THE GLOBAL SEARCH FOR GOLD SPECIAL — Companies weigh risks of mining in former USSR

While only a handful of North American mining companies are operating mines in the former Soviet Union, many more are exploring the vast territory in search of projects with production potential.

“The region offers tremendous opportunity and bears resemblence to Canada in the 1960s, before deposits such as Kidd Creek and Hemlo were found,” says Michael Newbury, director of Endeavour Capital, who has spent several years in Russia and its neighboring republics.

Newbury believes Russia offers especially attractive opportunities in the gold sector. “You have to remember that most of Russia’s gold production — about 80% — came from placer mines,” he explains. “Because of declining reserves, many of these operations are marginal and no longer receive funding.”

Last year, Russia produced about 130 tonnes of gold, which is estimated to be less than half the amount produced by the Soviet Union decades ago. The numbers are still declining, according to Interfax News Agency, which recently reported that a Russian mining lobby had sent an official request to Alexander Lebed, Russia’s national security chief, to help overcome what is perceived as a crisis in the gold industry. Lebed was told that gold production is 29% behind last year’s output at this time. The lobby group also asked Lebed to persuade the government to settle its ongoing debts to the gold industry.

The few hard-rock gold mines operating in Russia typically produced concentrates that were shipped, often over great distances, to one of several, government-controlled smelters. “I don’t believe that any gold operation produced a dore bar,” Newbury says, pointing out that the high transportation and smelter costs rendered many remote projects uneconomic.

While Russia has many skilled geoscientists, geological information was not freely shared, and exploration efforts there generally did not make use of recent deposit models (such as Carlin-type) or of the sophisticated, high-technology tools available in the West (the diamond sector being an exception). The collapse of the economy also left many mining projects without capital to invest in development and/or new processing technologies. And environmental controls were a luxury few mines could afford, even at the best of times.

While all this translates into bottom-fishing opportunities for Western companies, Newbury says foreigners should expect challenges because Russia and its former republics are still adapting to a free-market economy.

“There are people both in government and in industry who believe their resources are being given away,” Newbury says. “Some believe they are technically competent, and will say `give us the money and we will do it.’ But others recognize that to attract foreign investment, they have to make changes.”

Some companies are waiting for Russia and the republics to make progress on a legal framework designed to protect the rights of foreign shareholders. Newbury says he would also like to see Russian executives learn more about Western-style corporate governance. “It may be difficult now, but things will get easier,” he predicts. “Meanwhile, it doesn’t cost much for mining companies to sit at the edge of the pool and put their toes in the water.”

Zarafshan JV

Some companies have done much more than get their toes wet. Newmont Mining (NEM-N), for example, has been producing gold at its 50%-held Zarafshan project in Uzbekistan since the third quarter of 1995. A partnership with the government, the project recovers gold by leaching existing stockpiles of low-grade ore from the Muruntau mine.

By all accounts, Newmont faced a number of challenges in building and operating the mine. The mine’s remote location caused cost overruns, there were design problems with the crushing circuit, and the company was faced with the challenge of training a workforce to meet Western-style productivity expectations.

However, progress is being made, and Zarafshan appears to be close to reaching its cruising speed. During this year’s second quarter, 84,300 oz. gold were produced, a 64% increase over the first quarter. Total cash costs fell to US$200 per oz. from US$223 in the previous quarter. For the first six months of 1996, Zarafshan produced 135,700 oz. (67,800 equity ounces) at a cash cost of US$209 per oz. Newmont, meanwhile, is eyeing other opportunities and continues its discussions with the government on the development of gold deposits in the Angren region.

Canadian uranium producer Cameco (CCO-T) is another early entrant, having visited Kyrgyzstan in early 1992 in search of uranium prospects. Instead, the company found a highly explored gold deposit that fit the company’s long-term diversification plan to become a sizable gold producer.

Kumtor project

Towards that end, the company expects to start production early next year at the Kumtor mine, situated in a remote location 4,000 metres above sea-level in the Tien-Shan Mountains.

