Banking on Boka

Southwestern Resources (SWG-T, SWGGF-O), a junior with nine years of Chinese exploration experience under its belt, is aggressively advancing the Boka gold project in the Yunnan province of China through prefeasibility studies.

A scoping study completed in the middle of last year outlined 5 million oz. of resources and showed the potential for a low-cost mining operation. The prefeasibility work is concentrating on geological modelling and a new resource update, along with engineering, metallurgy, plus social impact and environmental studies related to the proposed mine.

“We have been drilling pretty much continuously there since the start of the project about two-and-a-half years ago,” Timo Jauristo, Southwestern’s vice-president of corporate development, told those attending BMO Nesbitt Burns’ 2006 Global Resource conference. “There’s great potential to expand these resources and that’s what we will be focusing on this year.”

During the second quarter, three drill rigs were being used for geotechnical investigations and seven rigs continued resource definition drilling at Boka 1 and Boka 7. Southwestern recently wrapped up the delineation drilling at Boka 1 North and Boka 1 South, which host the bulk of existing resources, and is now focused on better defining Boka 7. A new resource update is expected to be ready by the end of the third quarter.

The geotechnical holes were designed to test rock quality in the proposed tailings area and potential open-pit areas. Some of the principal technical issues at Boka relate to distribution of grade in a package that, in general, has poor rock quality characteristics.

The black shales and finer-grained sediments that host the bulk of the mineralization are very badly broken up. The host rock is a combination of carbonaceous shales, slates, sandstones and conglomerates, intruded by mainly gabbro sills and dykes.

The prefeasibility study is being carried out under the direction of Ausenco, with the assistance of SRK Consulting and Golder Associates. Originally scheduled to be complete by year-end, the prefeasibility work now won’t be finished until the second quarter of 2007.

SRK is reviewing the resources, mining plan and geotechnical work.

“There are certainly challenges, but SRK felt there was nothing that was found to be, from an open-pit perspective, insurmountable,” Jauristo said. “It’s just a matter of understanding the geotechnical characteristics better and designing around it, but they didn’t run away raising their hands and saying it couldn’t be done, by any means.”

The original scoping study prepared by Hatch, an engineering and geological consultant, was a “first-pass” assessment of the Boka project addressing principally the resource base and the scope for future production from the site. Hatch examined the trade-off between open-pit and underground mining scenarios, the problems posed by the “challenging” terrain around the site, metallurgical options for processing and the likely costs associated with building and operating a modern gold mine and mill in China.

From a database of 67 holes completed to April 27, 2005, and guided by Southwestern’s geological interpretation, Hatch estimated Boka 1 North, Boka 1 South and Boka 7 collectively hosted indicated resources of 10.4 million tonnes averaging 2.88 grams gold per tonne, the equivalent of 966,000 contained ounces. These zones contain an additional 45.8 million tonnes averaging 2.97 grams gold, or a little more than 4 million oz., in the inferred category. High-grade values are capped at 31 grams, and a lower cutoff grade of 0.5 gram gold was used.

‘Experimental’ province

The Boka project is in the southwest of Yunnan province, 110 km north of the provincial capital of Kunming, a 3-hour flight from Beijing. Southwestern has focused its exploration efforts in Yunnan because it is an “experimental” province of China. All levels of government in Yunnan are supportive of foreign investment in mining. It has its own mining laws that cover permitting, from exploration to mining, at the provincial level. Yunnan has favourable tax laws, including a 5-year tax break on mining projects, because it’s considered the frontier.

Boka is accessible by 280 km of paved and gravel road from Kunming. The provincial government is currently undertaking a major upgrading of roads in the area and by the end of the year, a new modern paved highway from Kunming into neighbouring Sichuan province, will pass within 10 km of Boka. The remaining access road is expected to be sealed sometime in the New Year. When the upgrades are finished, the drive to Boka from Kunming should take about three hours.

The Boka project is focused along the western flanks of a north-south-trending plateau bounded by the Xiaojiang River to the east and the Jin Sha Jinag River, the main upper tributary of the Yangtze, to the west. The terrain in the immediate area of the principal showings is rugged with deeply incised valleys and creeks that cut across the general north-south trend of the mineralized zones. The plateau sits at an elevation of about 1,900 metres.

The climate is subtropical, with cool, dry winters. Much of the area is inhabited by local farmers with intensive terrace farming, particularly on the plateau.

The main zones of sub-cropping gold mineralization occur along the steep western slopes of the plateau between 1,600 and 1,850 metres elevation, and dip moderately into the hillside.

Southwestern owns a 90% interest in the project, which covers 157 sq. km of exploration and mining licences. The remaining interest is a 10% carried interest held by a state-owned Chinese partner, Team 209 of the Nuclear Industry of Yunnan province.

The mining permits and exploration licences covering the Boka project were originally transferred by the Chinese partner into the Yunnan Gold Mountain Mining Co., a Sino-Foreign co-operative enterprise, upon formalizing a joint-venture agreement with Southwestern in November 2002. Southwestern acquired a 90% equity interest in the joint-venture company by contributing a total of US$4 million and by paying US$1.7 million in compensation to Team 209 for closing down its small-scale mining and vat-leaching operations on the Boka 1 North gold zone.

Gold mineralization at Boka was first discovered in 1999 by the Yunnan Ministry of Geology and Mineral Resources through stream-sediment sampling and soil geochemistry. The discovery was made at a time of depressed copper prices. The Dongchuan copper mining region is south of Boka.

