Perseverance Paying Off For Castle Gold In Mexico

SITE VISIT

DURANGO, MEXICO — John Wayne was here. En route to Castle Gold’s (CSG-V, CSGLF-O) El Castillo gold mine, about an hour and a half north of Durango on Highway 54, the company’s vice-president of exploration Miguel Cardona points to a corral, a ranch, and a few tattered fences, whizzing by to the left and says that’s where the American actor shot Westerns. It’s now a tourist destination called “Las Villas del Oeste.”

Was it there that John Wayne uttered that enduring phrase: “A man’s got to do what a man’s got to do”? No, it turns out he coined that one in director John Ford’s seminal Western Stagecoach, shot in California in 1939. But he did, according to the movie website imdb.com,make the 1965 movie The Sons of Katie Elder in Durango state and chances are that he then came to Las Villas del Oeste as the character of John Elder, a son out to avenge his gambling father’s murder.

And perhaps that’s a more fitting film to reference on a visit to the flagship mine of a relative newcomer in the gold mining industry, one determined to drive down high costs and to ramp up ore mined in the pursuit of profits. John Wayne, who apparently did all his own stunts in the movie only four months after he had a cancerous lung surgically removed, says as Elder to his younger brother: “All we want to do is make you end up rich and respectable.”

Battle Mountain Gold, before Newmont Mining (NMC-T, NEM-N) acquired it in 2002, discovered gold mineralization at El Castillo in 1995. Battle Mountain was looking for gold assets with potentially minable resources under 1 gram gold per tonne and found it at El Castillo following a stream-sampling program and a 207-hole drilling campaign that led to a historic resource estimate of 62.3 million tonnes grading 0.63 gram gold per tonne.

The resource estimate was as far as Battle Mountain advanced the project. After the takeover, Newmont decided El Castillo, with a little over a million ounces contained gold, wasn’t sizable enough for it to pursue. So Newmont dropped its rights to the property.

It was, however, a good fit for Morgain Minerals. With a portfolio of a half-dozen or so properties in Mexico, and looking for a production-worthy asset, it acquired El Castillo in 2002 through a government lottery. By 2003, it produced a prefeasibility study and by 2005, it had permitted a proposed open-pit mine targeting the oxide portion of the El Castillo deposit, which extends to about 150 metres.

That same year, Morgain initiated a pilot project, mining 100,000 tonnes of ore and sending 30,000 tonnes to a test heap-leach pad. Morgain planned to ramp up production to as much as 20,000 oz. gold and to that end, began building a larger heap-leach pad and processing facility.

But a merger intervened. In 2007, Morgain agreed to join forces with Aurogin Resources, a small mining company with a 50% share in the El Sastre gold mine in Guatemala, under the banner of Castle Gold. With a three-year horizon in mind, the new company’s stated goal was to grow a 100,000-oz.-per-year gold mining company.

Reality bites

As in any Western worth its gunpowder, however, complications arise, obstacles must be overcome, ambitions change and twists of plot ensue. For Castle Gold, mine development was at first slower than forecasted and production lower than hoped.

In 2007 at El Sastre, still 50%- owned by two Guatemalan nationals, Castle Gold expected to churn out a total of 20,000 oz. gold by the end of the year. But while it placed 262,000 tonnes ore grading 2.6 grams gold on its leach pad — the equivalent of nearly 22,000 oz. gold — the delay between piling ore, leaching ore and extracting gold meant the company missed the mark. The year ended with 11,000 oz. gold produced.

For El Castillo, hopes were high that it would reach an annualized production rate of 15,000 oz. gold, at which point Castle Gold would officially commission the mine. But with leaching behind schedule, 2007 was to pass without the sound of champagne corks or revolvers popping in Mexico.

With humbling production rates in 2007, Castle Gold revised its goals for 2008, cutting El Sastre’s production forecast from 20,000- 25,000 oz. gold to 12,000 oz. The junior aimed for a yearly production rate of 29,000 oz. gold from both operating mines.

But at the outset of 2008, it seemed unlikely that Castle Gold would reach even that downsized ambition. Although the new company posted its first profit of US$765,000 in the first quarter of 2008, both mines fell short on production. El Castillo did not reach the 15,000 oz. yearly rate, though it churned out 2,632 oz. gold, and El Sastre came in at a modest 2,560 oz. gold for the quarter (half of which was attributable to Castle Gold), slightly below what was needed to stay on track for the year’s planned production of 12,000 oz. gold.

The second quarter of 2008 was a mixed blessing. Muted celebration emerged from El Castillo as production nearly doubled to 4,692 oz. gold and, as it finally achieved the 15,000 oz. gold rate, the mine was officially commissioned. Production also grew slightly at El Sastre to 1,780 attributable oz. gold (3,560 oz in total). But though production was up, Castle Gold’s earlier profits withered to a small loss of US$316,000.