Cameco holds a one-third interest and is operator of the mine, which, once up and running, is expected to turn out 500,000 oz. gold annually. At last report, reserves stood at 80.5 million tonnes grading 3.58 grams gold per tonne (9.26 million contained ounces), plus a resource of 32.4 million tonnes at 3.75 grams (3.9 million contained ounces).

As might be expected, Kumtor’s remote location and high altitude have posed some challenges. Mining, which began in 1995, initially focused on removing a 15-metre-thick ice cap that covered a portion of the open-pit deposit. The minesite is often covered in snow, which can fall any day of the year. In addition, bad weather is believed to have contributed to last year’s helicopter crash, which killed 15 people who were returning to the capital from the project site.

Construction on track

Construction is about 80% complete, and development remains on schedule, though project costs have increased to US$450 million from an original estimate of US$360 million. Despite the US$90-million increase, Cameco views the project as “highly attractive,” as gold price assumptions used in the initial evaluation were lower than current forecasts.

To say Bakyrchik Gold (BKG-L) faced challenges during the construction and operation of its 40%-held gold mine in Kazakhstan would be an understatement. While no one argues that the Bakyrchik mine has huge reserves (more than 10 million oz.), mineralization is refractory, with the gold contained in arsenopyrite or pyrite. The deposit contains substantial quantities of carbon, which complicated the metallurgy to such a degree that the physical removal of carbon from the flotation concentrates became a prime metallurgical challenge.

The gold recovery plant on site used the Redox process, without much success and with numerous technical and operating problems. Recoveries were so dismal (about 50%) and costs so high that analysts say the 6,500 oz. produced between June 1995 and March 31 of this year carried a production cost of US$2,300 per oz.

Mining the ore is also challenging, as the oreshoots dip at between 30 and 45 and are contained within a major shear zone. The weak nature of the deposit and host rocks had limited the choice of mining methods to semi-mechanized underhand stoping using imported timber for support. The joint venture is now reported to be looking at more mechanized, bulk-mining methods, such as sub-level caving.

Second chance

Fortunately for Bakyrchik, a group of high-profile investors, including mining financier Robert Friedland, took an interest in the cash-starved company earlier this year. More recently, Indochina Goldfields (ING-T) bought out the 26.6% interest held by Friedland and his associates. The newly listed company says it was intrigued by an independent evaluation of Bakyrchik’s resource potential, which indicated that “the possibility exists for more than 49 million oz. to be contained in the concession area.”

Bakyrchik is now looking to process sulphide reserves (43.1 million tonnes grading 7.37 grams) using conventional roasting. A feasibility study is expected to be completed by year-end, based on an operation that wo
uld produce about 250,000 oz. annually. Such an operation would require additional capital investment; indeed, sources predict it may cost as much as US$100 million to turn the operation around.

The latest metallurgical testwork by Lurgi Energie of Germany is yielding gold recoveries of about 90% using conventional roasting technology. Indochina Goldfields reports that Lurgi has expressed an interest in providing a fully financed, turnkey package for a processing plant, from crushing to dore production. The flow sheet would incorporate a whole-ore Lurgi circulating fluid bed roaster, followed by a conventional carbon-in-pulp circuit.

If all goes well, Bakyrchik and Indochina would look to scale the project up even further in the years ahead, to as much as 750,000 oz. annually.

Vasilkovskoye

In the meantime, Bakyrchik has joined a consortium, led by Teck (TEK-T), that is negotiating to acquire rights to explore and develop another huge gold deposit, also situated in Kazakhstan. So far, however, the consortium has been unable to work out an agreement to acquire, jointly, an 80% interest in the Vasilkovskoye project, which hosts 100 million tonnes grading 2.4 grams gold. Efforts continue, though the Kazakhstani government is now talking with other interested parties.

