Greystar poised to build Colombia’s flagship mine

VANCOUVER–Defining a gold resource of 10.15 million oz. based on 717 drill holes totalling 244,443 metres is a major accompl i s h – ment for any junior company aspiring to make the leap from exploration to production.

G r e ys t a r Resources (GSL-T, GYSLF-O) released this upgraded and

expanded resource for its wholly owned Angostura project, in Colombia, in late 2007, and weeks later reported that drilling in a high-grade portion of the deposit had returned 15.42 grams gold and 153.5 grams silver per tonne over 19.75 metres.

Yet this flurry of good news didn’t do much to boost the company’s share price, which flits between $5 and $6 in a 52-week trading range of $10.44-4.40.

Eduardo Baer, a mining analyst for Toronto-based Octagon Capital, says most development-stage companies are under scrutiny and pressure because of concerns about escalating capital costs associated with large-scale mine development, high gold prices notwithstanding. While he doesn’t believe such concerns are always justified, he says companies working in Colombia have always traded at a discount because of real or perceived security concerns related to the presence of gangs and guerillas, notably the Revolutionary Armed Forces of Colombia (FARC) and its notorious use of kidnapping as a terror tactic.

“You can’t minimize security risk, and the presence of FARC is still felt, but these issues are being addressed,” Baer says, adding that the numbers of guerillas and kidnap-pings have declined in recent years, particularly since President Alvaro Uribe was first elected in 2002.

Polls consistently show that Uribe enjoys strong support for his free-market reforms and successful campaigns against the FARC and other armed groups. Baer saysmany more Colombians support “Plan Colombia” — the U.S.-backed strategy to combat the narcotics industry, promote peace, revive the economy and strengthen democracy — than the socialist “Bolivar Revolution” championed by Venezuelan President Hugo Chavez. He also notes thatColombia nowranks next to oil-rich Venezuela, and ahead of Peru and most other South American nations in the Human Development Index, the normalized measure of life expectancy, literacy, education, standard of living and per capita gross domestic product.

Colombia’simproved securityclimate may not be fully appreciated by investors, but the stability has allowed Greystar to accelerate work programs to advance its flagship Angostura project toward feasibility and ultimately initial production in late 2010.

“The address is no longer the big issue that it once was,” says Frederick Felder, executive vice-president of Greystar. “We don’t find it challenging to work here as we’ve invested very heavily in this project, in many areas, and over many years.”

During the tough early years, Greystar worked proactively with the government to address security and mining-law issues, and consulted extensively with community and church leaders on social, environmental and economic matters. These initiatives helped the company win the support of nearby communities in Santander state, northeast Colombia.

Angostura is also a flagship project for Colombia, which doesn’t yet have a large-scale operating gold mine, despite being one of the most underexplored and geologically prospective South American nations for precious metals. Local support for the project has grown because Angostura is literally being developed as a “Colombian” mining project. With a workforce of 420 people on site, all are Colombians, except one.

“I’m the only foreigner,” Felder quips, adding that Greystar has implemented capacity-building and training programs to ensure that locals get the “best jobs” instead of just low-level ones.

Greys tar invests about US$200,000 annually to support local social programs, particularly in the nearby community of California, which has a population of about 1,800. Education and training programs are priorities, and roughly half the workforce is currently involved in programs to upgrade their skills. The company supports an experimental farm, managed mostly by women, that provides produce to the community. It also invests in a micro-credit lending program that has successfully launched 40 local projects. These investments are guided by the principle that the company shouldn’t pretend to replace the state.

The programs have practical goals too, such as training locals as heavy-duty equipment operators, and hiring Colombian geologists, engineers and business professionals who would ideally remain with the project as it advances to production.

“We rely heavily on local engineers and contractors,” Felder says. “We intend to continue this practice because the costs are lower, and also because the big engineering firms are over-stretched and don’t always have the resources to do the job properly. Nobody wants to talk about this, but it’s a big problem in the industry.”

The capital costs of the Angostura project will be determined by a feasibility study scheduled to begin in the second quarter of 2008. A previous scoping study (May 2007) estimated initial capital costs of US$380.4 million and sustaining capital over the life of the mine at US$140 million. This estimate has a base date of Jan. 2007, with no allowance for subsequent cost escalation.

Felder says capital cost inflation in Colombia is “nowhere near” the levels experienced in established mining jurisdictions, and adds that concerns about rising capital costs at Angostura are more perception than reality.

