant further exploration. For example, the Eureka southeast extension corridor has seen little systematic exploration. But apart from the Vein zone and Eureka, Cerro Negro has about half a dozen other prospective targets, including Mariana, Herradura, Bajo Negro, Pescado Rabioso and Silica Cap. Drilling, currently off for the Argentinean winter, will resume in September or October.

Holes 901-913 at the Bajo Negro target recently returned intersecting mineralization. Hole 913 cut 7.75 metres of 39 grams gold per tonne and 45 grams silver from a depth of 205 metres. Hole 908 cut 6 metres of 24 grams gold and 22 grams silver from 166 metres. And hole 904 cut three intercepts, one of which was 6 metres of 12 grams gold and 14 grams silver, from 111 metres.

The climate here is semi-desert. Cerro Negro is 300 km by paved and gravel roads southwest of the port city of Comodoro Rivadavia (population 140,000) via Las Heras. The nearest village is Perito Moreno, 165 km away on paved and dirt roads. The village has an airstrip. The road crosses the small river of Rio Deseado.

Fremantle, Western Australiabased Andean had working capital of about A$20 million on March 31. The company has 405 million shares outstanding. At presstime, Andean Resources shares were trading at $1.72 apiece in a 12-month window of 40¢-$2.

CIBC analyst Barry Cooper rates Andean Resources as outperform, with a $2.50 target. Dundee analyst Ron Stewart rates the shares a buy, with a $2.10 target.