Eritrea's great gold potential - and copper and silver and zinc!
The tale of Eritrea's first major miner, Nevsun, which has had mixed fortunes
this year and gold explorer, Andiamo Exploration, whose chairman has been a long
time believer in the country's mineral potential.
Author: Lawrence Williams Posted: Friday , 04 May 2012
LONDON - Two interesting presentations today at a Mining Journal Investor
Seminar in London - one from an already operating, dividend-paying, miner in
Eritrea with a remarkably good earnings profile and the other from a very early
stage explorer looking for gold and VMS (Volcanic Massive Sulphide) copper-gold
orebodies along the same trend.
The first of these will be obvious to anyone who follows activity in this
remarkably prospective part of north-eastern Africa as it operates the only
significant mine in the country - Nevsun Resources with its VMS-hosted Bisha
open pit gold and base metals operation - which in a year's time is due to
transition into a high grade copper mine with gold and silver credits, and then
will later on become a major zinc producer with copper, gold and silver as
byproducts. The other is unknown to most as it is still a private UK company,
without even a website as yet - Andiamo Exploration - the love child of Tim
Williams who has been an Eritrea mineral-potential enthusiast ever since he was
an exploration geologist there a couple of decades ago.
But let's start with Nevsun - which had been a great money earner for its
shareholders up until early February this year when its stock price was
decimated - or rather fell off a cliff' as VP Business Development Scott
Trebilcock put it in his presentation today. The reason - operating results
were showing that the ore tonnages in the gold-rich open pit oxide section, as
initially modelled, were not consistent with operating results - put simply that
some of the anticipated ore proved to be waste - and the company was forced to
cut its gold output target for the year in half - to a still respectable 190,000
to 212,000 ounces from a reserve amounting to 1.5 million tonnes grading 5.1
g/tonne. (see Mineweb article Missing oxide ore sees Nevsun cut 2012 gold
output guidance in half). Nevsun's stock almost halved on the announcement and
has drifted back further since along with the froth falling off the gold and
base metals markets.
In chopping Nevsun's share price though, what the investors do not seem to have
taken into account is that Bisha's gold production is, in fact, only a small
part of the overall financial equation for the project. It is actually a base
metals project with a gold kick-starter. Its peak earnings will be reached when
it becomes primarily a high grade copper miner and will be achieved in 2014 and
2015. It then falls back, on the current plan, as it becomes mainly a zinc
producer (with byproduct copper, gold and silver), for much of the rest of its
mine life up until 2023 - assuming it doesn't extend its resource base in the
meantime. The gold in the leached out oxide cap has already enabled it to pay
back capital costs and the company is an enormous rarity in the junior producer
sector in paying an annual 10 cent dividend - almost a 3% yield at the current
share price. Even the gold majors can't match that kind of return these days.
Indeed Nevsun's cash accumulation profile over the next decade is substantial -
no small wonder that recently a leading Toronto analyst recommended Nevsun stock
as a bottom-fishing opportunity. The market invariably over-reacts on what it
perceives as bad news - particularly with regard to missing, or non-existent,
gold (Bre-X remains firmly fixed in investor memories!). But Nevsun is no
Bre-X. There is no suspicion of fraud here - just an admittedly significant
misinterpretation in the assessment, by third party consultants, of overall ore
tonnages from drilling results where core recoveries were poor in areas of
highly fractured and broken up oxide rocks. But in the overall profit pattern
for the mine the gold is a relatively small component in mine-life profit and
revenue projections.
The company remains completely confident that the same assessment problems will
not apply in the far more competent sulphide zones where core recoveries were
much higher.
Meanwhile Nevsun, which owns 60% of the local operating company with the balance
being owned by the Eritrean state mining company, ENAMCO, is also looking at
other opportunities within its mining area to extend its resource - and in a
smaller version of Bisha, a little to the south at Harema, there does seem to be
the potential for the mining of another gold-rich cap over a VMS gold/copper
prospect, which could be mined at low cost and trucked across and run through
the Bisha plant. There is also a highly prospective zone to the northwest of
the mine where a resource estimate is expected by the end of the year.
Nevsun announces its Q1 results on May 9th, and these will be followed with
particular interest, particularly inasmuch as they will give the next official
guidance on whether this year's downwardly revised gold output target will be
achieved - or perhaps exceeded.
