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Queenstake will receive US$7 million cash and 2 million Nevada Pacific shares. The closing date is set for early February, subject to due diligence and board and regulatory approvals.
“It’s a cheap acquisition cost on a per-ounce basis, about twenty dollars [U.S.] per recoverable ounce,” Nevada Pacific Chairman David Hottman tells The Northern Miner. “We are well aware that the mine has had substantial difficulties, and we believe our team can solve the operational problems.”
Led by a seasoned group of professionals, including Hottman and geologist Joe Kajszo, Nevada Pacific has been exploring Nevada at the grassroots level since its formation in 1997. With the addition of Richard Barclay and Gary Nordin, veterans who played key roles in the early development of both Bema Gold and Eldorado Gold, Nevada Pacific has spent the past year reviewing several advanced projects with ounces in the ground.
The Magistral project contains an overall measured and indicated resource of 11.8 million tonnes grading 1.62 grams gold per tonne, for a total 616,000 contained ounces, at a 0.4-gram-per-tonne cutoff grade.
“It is a pleasure to be back in Mexico producing gold, using our developed skills and former experience in the area,” states Hottman. “Our management team was instrumental in the past development of Eldorado’s Mexican gold production [La Colorada and La Trinidad] during the 1990s. Mexican gold production will serve as a strong foundation to [expand] our company.”
Situated in the western foothills of the Sierra Madre, some 100 km northwest of the state capital of Culiacan and 40 km east of the town of Guamuchil, Magistral is a newly constructed open-pit/heap-leach operation. Built for a capital cost of US$10.3 million, Magistral is designed to produce roughly 40,000 oz. annually over an 8-year life. The original, 2000 feasibility study, prepared jointly by Kappes, Cassiday & Associates of Reno and Pincock, Allen & Holt (PAH) of Denver, predicted cash costs in the order of US$180 per oz.
Proven and probable reserves, as estimated by PAH in June 2002 prior to the commencement of mining, totalled 7 million tonnes grading 2.07 grams gold per tonne, equivalent to 465,200 oz., based on a US$300-per-oz. gold price. Covering 96 sq. km, the Magistral project incorporates four deposits, San Rafael, Samaniego Hill, Sagrado Corazon and Lupita, which will be mined separately by open-pit methods at a production rate of 1 million tonnes per year. The overall waste-to-ore stripping ratio is 5.6:1.
Gold mineralization, typical of low-sulphidation epithermal systems, is hosted in a series of structurally controlled silicified stockwork and breccia zones, plus local quartz veining, within sheared, broken and propylitically altered volcanic rocks.
Since beginning commercial production at the start of 2003, Magistral has produced 27,000 oz. No cash costs have been disclosed, but Queenstake says that during the 3-month period ended Sept. 30, 2003, the mine “continue(d) to experience operating deficits.” The mine has experienced lower-than-expected production, compounded by low equipment availability and high maintenance costs, which have affected operating costs. In a bid to keep capital costs down at Magistral, Queenstake acquired most of its mining equipment by purchasing the assets of the Santa Gertrudis gold mine, a former producer in Sonora state, from Campbell Resources.
Queenstake’s decision to sell Magistral comes only weeks after consolidating 100% ownership of the mine. The company acquired the remaining 57.5% controlling interest in Magistral from Midwest Mining, a private Delaware-based company owned by Landon Clay, for 11.2 million Queenstake shares plus 2 million warrants entitling the purchase of an additional share on a 1-for-1 basis at $1 for two years. Midwest had acquired its interest in Magistral by providing the project financing. The original joint venture called for Midwest to receive preferential payback from 100% of cash flow until it recovered its capital contribution plus a return of 12% per year. Under terms of the original joint venture, Queenstake, as operator, has been receiving only US$50,000 per month in management fees since operations commenced, on top of the US$300,000 it was paid during the construction phase.
“We’re getting the whole thing debt-free, as-is,” enthuses Hottman. “We think it’s a great deal.”
