Queenstake kicks off construction at Magistral gold mine

Vancouver — Queenstake Resources (QRL-T) and the Magistral joint venture are in the process of building a facility that will be able to treat 1 million tonnes of ore per year from four discrete pits of the Magistral gold mine in Sinaloa, Mexico.

The Magistral joint venture consists of Queenstake’s subsidiary, Pangea Resources and a private company Midwest Mining. Midwest receives a 50% interest in the Magistral project, as well as a 15% shareholding in Pangea Resources.

"The finalization of the Magistral joint venture enables us to put Magistral into profitable production on the basis of the existing reserve while continuing to develop the exciting geologic potential of both the immediate area of the planned open pits and of the district as a whole," said Chris Davie, President of Queenstake. "It is the next stepping stone to Queenstake’s future growth."

The cash component of the project construction budget is US$6 million and has been financed by Midwest. According to the financing agreement Queenstake will be paid US$300,000 during the construction phase and US$600,000 per year during operations until Midwest has recouped its US$6.6 million capital investment and imputed interest at the rate of 12% per year from 100% of the distributable cash flow of the joint venture. After that point Queenstake will be paid US$300,000 by the joint venture during each year of operation and the company’s 85% owned subsidiary will receive 50% of the distributable cash flow from the joint venture.

The production decision was made on the basis of the current reserve at Magistral, which consists of 6.15 million tonnes of ore grading 1.86 grams gold per tonne. The reserve does not include recent drilling results, which intersected substantial widths and grades of mineralization in the zone immediately adjacent to the reserve. This zone remains open on strike and down dip. Queenstake plans to perform an additional 3,000 metres of diamond drilling during the construction phase and subsequently reassess the resource and reserve.

The mine is expected to produce 40,000 oz. of gold per year at a life-of-mine cash cost of US$180 per oz. gold. The mine is currently expected to have a life of 6.5 years. Based on current reserves and a US$300 per oz gold price the project is projected to generate US$24 million in net revenues after pre-production capital expenditures.

The mining equipment for the operation will be sourced from the company Oro de Sotula. Oro was the past operator of the Santa Gertrudis mine in Sonora, Mexico and a subsidiary of Campbell Resources (CCH-T). Queenstake has exercised its option to acquire all of the shares of Oro de Sotula for US$2 million. The payment will be made in two notes of US$1 million. The first million is contingently payable in three tranches when the gold price reaches US$315, US$330 and US$350. Each price must be reached and sustained for 120 days before December 31 2005. The second million note has a three year term and will be credited under certain circumstances depending on total remaining liabilities of Oro and the reclamation costs of Santa Gertrudis. Should Queenstake sell or enter into a joint venture on the Santa Gertrudis property, Campbell is entitled to one third of any proceeds and would receive a 1% net smelter royalty from future production.

The mining equipment and buildings at Santa Gertudis will be moved to Magistral. Secondary and tertiary crushing equipment is all that is required to be purchased by the joint venture. The construction budget includes; exploration drilling and ongoing care and maintenance cost at Santa Gertrudis; the relocation of equipment and major buildings; improvement of access roads; and the construction of a leach pad and solution ponds. Closure and reclamation at Santa Gertrudis will be funded by the joint venture.

Queenstake expects construction to be completed by July this year and the first pour should occur in September. Mining will commence at the San Rafael pit which hosts 1.3 million tonnes grading 2.25 grams gold per tonne. No pre stripping is required at the pit and the strip ratio is calculated to be 4.8:1. During the first year of production at San Rafael, pre stripping will commence at the Samaniego pit. Production from Samaniego will come on line early in the second year of production at San Rafael.