Partly to blame for the loss was a change in management. At the top, Castle Gold president and CEO Chris Babcock stepped aside for a new chief, Thomas Atkins, then president and CEO of Crowflight Minerals (CML-T, CMLGF-O). It may have seemed like an odd fit at the time, a then-nickel man who was overseeing construction of a northern Canadian nickel mine jumping over to a Mexican gold project. But Castle Gold announced that now was “the time to appoint a president and CEO with a proven track record in investor relations, finance, human resource management, mergers and acquisitions, and overall corporate development.” In Atkins, Castle Gold was getting someone who guided Crowflight as it raised $150 million in project capital and then began to build the Bucko nickel mine in Manitoba.

If the first and second quarters were tough, it didn’t get much easier in the third. A heavier than usual monsoon season assailed Castle Gold’s leach pads, diluting its pregnant solution and slowing down the recovery of gold in the carbon-in-leach (CIL) pillars. Added to that, the strip ratio reached a record high of 1.55, compared with the life-of-mine (LOM) strip ratio of 0.63.

Thus, while it mined 1.3 million tonnes of ore and waste, 40% more than during the previous quarter, it still produced about the same amount of gold: 4,629 oz. All told, the monsoon dilution and high strip drove up cash costs to an unusually pricey US$685 per oz. gold for the quarter. Still though, with gold selling at nearly US$900 per oz., Castle Gold managed to post earnings of US$760,000.

A mine’s got to do what a mine’s got to do

In Westerns, cowboy-heroes persevere, rising to the challenge and making good on their word. So, too, did Castle Gold in the last month of the fourth quarter of 2008, when it hit the 29,000 oz. yearly rate of gold production it had earlier targeted. El Castillo alone reached a 24,400 oz. gold yearly rate, and adding El Sastre’s production boosts that figure closer to around 30,000 oz. gold.

At El Castillo, cash costs fell dramatically to US$520 per oz. and the strip ratio dropped to between 1.5 and 1. All told, Castle Gold produced 16,455 oz. gold in the year, about a third of which came from its 50% share in El Sastre. And supported by resurgent fourth-quarter results, Castle Gold’s net earnings for the year jumped from a loss of US$1.5 million in 2007 to a profit of US$1.8 million in 2008.

So before leading a tour of El Castillo mine, Atkins, pointing to a graph depicting El Castillo’s 2009 and 2010 production, said with some confidence that Castle Gold intended to produce 30,000 oz. g
old in 2009. Next year, he said production would rise to 50,000 oz gold.

To hit its targets, Atkins described a double-barrelled strategy. First, the record strip ratio hit during the third quarter of 2008 would, on average, fall to about 1.2 this year and then hover around par at the beginning of 2010. By the end of next year, it would approach the LOM average of 0.6:1.

Second, Atkins outlined a move towards a hybrid contract-owner mining model that since The Northern Miner’s visit early this year, the company has in fact begun to realize. In its pit, Castle Gold has been relying on its contractor’s equipment. But in April, the junior bought a host of new equipment, including four Cat 740s. The 40-tonne trucks will replace its contractor’s 20-to 30-tonne trucks and should boost the mining rate to 600,000 tonnes per month and help it achieve 30,000 oz. gold production in 2009.

Along with a recently acquired portable screening deck that will divert higher-grade ore — over 0.6 gram gold — directly to the leach pad, the new equipment should also help Castle Gold meet its 800,000-tonne-per-month goal by about 2010 and ensure gold production hits 50,000 oz. that year.

In addition, Castle Gold has renegotiated terms of its agreement with its mining contractor, CAMSA, and realized a 10% reduction over previous terms. Added up as savings on cash costs, the new equipment, the increasing mining rate, the screening deck and the new contract, should net the company about US$85 per oz. gold.

Although Atkins says production at El Sastre will begin winding down in 2009, Castle Gold plans to drill prospective ground just southeast of the main pit at El Castillo, where there is potential to add new resources to the mine’s current 10-year mine life (at production of 50,000 oz. gold a year). He says the company will drill 14-18 holes in the area.

Castle Gold has also calculated a transition zone and sulphide resource about 150 metres below the El Castillo open pit. The new zone stands at 27.9 million inferred tonnes grading 0.7 gram gold for about 625,000 contained ounces gold and adds to the existing oxide resource of 94.3 million measured and indicated tonnes grading 0.39 gram gold.

Beyond El Castillo, Castle Gold is also proving the potential of its 100-sq.-km La Fortuna property, 70 km northeast of Culiacan in Sinaloa state. Castle Gold recently estimated measured and indicated resources there at 4.8 million tonnes grading 1.98 grams gold.

What it all means is that after two trying years, Castle Gold has finally begun to prove its mettle, learning to match promises with results. And now it just might — as production ramps up and costs come down — end up making a few out there rich and respectable.