Castle Gold hikes El Castillo resource (September 15, 2008)

Using a higher gold price of US$625 per oz., Castle Gold (CSG-V, CSGLF-O) has increased resources at its El Castillo heap-leach open-pit mine in Durango state, Mexico, by 16% and boosted reserves by 50%.

An updated technical report puts measured and indicated resources at the mine at about 94 million tonnes grading 0.39 gram gold per tonne, equivalent to about 1.2 million oz. gold at a cutoff grade of 0.15 gram gold per tonne. Proven and probable reserves (which are a part of the resource) stand at 47 million tonnes grading 0.5 gram gold, amounting to 750,000 oz. gold. Castle Gold may be able to increase the resource by infill drilling, as well as drilling outside the pit; further drilling is planned for the fourth quarter.

The National Instrument (NI) 43-101 technical report recommends raising the mining rate to 5 million tonnes per year, and annual production to 52,000 oz. gold.

At this production rate, and assuming a gold price of US$625 per oz. and a 10-year mine life, the net present value (NPV) of the mine is about US$54 million at a discount rate of 10%.

At the same gold price but a discount rate of 7.5%, the NPV increases to US$61 million, while a 10% discount rate and higher price of gold at US$750 per oz. would raise the NPV to US$80 million.

El Castillo, which started operating in July, is currently producing about 15,000-20,000 oz. gold per year. But Castle Gold CEO Tom Atkins believes the company can reach the higher production rate recommended in the technical report in the second half of 2009 with minimal capital spending.

Castle Gold owns 100% of El Castillo, located about 120 km north of the state capital, the city of Durango. The nearest town is San Juan Del Rio, about 10 km distant. Water is pumped from wells, and electricity is produced by small generators on-site, and used to power a crusher and pumps in the heap-leach circuit. The mine is accessible by paved road. It employs 60 to 80 workers, most of whom are contract miners.

Castle’s second producer is the El Sastre mine in Guatemala, where it owns a 50% interest, with Guatemalan partners owning the balance. At a cutoff grade of 0.5 gram gold per tonne, proven and probable reserves are 500,000 tonnes grading 2.5 grams gold, equivalent to 40,000 oz. Inferred resources stand at 300,000 tonnes at 2.2 grams gold, or 21,000 oz. gold. El Sastre, also an open-pit, heap-leach operation, reached commercial operation in 2007 and is currently producing at a rate of 10,000-15,000 oz. gold per year.

Arenal, a satellite deposit 1 km away, holds an inferred resource of 1.8 million tonnes grading 1.3 gram gold per tonne, or 76,000 oz. gold.

Castle Gold holds 50% of the deposit, which it plans to develop as an open-pit, heap-leach operation. Infill drilling to upgrade the resource to the measured and indicated categories is planned for the fourth quarter, with a scoping study to follow by the second quarter of 2009.

There are 40 to 50 workers, most of whom are contract miners, at El Sastre. The property is located about an hour’s drive north-northeast of Guatemala City, and Atkins says the company has good relations with both government and the community, and no security problems. Taxation is 5% on sales plus a 1% royalty on sales.

Turning back to Mexico, Castle Gold owns 100% of the La Fortuna development project in a remote location near the western boundary of Durango state, about 100 km from Culiacan. The 100-sq.-km project holds a past-producing mine where gold, silver and copper were mined in the 1880s, processing 200,000 tonnes grading 20 grams gold per tonne. A total of 121 historic holes (19,000 metres) were drilled from the 1970s to the 1990s by San Fernando Mining, while Alamos Gold (AGI-T, AGIGF-O) conducted bulk sampling.

At a cutoff grade of 0.5 gram gold, a 1995 estimate put historic resources at 4.5 million tonnes grading 2.25 grams gold or 322,000 oz. gold, with 30 grams silver and 0.23% copper.

Castle highlights a number of historic holes (for which true widths are not known). For example, hole 7 returned 51 metres of 7.4 grams gold, 30 grams silver and 0.5% copper, from a depth of 22 metres. Hole 6 cut 42 metres of 7.4 grams gold, 32 grams silver and 0.7% copper, from a depth of 52 metres. And hole 3 cut 44 metres of 6.4 grams gold, 27 grams silver and 0.45% copper, from 27 metres. Atkins says that mineralization is open along strike, laterally and at depth. Metallurgical tests by previous owners showed recoveries in a range of 84-98%.

Castle Gold is planning to proceed with an NI 43-101 resource estimate for La Fortuna. So far, it has drilled six holes twinning historic holes, and is awaiting assays. Metallurgical testing is in progress, which will be followed by surface exploration, and later by drilling. A scoping study is planned for the second quarter of 2009. Since the mineralization is located below a hilltop, various mining scenarios will be considered, such as an open pit, an adit, etc.

A new highway from Culiacan currently being built will pass in the vicinity of La Fortuna, improving accessibility. Electricity is not available, so if the project goes into production, diesel generators will have to be used, while water could be pumped from area rivers, or a small dam could be built. Atkins believes that labour would be available should the deposit prove economic, despite the remote location.

For the year to December 2007, Castle Gold had revenues of US$7.8 million and a net loss of US$1.5 million.

For the six months to June 2008, Castle Gold had revenues of US$2.4 million and a net income of US$450,000.

On June 30, the company had US$1.5 million in cash and equivalents, while long-term debt stood at US$6.4 million. Castle Gold has 88 million shares fully diluted.