Extension

The outcome will be of interest to Placer Dome (PDG-T), which pulled out of the project last year and is awaiting the return of a $35-million refundable deposit still owed it by the Kazakhstani government. In early July, Placer Dome delivered a notice of default to the government, which then requested an extension of terms in order to accommodate the re-tendering schedule of the Vasilkovskoye property.

The Vasilkovskoye deposit is amenable to conventional cyanidation processing. Operating plans, based on open-pit mining, call for production of 500,000 oz. gold annually. The government of Kazakhstan is looking to retain a 20% interest in the project.

Late last year, Cyprus Amax Minerals (CYM-N) announced the sale of a Russian subsidiary to Amax Gold (AU-N) in return for shares of that company. As a result, Amax Gold acquired a 50% interest in the gold company that is developing the Kubaka gold project in the Madagan region of eastern Russia.

The mine, currently under development, is expected to enter production in early 1997.

Kubaka is an open-pit, mill-recovery project 320 km from the Arctic Circle. It has minable reserves of 5.4 million tons grading 0.46 oz. gold per ton, for roughly 2.5 million oz.

The US$180-million, 2,000-tonne-per-day operation is expected to produce about 310,000 oz. gold annually at a cash operating cost of US$184 per oz. Total costs have been estimated at US$260 per oz. The mine’s life is estimated at seven years.

Jilau and Taror

Another new producer in the former Soviet Union is Nelson Gold (NLG-T), which operates a mining and milling complex in the Zeravshan valley in Tajikistan.

Nelson has a 49% interest in the project, which features two deposits: Jilau and Taror. The first phase of work, now under way, involves developing the Jilau deposit and adding a carbon-in-leach plant to an existing mill complex.

Production from Jilau began early this year, and total production for 1996 is forecast at 47,000 oz. gold, owing to mechanical problems during startup. Production from the first-phase is expected to increase to 72,000 oz. per year.

At last report, Jilau had measured and indicated reserves of 49.7 million tonnes grading 1.28 grams gold, plus inferred resources of a further 57 million tonnes at 0.86 gram.

Meanwhile, feasibility work, in phases, continues to advance the Jilau heap-leach project. The first phase will involve a 5-million-tonne-per-year operation, while the second envisages a further expansion.

The third phase will entail developing the Taror deposit, which is now at the prefeasibility stage. Measured and indicated reserves stand at 18.5 million tonnes grading 4.38 grams, plus an inferred resource of 3.8 million tonnes grading 3.91 grams. The deposit also contains copper values, plus significant levels of arsenopyrite.

In June, Nelson reached an agreement with the government on terms relating to gold sales, taxation and royalty payments. A refining contract has been signed, and the refined gold can be sold for U.S. dollars, with funds to be held in an authorized bank outside the republic.

Armada sets sail

Robert Friedland recently joined the board of Armada Gold (AAU-A). The junior has a 69.3% interest in Balgold, a past-producing gold project in the Chita region of eastern Siberia.

Under way is a bankable feasibility study which is based on plans to produce more than 450,000 oz. gold annually from a 15,000-tonne-per-day, open-pit mining and milling complex. Processing would entail flotation, pressure oxidation and carbon-in-leach.

The study should be completed early next year. However, a prefeasibility report indicates production costs would average US$147 per oz.

At last report, the Baley-Taseevskoe gold deposit was found to host a fully diluted resource of 55 million tonnes averaging 3.41 grams gold per tonne, with a 0.7-gram cutoff.

A recent round of drilling hit broad, high-grade gold at the deposit including: 20 metres of 7.3 grams, 9 metres of 20 grams, and 42 metres of 3 grams. President Derek Fisher says these results show Baley to be “a major deposit with a high-grade core and a large halo of low-grade mineralization.”

The project also has potential to process two tailings dams believed to host 1.3 million oz. gold, plus smaller, undeveloped deposits within the land package.

Armada has other mineral projects, including a copper project in Mongolia, which was acquired through its recent merger with Nescor, a private company.