Wealth of potential sees Canadian miners through Eritrean turbulence

Eritrea usually finds itself in the western media’s headlines for its dispute with neighbouring Ethiopia over the two countries border.

But western mineral explorers in the know are paying attention to the east African country for another reason: it is home to one of the world’s largest and most under-explored volcanic-hosted massive sulfide (VHMS) belts in the world.

Three Canadian-based miners have made significant discoveries along the belt over the last five years and they are intent on bringing the country into the centre of the mining world’s stage.

Nevsun Resources (NSU-T, NSU-N) has made the most significant find with its Bisha discovery. The project sits in close proximity to Sanu Resources’ (SNU-V) Hambok discovery, both of which lie in the western lowlands portion of the belt. Sunridge Gold (SGC-V) has also made several discoveries at its Asmara project which covers an expanse of the belt in the central highlands near the Eritrean capital of Asmara.

The flurry of discoveries is in keeping with nature of VHMS belts as they typically yield deposits in clusters.

The Iberian Pyrite belt of Spain and Portugal is a prototypical example with some 88 deposits combining for 1.6 billion tonnes of massive sulfide containing 63 million tonnes of zinc, copper and lead.

But if the belt has been somewhat over-looked, it is not without reason.

For such a small country — its population is just 5.5 million and its gross domestic product is only US$1.5 billion — Eritrea has rather large issues.

It has been run by a transitional government since declaring independence from Ethiopia in 1993 – a country it has held a fragile peace with since a two year war erupted in 1998 over who held claim to the border town of Badme.

While a UN commission ruled the town was rightfully Eritrea’s, Ethiopia still occupies it. The latest attempt at peace is being brokered by Libyan leader Muammar Kadhafi, who is taking his turn as the head of the African Union.

But miners there have waded through such uncertainty, partly buoyed by a mining code based on that of Australia’s Northern Territories with its royalty of 5% on precious metal, 3% on base metals and tax rate of 35%.

And their patience was seemingly rewarded when Nevsun secured a mining licence for Bisha in 2008.

The licence came after a steady stream of accomplishments for Nevsun. It finished its feasibility study for Bisha in late 2006, had a stability agreement signed with the government by the end of 2007 and was awarded a mining licence in January 2008.

To get their though, the company had to come to an agreement with the government that gives it a 40% stake in the project. That interest, however, comes with the condition that the government must contribute one third of the equity needed for construction.

Nevsun currently has roughly $40 million in its treasury and plans to raise the bulk of the rest of the $250 million it will need to get to production through debt financing – which it plans to have secured by the end of the first quarter.

The richness of the deposit, Nevsun says, allows for a higher than usual debt to equity ratio because the payback period is very short.

By Nevsun’s calculations the project has an internal rate of return of 42% and a payback period of just 1.6 years.

The deposit’s 20 million tonnes of proven and probable reserve is broken up over three zones. 4.02 million tonnes grading 7.99 grams gold, and 33 grams silver is in the oxide cap; 6.35 million tonnes grading 0.83 grams gold, 36 grams silver and 4.4 % copper is in the supergene layer; and 9.71 million tonnes grading 0.76 grams gold, 54 grams silver, 1.14% copper and 7.21% zinc is in the primary zone which is the deepest of the three zones.

The mine is set to go into production by mid 2010 and currently has an estimated mine life of 10 years.

As for Sunridge Gold, its chief exposure to the country is through its Asmara project which sits just west of the capital city of Asmara.

The 925 sq. km project is host to four deposits three of which it describes as VMS deposits: Emba Derho copper-zinc-gold deposit, and Debarwa and Adi Nefas, which are high-grade gold, copper, zinc, and silver deposits.

The fourth deposit, Gupo, is a gold deposit that sits 8 km from Emba Derho. Its mineralization is associated with quartz veins along a shear zone and also occurs as free gold associated with sulphides in mainly quartz veins.

The government has a 10% free carried interest in Asmara with Sunridge holding the rest.

Emba Derho has an indicated resource of 38.4 million tonnes grading 1.02% copper, 0.99% zinc, 0.18 grams gold, and 9.31 grams silver in the copper rich primary zone. A second zone, the zinc rich primary zone has indicated resources of 20.5 million tonnes grading 0.28% copper, 2.35% zinc, 0.39 grams gold and 12.13 grams silver.

But Sunridge’s most recent work has been at Gupo. In early February it announced metallurgic results for the gold deposit which returned 98.4% recovery for ore in the oxide zone and 95.6% recovery for ore in the sulphide zone.

Sunridge says it will do a new resource estimate and scoping study on the Gupo to determine the economics of a low-cost, open-pit, heap-leach gold operation.

At this point, Gupo has an inferred resource of 1.97 million tonnes grading 2.99 grams gold for 189,000 oz.

That resource estimate doesn’t include results from 26 holes that were reported back in January of 2007. Results from that program were highlighted by: 38.50 metres grading 2.12 grams gold; 26 metres grading 1.03 grams gold and 59 metres grading 1.52 grams gold.

The third key Canadian player in the country is Sanu.

Chaired by former Tenke Mining president Paul Conibear, whose experience in the Democratic Republic of the Congo makes him no stranger to running a project in politically difficult climates, the company’s key project is Hambok which lies just 15 km southwest of Nevsun’s Bisha.

At the beginning of February the company announced a resource estimate with an indicated resource of 10.7 million tonnes grading 2.25% zinc, 0.98% copper, 6.84 grams silver, 0.2 grams gold and an additional inferred resource of 17 million tonnes grading 1.74% zinc, 0.85% copper, 5.89 grams silver and 0.19 grams gold. Those numbers were calculated using a 0.75% zinc cut-off grade.

Sanu began exploring in Eritrea in 1998 and made the Hambok discover in March of 2006.

And while such results are proving out the richness of the VMHS belt, clearly for Canadian miners to truly flourish in Eritrea peace and the rule of law must take a firmer hold.

An encouraging sign of that could be read into the European Commission’s recent decision to spend €122 million on development for the country.

The Commission, however, made clear that all was not rosy in the country and it took the opportunity to voice its concern about human rights issues and labelled Eritrean president Issaias Afewerki’s government as authoritarian.

Still despite its reservations the Commission said engagement with authorities was the best way to improve the situation

The jailing of Swedish-Eritrean journalist Dawit Isaak, who has been held without trial since 2001, is often cited by foreigner observers as an example of the country’s poor human rights record.