The other presentation on an Eritrean project came from Tim Williams, who left
what might be considered a secure, and remunerative job in Ernst & Young's
mining department to set up junior explorer Andiamo Exploration, which is wholly
concentrated on ground to the southwest of Bisha along the same general
geological trend. Andiamo (lets go in Italian) is concentrating on looking for
VMS gold-copper orebodies with gold-rich oxide caps which can be easily and
cheaply mined (like Bisha's gold-rich cap) and also for shear zone hosted gold
deposits. The area over which it has its exploration licence has a strong
history of artisanal mining and parts of it are dotted with these local miners'
small pits - a pretty good indication of a strong gold prospect.
Williams has, ever since he was an exploration geologist working in the region,
wanted to go back there and exploit what he sees as areas of huge mineral
potential. Initially the political environment in Eritrea was not conducive to
foreign investment, but now it is considered one of the best mining
jurisdictions in Africa and is virtually corruption-free, although Williams
reckons the state take from a mining operation may rule out the development by a
junior of all but the best projects - marginal ones wouldn't be worth their
while. The writer has known Williams (no relation) for many years and he has
never wavered in his enthusiasm for Eritrea as a great mining destination and a
desire to get back there once he had achieved the financial wherewithal to set
up a project like Andiamo.
Andiamo is still a private company, and if Williams, who is chairman, has his
way, as he told Mineweb, will remain so, but some of the institutional
shareholders he has brought on board may force his hand as they can only value a
private company at zero in their books. They need a stock price quote more than
the company itself does as Williams reckons the costs and management time
involved in first organising an IPO, and then the paperwork and management time
involved in meeting compliance regulations would mean management has to take its
eye off in-field operational matters. Very significant for a small explorer with
limited management personnel.
Principal Andiamo shareholders are Williams and Seife Berhe, the Eritrea country
manager and Eritrean national, while the remainder is held by institutional and
high-worth private investors. It has raised $7.5 million to date, but the burn
rate and costs incurred so far have left it with only around $1 million in the
kitty, so exploration is currently proceeding cautiously and more money will
need to be raised before sufficient drilling can be undertaken to come up with
some kind of compliant mineral resource estimate. The company has a small, but
impressive, board of directors encompassing great experience in African
exploration and in finding significant VMS projects.
Anyway, Andiamo, has a suite of highly prospective targets, some of which have
already provided some excellent indications for meeting the company's
exploration criteria - both VMS and shear hosted - most of these being near
surface exposures with soil sampling, trenching and initial shallow exploration
drilling coming up with some impressive gold values - as well as some
significant base metals showings. The next stage will be the raising of more
capital so that the company can continue investigating the key targets - not
necessarily an easy task in the current gold price environment.
Meanwhile today, but not presenting at the seminar, Australian explorer Chalice
Gold, which is also exploring in the same areas - its Mogoraib prospect is some
10 km to the north of Bisha - has announced it has entered into a jv with ENAMCO
(itself largely financed by its revenues from Bisha). The JV, which
incorporates the company's Mogoraib North and Hurum exploration areas will be
owned 60 per cent by Chalice and 40 per cent by ENAMCO (including a 10 per cent
free carried interest) - similar terms to that negotiated between Nevsun and the
Eritrean Government and for Chalice's flagship Koka gold operation - and will be
funded in accordance with each party's paid participating interest, being two
thirds Chalice and one third ENAMCO.
In consideration for ENAMCO acquiring its 30 per cent paid participating
interest in the JV, subject to audit, ENAMCO will sole fund an estimated ca
US$750,000 of exploration expenditures from 1 March 2012. This represents one
third of historical project-to-date expenditures incurred at Chalice's Mogoraib
North and Hurum prospects.
Chalice is currently developing, with ENAMCO, the high grade, open pit Koka Gold
Deposit. This is estimated to host a JORC and NI 43-101 compliant Probable
Mineral Reserve of 4.6 million tonnes with a grade of 5.1 g/t gold, containing
760,000 ounces.
The low cash operating cost of US $338/oz gold is expected to be in the lowest
quartile of global gold mine production costs. Planned mine production will
average 104,000 gold ounces per year over a seven year mine life.
The Koka Gold Deposit lies within the 547 square kilometre Zara block of
Exploration Licences. Chalice's Hurum license lies along strike from the Zara
licences, and the Mogoraib North Licence is, as noted above, proximal to
Nevsun's Bisha mine.
Much of these highly prospective Eritrean gold and base metals-bearing trends
are still very underexplored and the prospect for Eritrea, with a population of
around 5.2 million people, becoming a significant precious and base metals
producer remains largely untapped, but is extremely promising given the
seemingly excellent relations between the government and foreign mining and
exploration companies to date despite some slightly onerous participation terms.
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Received on Fri May 04 2012 - 14:07:10 EDT
