LATIN AMERICA — Legal disputes upstage Latin American mining convention — Massive sulphide projects in Mexico attract attention

A year ago, delegates attending the Investing in the Americas conference in this popular tourist destination were reeling from reports that Bre-X Minerals had little, if any, gold at its Busang project in the jungles of Kalimantan. This year, the annual mining event was upstaged by allegations that Crystallex International (KRY-T) had misrepresented the status of its high-profile legal battle to “enforce rights” to a portion of Placer Dome’s (PDG-T) Las Cristinas gold deposit in the jungles of Venezuela’s Bolivar state.

The incident prompted several speakers to warn delegates to secure proper title before exploring mineral projects in Latin American countries, while others made the point that taking on a strong local partner can help foreign companies avoid ownership disputes and other legal quagmires. But the Crystallex controversy was a sideshow to the main topic of interest: how companies are positioning themselves to survive the industry downturn. “It’s the worst time for metal prices,” one delegate said, “but the best time for expansion, consolidation and mergers.”

Although attendance was down dramatically from previous years, representatives from most major companies could be seen chatting up juniors with large tracts of exploration ground anywhere from the Rio Grande River to Tierra del Fuego. And with equity markets in the doldrums, the juniors appeared to appreciate the attention.

The convention floor was also abuzz with speculation about which major might come to the aid of Inmet Mining (IMN-T). Days earlier, the Toronto-based company admitted that it was not capable of financing its 50% share of the huge Antamina copper deposit in Peru. The other 50% is held by partner Rio Algom (ROM-T).

At last report, minable reserves stood at 500 million tonnes grading 1.2% copper, 1% zinc and 12 grams silver per tonne, plus minor molybdenum and bismuth. Another 500 million tonnes carrying similar grades is in the resource category.

Inmet is evaluating a number of alternatives, including the sale of all or part of its interest in Antamina, or the sale of the company. Two majors that previously bid on the Antamina project, Noranda (NOR-T) and Rio Tinto (RTP-N), are rumored to be among the interested parties. The best odds are being given to companies with existing smelting capacity, as the proposed mine will produce six different concentrates (T.N.M. March 23-29/98). Deep pockets would be helpful too: the project’s capital costs are estimated to be a hefty US$1.7 billion.

Several presentations focused on the outlook for mineral commodities produced in South America, particularly in light of weak prices and reduced demand from Asian customers. Delegates were told, however, that the weather-altering phenomenon known as El Nino has wrought more economic havoc in northern Chile, Peru and Ecuador than the Asian crisis. The Pan-American Highway has been cut in more than 20 places by heavy rains and flooding, while more than 60% of the infrastructure in Ecuador has been destroyed or damaged. Over the longer term, Chile and Peru are expected to be hardest hit by the Asian crisis on the commodity side, with Brazil most affected on the financial side.

El Nino does not appear to have stopped the pace of work at the Pierina deposit in Peru, however. Alex Davidson, vice-president of exploration for Barrick Gold (abx-t), said the new gold-silver mine is scheduled to come on stream one year ahead of schedule, owing to a decision to heap-leach, rather than mill, reserves from the open-pit deposit.

Production in the first three years is expected to be 750,000 oz. gold at cash costs of US$50 per oz., after silver credits.

“We see plenty of upside on the property and on the belt,” Davidson said, “and we’ve increased our holdings in the area.”

Davidson also believes that the Pascua mine project in Chile’s El Indio belt has plenty of exploration upside. The deposit is “far from being delineated,” he said, noting that recent drilling has identified mineralization at depth and in a new body, from which a hole returned 180 metres of 2.9 grams gold and 45 grams silver. “We expect a reserve boost at Pascua this year.”

Barrick has refocused its exploration effort in the El Indio belt to encompass targets other than the high-grade vein systems discovered and developed by previous operators. “We now believe that [the El Indio deposit] is not typical of the belt,” Davidson said. “The Pascua-type systems have distinct geochemical and geophysical signatures.” The company’s ongoing exploration will incorporate these new exploration models, as well as a broader range of technology to detect the more subtle signatures of low-sulphidation systems believed to occur in the El Indio belt.

Rival gold producer Newmont Gold (NGC-N) brought plenty of good news from its ongoing work in the Yanacocha district of Peru, and its La Herradura gold property in Mexico, scheduled to go into production later this year.

Bruce Harvey, manager of South American exploration, described the Yanacocha mine as “a shining star” and a “tremendous success story.”

Newmont and its partners now have four mines operating in the district, with three other deposits waiting in the wings. With a total gold resource approaching 20 million contained ounces, Yanacocha is expected to produce more than 1 million oz. gold this year at a cash cost of US$97 per oz.

Harvey also told delegates that Newmont has placed a “strong emphasis” on community programs aimed at improving education and living standards in the vicinity of Yanacocha.