The decision to proceed with the construction was made in January 2002. Immediately, roads were constructed and preparations were made to transport the equipment from Santa Gertrudis. By March, earthworks for the leach pads, crusher workshops and mine haul road were under way.
By the end of April, the first liner was placed on the leach pad, the dams that form the solution ponds were growing, and reconstruction of the gold recovery plant and workshops were well in hand. In August, the leach pads were commissioned and mining of the San Rafael orebody began. The primary and secondary crushers were then commissioned, and crushed ore began to be stacked on the pads in 5-metre benches. The mined material is crushed in two stages to a size of 80% passing 24 mm. The ponds and excess solution dams were completed in mid-September, and the first cyanide solution was added to the stacked ore. The first gold dor bar, weighing 255 oz., was poured in early October 2002.
Originally, the capital cost of the Magistral project was budgeted at a mere US$6.6 million, but cost overruns led to a final development cost of US$10.3 million. The difference is attributed largely to difficult ground conditions encountered while preparing the leach pad area, resulting in substantially greater equipment requirements than had been budgeted.
A little more than 1 million tonnes of ore containing 45,000 oz. at an average grade 1.56 grams have been mined from the San Rafael pit, crushed, and placed on the leach pad. By comparison, the head grade in the mine plan was of 1.89 grams for the first year of operation. The pit model for San Rafael was estimated to contain 1.3 million tonnes in proven and probable reserves grading 2.24 grams, equivalent to 95,500 oz. Based on the 27,000 oz. leached to date, gold recovery is about 60%, well off the 76% predicted for San Rafael in the feasibility report. The overall gold recovery for the four deposits combined was expected to average 72.9%. Hottman blames the recovery problems on low pH (high acidity) levels in the heaps.
“When the pH levels get to low, the gold won’t bond to the cyanide,” explains Hottman. “It’s not a problem solving the issue; it’s a question of which method to use to solve it.”
The Magistral project is subject to a sliding-scale net smelter return royalty (NSR) royalty, held by
Hottman also sees “tremendous exploration potential” on the rest of the Magistral property. A richer zone at depth containing 462,000 tonnes grading 8.47 grams, or 125,800 oz., is partially defined along a 125-metre portion of a 600-metre-long La Prieta structure in the Samaniego Hill area. This zone remains open along strike and at depth.
Nevada Pacific is in the midst of closing a non-brokered $10- million private placement consisting 9.1 million shares priced at $1.10 apiece. The company has $1.9 million in cash, with 26.9 million shares outstanding, or 33 million fully diluted.
In the meantime, Queenstake is concentrating its energy on the Jerritt Canyon mine acquisition in Nevada’s Elko Cty. In its first quarter since Queenstake acquired the operation, Jerritt Canyon produced 81,590 oz. at a cash operating cost of US$247 per oz. and a total production cost of US$325 per oz. for the 3-month period ended Sept. 30, 2003. Earnings from operations amounted to $3.1 million, and the amount of cash flow generated was $9.7 million.
Queenstake acquired a 100% interest in Jerritt Canyon from
With the acquisition of Jerritt Canyon, Queenstake assumed liability for the reclamation and closure of the mine. The company negotiated an environmental risk transfer program with American Insurance Group, providing coverage for 20 years, for a total up-front cost of US$32.7 million. To finance the Jerritt Canyon acquisition and the environmental risk insurance policy, Queenstake raised $49.2 million in the third quarter through a series of private placements and a US$20-million debt financing.
At the end of 2002, Jerritt Canyon had proven and probable gold reserves of 2.2 million tonnes grading 8.09 grams, equivalent to 581,000 contained ounces. With a remaining life of less than two years, based on the current mine plan, Queenstake is embarking on an aggressive drilling campaign to convert some of the additional 2.3 million oz. of resources into reserves and extend the life of the mine. Drilling on some of the outlying exploration targets is planned for the spring of 2004.
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