“We’ve always been very cost-conscious,” he says, pointing to the company’s “all-in” HQ drilling costs of about US$115 per metre, well below prices paid in over- heated mining jurisdictions.

The scoping study was based on in-pit provisional reserves of 167 million tonnes grading 1.28 grams gold and 5.82 grams silver per tonne, or 6.8 million oz. gold and 31.2 million oz. silver, using a 0.5- gram cutoff grade, a US$500-peroz. gold price, and a 4.4:1 strip ratio. Production was projected to average 395,000 oz. gold and 1.3 million oz. silver per year over an 11-year mine life. The total cash cost to produce an ounce of gold was estimated at US$276.

The independent study estimated an internal rate of return of 14.2%, using a base case average gold price of US$550 per oz. in the first year, US$525 per oz. in the second year, US$515 per oz. in subsequent years, and a silver price of US$9 per oz. throughout the mine life. At the time, Greystar president David Rovig said the study confirmed “an economic gold project” with “considerable potential to optimize value.”

The proposed mine plan in the scoping study was based only on open-pit resources, however, the deposit contains mineralization that extends well beyond the open-pit boundaries, opening up the possibility of underground mining after open-pit resources are depleted. An underground program is under way to provide material for feasibility-level metallurgical, geological and engineering tests and studies.

The feasibility study will examine a larger resource than the previous estimate in late 2006. Based on the latest estimate released in late 2007, Angostura hosts combined measured and indicated resources of 234.3 million tonnes grading 1.35 grams gold and 7.3 grams silver per tonne, or 10.2 million oz. gold and 49.8 million oz. silver, with 75% of the total gold resource in the indicated category. The deposit hosts another 77.7 million tonnes grading 1.37 grams gold (about 3.4 million oz.) and 7 grams silver in the inferred category.

Of the total measured and indicated resources, 58 million tonnes are oxides and 176.4 million tonnes are sulphides.

While mining recoveries and dilution parameters were not factored in at this stage, the estimates are based on cutoff grades of 0.4 gram and 0.55 gram gold per tonne for oxides and sulphides, respectively.

Metallurgical test work is ongoing and will reach beyond the scoping study, which had proposed a unified ox
ide-sulphide operation that would have higher capital costs than starting with an oxide-only operation.

The feasibility study will examine a staged production scenario starting with the oxide mineralization and transitioning into sulphide resources. Column tests indicate that 91% gold recoveries can be achieved from heap leaching oxide material, with overall recoveries of more than 68% from transition materials using heap-leaching methods. Overall recovery of gold from high-grade sulphides using a combination of flotation and bio-oxidation processes is estimated at 79%.

Greystar is targeting late 2010 for the start of production at Angostura. The first phase of the staged project will be heap-leach only.

In addition to feasibility-level technical, environmental and socioeconomic programs and studies, Greystar is continuing to explore the 300-sq.-km project, with remarkable success of late.

A recent hole returned 15.42 grams gold and 153.5 grams silver over 19.75 metres from Los Laches, a high-grade portion of the Angostura deposit. Previous drilling in this area also returned high-grade results, including: 17.36 grams gold and 196.3 grams silver over 7.8 metres; 14.96 grams gold and 246 grams silver over 10 metres; and 7.78 grams gold and 43.4 grams silver over 5.45 metres. A hole drilled 50 metres east of the section that returned the aforementioned results intersected 19.9 grams gold and 23.3 grams silver over 10 metres.

Greystar has eight drill rigs turning at Angostura, and will add two more machines shortly. Because a significant portion of the contained gold occurs in higher-grade shoots (vein-vein and vein-fault intersections), ongoing drilling will test these priority areas. At least 40,000 metres of delineation drilling will focus on high-grade structures in order to upgrade resources to the measured category.

One of the rigs is testing the Las Animas gold-silver targets less than 1 km south of the Angostura deposit. One target in this area is marked by gold-in-soil geochemical anomaly measuring 200 by 300 metres where mapping and sampling have revealed similar mineralization as seen at Angostura. Drilling will test the oxide gold potential of this target, which is one of three anomalies to be drilled in the general area.

Greystar’s gold discovery costs are among the lowest in the industry, at a mere US$4.20 per oz., with many targets yet to be tested. Greystar has had more than its share of challenges over the years at Angostura, but finding gold does not appear to be one of them. –The author is a freelance writer based in Vancouver, and a former editor of The Northern Miner.