While several presentations highlighted the success of new copper projects in neighboring Chile, gold projects in that country were described as “disappointments,” with only 40% of new projects considered successful to date. The less-than-stellar performance of Chile’s gold mines was attributed to overstated grades, inappropriate technology, technical problems related to the “fast-track” approach to project development, and the general inexperience of management.

“The same lessons learned in the 1980s in North America are being repeated in Latin America,” said mining consultant Normand Champigny. “Companies will be hammered if they make the same mistake twice.”

Champigny also told delegates that corporate credibility is a key issue that deserves more attention from companies of all sizes. “Scrutiny on ethical behavior is mounting,” he added.

Few speakers were willing to predict when gold prices might end their prolonged slump, but economist David Gulley of Price Waterhouse drew applause when he urged central banks to adopt a more orderly approach to gold sales. “The current approach is wasteful and in no one’s interest.” Other speakers noted that the recent rise in silver prices could revitalize some historic silver camps in Central and South America.

The weak outlook for gold has prompted many juniors to diversify their exploration efforts and, with its easy access and low costs, Mexico appears to be the most popular destination. Most of the activity is focused on Zacatecas state, where partners Teck (TEK-T) and Western Copper Holdings (WTC-T) have made a significant massive sulphide discovery.

The Campo Morado district in Mexico’s Guerrero state is another active area, with one of the more advanced projects there being the massive sulphide project of the same name explored by Farallon Resources (FAN-T). President David Jennings told delegates that Farallon is examining three separate processing options for the fine-grained mineralization that occurs within a series of deposits at Campo Morado. The Reforma deposit is the most advanced, with drilling to date having defined a resource of 9.7 million tonnes grading 0.83% copper, 0.79% lead, 2.19% zinc, 117 grams silver and 1.86 grams gold.

Metallurgical testing of oxidation and bio-oxidation at low pressures and temperatures has shown that both techniques recover 90% of the copper and 95% of the zinc. This compares with recoveries of 65% for copper and 70% for zinc using conventional flotation, which has the advantage of lower capital costs. Recoveries for gold and sil
ver using oxidation or bio-oxidation would increase to the 65 to 70% range, compared with only 50% using flotation.

Farallon’s presentation was of particular interest to delegates awaiting results of metallurgical testwork from Teck and Western Copper’s San Nicolas discovery, where the mineralization also appears to be fine-grained.

This year, Farallon intends to complete bench-scale metallurgical testing, as well as a pressure-oxidation pilot study. Meanwhile, it will continue drilling a number of recently identified gravity targets.

Farallon still faces a legal challenge to its ownership rights issued by Summex Resources, a junior company that was delisted from the Vancouver Stock Exchange during the first day of the Miami conference. Summex directors say they “voted to delist” because the VSE had “unnecessarily” halted the trading of its shares, “with the view to discrediting the president and chief executive officer” (John Torok).

VSE officials, clearly of a different mind, alleged that Summex had breached a number of listing policies, such as not obtaining exchange approval for various non-arm’s-length dealings. They also ruled that Torok, John Link and David Fitch were not acceptable as directors. The matter has since been turned over to the British Columbia Securities Commission for investigation.

Meanwhile, legal bills are mounting for Summex, which says it intends to privately finance the ongoing litigation. In early March, a judge dismissed Summex’s application to add 19 parties and rewrite its claim in the lawsuit.

Costs were awarded to Farallon, which had opposed Summex’s application on the basis that it was an attempt to delay the trial, which is scheduled for May 11. Farallon describes Summex’s case as “a complete and total fabrication” and “an abuse of the legal process.”

The Summex-Farallon dispute took a back seat to the war of words that erupted in Miami over Crystallex’s legal battle against Venezuela’s Ministry of Mines over Las Cristinas 4 and 6. Several Venezuelan geologists later expressed disappointment that the dispute was holding up construction of what stands to be the country’s largest gold mine, and was deterring new investment in the country.

In his keynote presentation, Chilean economist Hernan Alberto Buchi said Venezuela and most other Latin American countries will have to be more vigorous in the area of economic policy-making if they hope to emulate the success Chile has enjoyed in attracting new mining investment.

“Argentina is advancing well, but there are still problems related to reforms,” Buchi told delegates. “Bolivia has adopted some good structural reforms, but needs a higher growth rate to deal with the country’s large population and low salaries. Mexico is a similar story to Argentina: the stability and reforms were interrupted, but are taking hold again. Peru has advanced a lot, but it came from the bottom, and still has to fine-tune reforms.”

Buchi said the fizzled gold rush of the late 1980s has left Venezuela scrambling to reassure investors that it is a good place for mining investment. “Venezuela wanted to foster gold projects, but didn’t have the macroeconomic stability, or the mechanisms in place for gold trading, and had problems fulfilling its promise,” he said. “It has gone forward, backward, and is trying to go forward again, but it still has a long way to go.”

However, Buchi told delegates that such mistakes are part and parcel of the transition to more open economies. “Errors are okay, and a function of a market economy.”