“Probably one of the biggest copper producers in China and quite a few of the miners who were out of work at the time, descended onto Boka to make a living,” Jauristo explained. “At one stage, there were about two thousand miners working the area. But they have been moved; there is currently no mining of that nature going on.”

Boka tunnels

The artisanal miners developed over 200 tunnels into the mountainside on Boka 1 North and South. The workings centred on narrow, high-grade zones within what is now recognized as a much broader, flat-lying to moderately dipping stratabound mineralized horizon typically 50-100 metres thick. The favourable horizon is dominated by Middle Proterozoic carbonaceous shales and calcareous siltstones, which have been subjected to ductile-brittle deformation or shearing. This has resulted in extensive multi-phase breccia development accompanied by quartz-carbonate and sulphide (pyrite) replacement.

The gold mineralization is associated with sulphides, quartz and ankerite, and has been deposited in structural and lithological traps along the favourable horizon, which extends for at least 8 km in a north-south direction and dips to the east in the order of 20 to 40.

Three main areas of mineralization have been identified: Boka 11 to the north, Boka 1 North and South in the centre, and Boka 7 in the south. Drilling to date has concentrated on the Boka 1 and Boka 7 areas.

The scope for futur
e production at Boka appears to lie in the range of 5,000-10,000 tonnes per day assuming an open-pit alternative, concluded Hatch in last year’s preliminary assessment. Hatch outlined a nominal 6,500-tonne-per-day (2.4 million tonnes per year) open-pit scenario capable of producing about 200,000 oz. annually at cash costs averaging US$143 per oz. over a 10-year life.

Infrastructure is well located. A 110-KVA power line passes within 5 km of the property and the numerous rivers in the area provide plenty of water. The needs of the local population and other socioeconomic issues are being addressed.

Capital cost estimates ranged from US$139 million up to US$235 million, reflecting the preliminary nature of the scoping study.

“There are clear economic advantages to working in China,” Jauristo said. “Some of those economic advantages have been built into these operating costs and the capital but we believe there are still a lot of economic benefits to be built into these numbers as we go into the prefeasibility study.”

The proposed operation was based on a series of open pits containing 480,000 indicated oz. and 1.7 million inferred oz. averaging a little less than 3 grams, at a stripping ratio of 6.7:1. The tabular, stratiform nature of the mineralization, which dips into the steep scarp slope and is covered by 100-200 metres of overburden and waste rock, will limit the extent of push-backs due to increasingly high waste-to-ore stripping ratios. Additional material downdip on the deposits may require a more selective underground approach, should the grades prove rich enough.

This year’s definition drilling on Boka 1 North encountered mineralization some 500 metres downdip. Hole 152 intersected 9 metres of 2.3 grams at that depth.

Hatch used a projected recovery rate of 90% based on limited metallurgical work performed on four 200-kg samples representing different ore types from the deposit. The samples selected by Southwestern were characterized as oxide, massive sulphide and mixed sulphide/carbonate/quartz mineralization. The proposed milling process entails crushing, semi-autogenous grinding and a conventional carbon-in-leach circuit.

Terrain limitations

Owing to terrain limitations, three tailings facilities are planned to be located in uncultivated discharge basins up to 6 km from the plant site. Two waste dumps were selected within 1-3 km of the mine site to minimize disturbance to the nearby town of Boka. Waste and sub-grade material from the pits will be transported by a series of overland conveyors.

At the time of the resource calculation last year, Hatch based its finding on a database of 67 drill holes, including only 11 holes on Boka 7. To the end of June, 182 holes totalling 72,800 metres had been completed on the project.

“We’re really excited about increasing the resources and defining what this operation is capable of with this prefeasibility study,” Jauristo said. “We expect to see substantial resource increases, particularly from Boka 7.”

Boka 7 was estimated by Hatch to contain 1.3 million inferred oz. in 14.5 million tonnes averaging 2.75 grams, based on the results of 11 widely spaced holes. Ten of those holes hit significant mineralization, averaging 2.5 grams to more than 3 grams across anywhere from 30 metres to over 100 metres thickness. Southwestern has since completed another 15 holes as it begins to better delineate Boka 7. Early results are a little disappointing. The best results from the recent drilling include 8.5 metres of 2.2 grams starting at 205 metres down-hole in hole 168.

“The intent has been to complete the prefeasibility study and understand better what we do have and then assess all options,” Jauristo said. “Southwestern’s strategy, historically, has not been to become the producing company, so there has certainly been interest in the project by the other major gold companies.”

Regional investigations by Southwestern have yielded anomalous gold values in stream-sediment samples for over 15 km distance in a north-south direction along the Boka landholdings. Follow-up work on some of these anomalies has resulted in the discovery of new prospective showings at Boka 8 and Xinching. The Boka 8 prospect is east of Boka 11 at the north end of the concessions. A shear zone extending for 800 metres and varying from 10-50 metres in width returned values ranging from 0.12 to 5.38 grams gold in rock-chip samples.

In the Xinching area, 3 km south of Boka 7, copper-gold mineralization was uncovered in carbonaceous slate and dolomite. A 15-metre-long channel sample across this zone averaged 5.4 grams gold and 1.4% copper. Both of these prospects will be targeted with further trenching.

Southwestern currently has 46.2 million shares outstanding or 50.3 million fully diluted. Of these, institutions hold about 20.8%, while management and directors own 23.4%. At the end of June, Southwestern had a working capital of $52 million.