SearchGold starts small with Gabon JV

SearchGold Resources (RSG-v) has received a mining permit for its 36%-owned Bakoudou-Magnima gold project in Gabon, a joint venture with Moroccan company Managem.

And even though the project is still on the small side, with proven and probable reserves of only 155,000 oz. gold, a net present value (NPV) of US$12 million, and a mine life of 3.5 years, SearchGold CEO and president Philippe Giaro says the decision to go ahead with the mine is not premature.

“The question that I am asked repeatedly is: ‘Why didn’t you wait? Why didn’t you drill off all of this and wait till you had more ounces?’ It’s because, first of all, we are not in the driver’s seat for this project any longer, and Managem wanted to go into production rapidly, because they prefer having a smaller capital expenditure and proving the viability of the project, and then going further on, and we don’t have any objection to that.”

Gabon, in West Africa, is known more as an oil producer than a mining country, but it does have mines, for example, a large manganese mine in Moanda. Bakoudou-Magnima will be SearchGold’s first operating mine.

The proven reserve at Bakoudou- Magnima is 600,000 tonnes grading 2.5 grams gold per tonne, equivalent to about 48,000 oz. gold, and the probable reserve stands at 1.1 million tonnes grading 3 grams gold per tonne, for about 107,000 oz. These reserves form a part of the resources. Measured resources are 500,000 tonnes grading 2.8 grams gold, equivalent to about 48,000 oz. gold, and indicated resources are 1.9 million tonnes grading 3.1 grams gold, amounting to 184,000 oz. gold, for a total resource of about 232,000 oz.

A feasibility study completed in August projects gold production at 40,000 oz. per year at a cutoff grade of 0.55 gram gold per tonne. Gold recovery over the 3.5-year mine life is projected at 88%. Mining costs are expected to be about US$5.44 per tonne ore and US$2.06 per tonne waste, while processing costs are forecast at US$8.86 per tonne. Allin operating expenses are projected at US$380 per oz. gold, including refinery costs, reclamation costs, withholding tax, government royalties and operator management fees.

When Managem delivers the final documents of a feasibility study, SearchGold’s stake in the project will decrease to 27% from 36%. Capital costs for the open-pit mine are estimated at US$30 million, of which SearchGold’s portion is US$8.1 million. However, because of unfavourable conditions in the capital markets, SearchGold will probably exercise an option allowing it not to contribute its share. As a result, it will cede another 4.5% interest to Managem, leaving SearchGold with a 22.5% stake. The project has a local partner in Gabon who owns 10% and is responsible for contributing a proportionate amount of overall capital expenses, or US$3 million.

At a gold price of US$800 per oz. and a discount rate of 8%, the project’s NPV is US$12 million. With an ownership stake of 27%, Search- Gold’s portion of the NPV is US$3.25 million, reduced to US$2.7 million at an interest of 22.5%. SearchGold’s share of the project’s cash profit forecast of US$24 million is US$6.5 million at a 27% stake, declining to US$5.4 million at an ownership of 22.5%. But these figures are based only on the 155,000 oz. of reserves, so they could grow as reserves are added.

“This is a small project, and I acknowledge that,” Giaro says. “The intent here is to get started with the project and realize the entire potential of the concession.”

The government of Gabon receives a 5% royalty on production, but does not own any carried interest in the project. There is also a corporate income tax in addition to the government royalty.

The joint venture’s mining permit includes 160 sq. km of ground; it also has an exploration permit totalling 2,900 sq. km. The project is located on an Archean greenstone belt, and mineralization is near surface, in saprolite. To date, drilling has encountered mineralization to a depth of 350 metres.

Managem operates five mines in Morocco, and has stakes in two gold mines in West Africa in partnership with Semafo (SMF-t): Kiniero, in Guinea and Samira Hill in Niger.

Giaro says it made sense to choose Managem as a senior partner on Bakoudou-Magnima because it had the capital and expertise, and also because of the strong political ties between Gabon and Morocco.

The drilling budget at the project for 2008 is US$2 million. The company owns two drills, and a third is being shipped to Gabon. It is anticipated that after 2010, drilling will be paid for from cash flow generated by the mine.

The company uses the village of Bakoumba, about 40 km northwest, as a base and for drill-core storage. There is a well-maintained unpaved logging road to the village.

The nearest railway line is at Moanda, linking this town with the Atlantic seaport of Libreville. The distance to Moanda is about 80 km, and consists mostly of a well-maintained unpaved logging road.

Electricity is not available onsite, so the feasibility study calls for diesel generators. Water will be pumped from the Koudou River, 1 km away.

SearchGold’s second project in Gabon is the Boou-Mimongo property, which consists of 7,900 sq. km and has good road access. The company has an option from Swala Resources to acquire 50% of the property by spending US$1.5 million on exploration over three years, of which one year has been completed. The project is at an early stage and no drilling has been done.

Turning from Gabon to Burkina Faso, SearchGold holds 100% of the grassroots Dou and Taouremba properties, together comprising 450 sq. km, and the Zitenga 2 property, which consists of 185 sq. km.

SearchGold is also active in Guinea, where it has the 475-sq.-km Mandiana project, near the border with Mali. Following surveys of termite mounds, the company proceeded with a reverse-circulation drill program on three sites. The best intersection was at N’Diambaye, cutting 22 metres of 12 grams gold per tonne. Drilling at Karfakolo returned 10 metres of 3.7 grams gold, while an intersection on the Intercolonial site returned 20 metres of 1.9 grams gold.

New drill targets have now been identified, and SearchGold is planning to proceed with more drilling. Giaro acknowledges that the political situation in Guinea is not easy, but hopes that things will improve with new Prime Minister Jean Eyeghe Ndong, a former mines minister. He is seen as pro-mining, and so far has managed to bring down the inflation rate.

SearchGold has 143 million shares fully diluted and $300,000 in the treasury, and plans to raise $1-1.5 million in the fourth quarter. Search- Gold owns 2.7 million shares, or 8.7%, of Stellar Diamonds, a small unlisted diamond miner with projects in West Africa, and 2.1 million shares, or 8.7%, of Golden Share Mining (GSH-v), an explorer focused on Quebec and Ontario.