Welkom, South Africa — There’s a buzz of energy permeating the staid, 1960s-style boardroom which
President Steyn, which consists of five separate shafts, is a remnant of the mighty Freegold complex in the Orange Free State. With just 200,000 oz. of production per year, the mine is a junior producer among the now-divided group of mines. But with resources of more than 22 million oz., it is also full of potential.
“The previous owners [most recently, car salesmen, and before that, farmers] didn’t know what kind of asset they had,” says Annandale, the projects manager, as he juggles incoming calls on his cell phone and leads the way to the Steyn 3 shaft. “Everyone was just taking from the mine.”
Then along came Thistle’s president and CEO, William McLucas, who recognized the potential for reviving an old mine that had significant resources but was starved for cash. In February, 2002, when gold was trading under US$300 per oz., the Edinburgh-based, TSX-listed company bought President Steyn for US$32 million plus an US$8-per-oz. royalty on production, using mainly debt financing from Standard Bank London. Thistle has since eliminated the royalty payment by purchasing JSE-listed President Steyn Gold Mines — a shell holding a US$3.25 convertible loan — for US$11 million.
So far, the revival strategy has worked. The mine managers have taken the first steps toward boosting production to 400,000 oz. per annum, from about 180,000 ounces in 2001. Proven and probable reserves at President Steyn, which will celebrate its 50th birthday next year, have increased by 88% to 3.2 million ounces through a combination of underground drilling and development. Milling capacity has jumped by 50% to 135,000 tonnes per month with the installment of a fourth ball mill at the plant, and, by separating out waste in a new ore pass system, Thistle has pushed head grades above 5 grams gold per tonne.
“The mill has a capacity of 350,000 tonnes per month, but it had become somewhat dilapidated,” says van Houten, the mine’s general manager. “We can push it up to 180,000 tonnes or higher with more improvements.”
But all of these improvements require a large infusion of capital, as does the massive development required to gain access to new reserves. “One of our biggest problems is that we need development quickly,” adds van Houten. “We’d like to have an 18-month store of reserves available. It’s a matter of capital.”
At presstime, Thistle was just weeks away from releasing its annual report and unwilling to make an early disclosure of capital spending plans, but the price tag will most certainly be in the tens of millions of dollars.
The biggest projected investment is a US$15-million second mill with a capacity of 150,000 tonnes per month, which would boost total production to 285,000 tonnes per month, or 440,000 oz. gold per year. The new mill would process ore from the northern section of the property, called the Massives project, about 35 km from the main shaft.
Currently, ore from this area is trucked to the main plant at a transport cost of about US$2 million a year. If big development plans for the Massives proceed, surface transport costs would jump to US$6 million per year, making construction of a new plant a sensible alternative.
The leap in production is expected to come from a hitherto overlooked area of the mine. Not only did the original miner, Avgold, leave in place several high-grade (up to 20 grams gold per tonne) pillars after bulk-mining the deposit; it also left behind a whole flank of the syncline that defines the mineralized reef. Thistle calls this the Massives project because of the huge caverns left behind by bulk mining, but the term could just as easily describe the exploration potential of the area.
The abandoned resources are partially explained by the history of the mine. When Anglo American and Avgold ran the operations, President Steyn consisted of five separate shafts, all of which operated independently of one another. The area Thistle plans to exploit was difficult to reach and ventilate from the only shaft available at the time. In 2000, the five shafts were consolidated into one operation, increasing accessibility.
President Steyn is part of the Free State goldfields, where mineralization occurs in conglomerates of the upper division of the Witwatersrand Supergroup and the basal formation of the overlying Ventersdorp Supergroup. The gold was deposited by fluvial systems and preserved in fan and delta deposits.
At 1,500 metres underground at the Massives, projects manager Theo Annandale negotiates a tricky descent through the conglomerates from the top of the mined-out caverns, a steep drop of a few hundred metres. At the bottom, he points out boulders as big as buses that have calved, and continue to calve, off the sidewalls of the stope. These are like gravy to the operation — easy to scoop up and send through the mill along with fresh ore. He estimates the loose boulders account for 6,000-7,000 tonnes of production per month.
The new exploration target at Massives, known as “Eldorado,” occurs along a 4.5-km strike length and is known to be 20 metres wide at the 54 level. Thistle is drilling the target to test vertical depth and downdip extensions. Exploiting the 75,000 tonnes of ore left behind in the pillars will help finance further exploration in the zone.
“We have sixty to seventy per cent of our ore coming out of the Basal Reef [the Main zone] at the moment, but as the Massives project kicks in, that will change,” says van Houten. By 2010, when production peaks, the Massives ore will account for more than half the mill feed, and by 2018, it is expected to represent all the mine’s output.
Although there is no questioning the potential at President Steyn, gold mining in South Africa carries unique risks, including currency fluctuations, a newly introduced royalty on production, black empowerment laws, a strong and often militant labour union, and the spreading threat of AIDS. At President Steyn, where the managers have spent much of their recent time in negotiations with the mineworkers union, these challenges are hitting the bottom line.
Over the past few months, the rand has been appreciating against the U.S. dollar while the price of gold has been dropping, squeezing the margin between what South African mining companies receive for their gold and their cost of production. In the third quarter of 2002, President Steyn’s operating costs jumped to US$256 per oz. from less than US$200 per oz. in the first quarter, owing to the combination of wage increases and a strengthening rand. Most of the mine’s revenue was protected by Thistle’s hedging program.
Thistle is also bracing itself for a new royalty scheme introduced by the government, which is expected to impose a 3% royalty rate on all gold production in the country. On the positive side, Thistle has eliminated the US$8-per-oz. royalty negotiated when it purchased the mine, by buying out the royalty holder.
As for black empowerment, Thistle is leading in this arena. Under South Africa’s new mining charter, mining companies are required to transfer 15% of mine ownership to historically disadvantaged South Africans within five years and 26% within 10 years. The new policy is an attempt to repair some of the inequities resulting from apartheid, which was dismantled a decade ago. Thistle plans to meet these demands by offering shares to its 5,000-strong workforce rather than inviting an outside group of black entrepreneurs to buy a stake in the mine.
This is a pivitol year for President Steyn. If Thistle can raise the cash it needs to finance development (it has already realized US$7 million by restructuring its hedge book) and the gold price holds up, the
resulting increase in reserves and production should turn the old mine into an increasingly profitable new venture.
— The author is a Toronto-based freelance writer on mining and environment issues.
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