Fortune turns for Jacobina

The Jacobina gold district of Bahia state, Brazil, is one of those famed areas like Kalgoorlie in Western Australia or the Porcupine in Ontario: everybody knows all about them — or to be more precise, everybody knows the sweeping generalizations about them.

The sweeping generalizations in the Jacobina district, that the deposits are probably paleo-placers, analogues of the conglomerate-hosted gold of the Witswatersrand Basin in South Africa, haven’t proved useful in keeping the district in business over the last decade. Some different geological thinking, combined with classical garimpeiro find-me-some-gold prospecting, has set up new drill targets in some unexpected places on the belt, targets that could mean a significant mine life at Desert Sun Mining’s (DSM-T) Jacobina project.

Desert Sun’s history at Jacobina begins in August 1996, when William Resources bought Jacobina from subsidiaries of Anglo American (AAUK-Q), which was reorganizing and disposing of assets it no longer wanted. Jacobina was a high-cost mine that had little attraction for Anglo; William was a company led by mining engineers that took the attitude that it could turn around underperforming operations.

That lasted only sixteen months: low prices and continued high costs sunk Jacobina and liabilities sunk William. But while William management was cleaning up the assets of the company in a restructuring, the gold price was turning, the Brazilian real was falling drastically against foreign currencies, and it began to look like Jacobina might have a future after all.

Much of that future was tied to the depreciating real, which had fallen from rough parity with the U.S. dollar in 1997 to US34 in 2002. Real-denominated expenses making up about three-quarters of Jacobina’s costs, it became clear that the mine now had an exchange-rate advantage it hadn’t had when it was closed in 1998.

Jacobina had another disadvantage at the time it was closed: a lack of investment. It had a narrow, track-width main haulageway and a mill that had gone without renewal for too long. That meant that Desert Sun would face high costs, but it also meant that — given the relatively cheap costs of capital in the early 2000’s — an investment that would pay off in lower costs could be recovered more quickly than in the late 1990s.

The company took the opportunity when the financing valve re-opened for junior mining in 2002 to raise money for pre-production work at Jacobina. There were two main tasks: renovating the underground mine and refurbishing the mill.

Jacobina had suffered from bottlenecks in previous production, so much of the task in the mine was to engineer those out of the way. Underground crushing, which had given both Anglo and William problems, was eliminated.

To make underground haulage more efficient, the main haulageway was slashed out and converted for much larger rubber-tired equipment. “We’re basically taking small open-pit equipment and putting it underground,” says Bruce Humphrey, Desert Sun’s president, who came over after a tour as chief operating officer at Goldcorp (g-t).

The changes, which altogether cost about US$30 million, are expected to allow production of 100,000 oz. annually at cash costs around US$189 per oz., according to a feasibility study prepared by SNC Lavalin (SNC-T), which assumes an exchange rate for the real of US33.

The new operation will mine reserves of 10.7 million tonnes grading 2.6 grams gold per tonne over a 7-year period. Production of an average 106,400 oz. a year at US$350 per oz. would bring in a cumulative cash flow of US$78 million.

Discounted at 5%, the net present value of the project is US$55 million, and its internal rate of return is 52%.

The light price tag for the capital cost, says Humphrey, comes from an established mining infrastructure around Jacobina, including roads and a water dam; anywhere else, he says, “you couldn’t do this for US$30 million.” The mine also has the advantage of strong government support, from both the state and the local municipality. Bahia state is repaving the mine road, and has provided a new electrical substation on the national power grid.

With some of its disadvantages out of the way, Jacobina’s natural advantages start to appear. The conglomerate host rock is highly silicified and thus very competent. Because the host rocks form prominent ridges, the zones can be mined from ramp-access workings and most of the mining is shallow, down to 150 metres below surface. The ore zones are mainly 16 to 20 metres wide, allowing them to be bulk mined, and there is only limited development necessary in unmineralized rocks of their hanging wall or footwall. Ore can be hauled direct to surface, knocking out capital costs for shaft sinking and operating costs for hoisting. Crushing has been moved entirely to the surface plant.

Jacobina ore is not difficult to treat. The renewed mill is expected to recover more than 96% of the gold in the ore, using a simple flowsheet of crushing, grinding, cyanide leaching and electrowinning. The mill had suffered from a lack of maintenance, and some 25-cm-diameter pipes were down to a 10-cm opening. The ball mills were relined and their motors rewound, and the mill should start to receive development ore in a month or so.

Desert Sun’s credibility as a producer will hang on providing gold at the cost predicted in the feasibility study, but its future as a mining company will hang on extending that short 7-year mine life through converting resources to reserves and finding new deposits. It’s here that the sweeping generalizations are being tested, and found wanting.

Historical production at Jacobina came from a handful of deposits, all along a corridor bounded by the contact between Proterozoic quartz-pebble conglomerates to the east and an Archean-aged granite and migmatite basement complex to the west. The last three mines to be operated, Canavieiras, Joao Belo, and Itapicuru, cluster in the area immediately south of the town of Jacobina.

When the mine closed in 1998, there were already resources blocked out but not brought into reserves. The easy choice, as it is anywhere, was to convert resources into reserves and to drill open extensions of the known zones to extend the resources. Drilling at the three past-producing deposits, and at two other zones — Serra do Corrego and Joao Belo Sul — has put together a measured and indicated resource of 24.8 million tonnes grading 2.5 grams gold per tonne, 688,000 oz. more than the August 2003 estimate of 14.8 million tonnes grading 2.9 grams per tonne. Another 22.2 million tonnes of inferred resources grade 2.6 grams per tonne.

On the assumption that about 90% of the 2-million oz. measured and indicated resource can be turned into reserves, a scoping study gives Jacobina a mine life of 13 years, producing around 150,000 oz. per year at about US$169 per oz. That project would have a net present value of US$169 million (again at a 5% discount rate) and an internal rate of return of 52%.

That the known deposits generally occurred as disseminations of free gold in the matrix of a quartz-pebble conglomerate fostered the view that they were similar to the paleo-placer gold deposits of the Witswatersrand, and exploration stuck to stratigraphically-defined “reefs” where mining had been concentrated.

But the Jacobina Group of sediments extend along a 75-km strike, and many of the features of the immediate mine area can be found along its whole length. Added to that, garimpeiros had worked the whole length of the district in the old days, and were doing so into the 1990s. And some of the mineralization was not typical, and not like a paleo-placer: there were quartz veins and there was definite hydrothermal alteration around all the mineralized zones, particularly the green mica, fuchsite, known from many volcanic-hosted gold deposits.

That has opened up possibilities all along the Jacobina ridges. One sign the new l
ook may be paying off is that exploration drilling at the Pindobacu prospect, near the north end of the belt, intersected several long gold intersections, including one of 21.9 metres grading 5.5 grams gold per tonne. If intersections like that can be lined up into resource blocks, there may be a renewed shot at fame for Jacobina.

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