LATIN AMERICA — Monarch improves performance of Venezuelan mine

Staying the course in Venezuela after the short-lived gold rush of the late 1980s may yet pay off for Monarch Resources (MRE-T), operator of the La Camorra gold mine in Bolivar state.

Despite the current slump in gold prices, Monarch reported positive cash flow from La Camorra for the first time since the first quarter of 1997. Operating costs were reduced by 37%, or US$6 million, on an annualized basis — a feat the company describes as a “significant turning point.”

“We’re headed in the right direction,” says Lester Knight, vice-president of finance. “But at these low prices, our efforts to cut costs to the point where we get back on the radar screen will have to be ongoing.”

Cutting production costs is but one of several challenges Monarch has faced since it arrived in Venezuela along with numerous other North American companies more than a decade ago. Most were lured to areas being worked by artisanal miners, such as the Kilometre 88 region in the southeast, where Placer Dome was exploring the huge Las Cristinas gold deposit.

The government of the day, then battling a downturn in oil prices, hoped to diversify the economy by developing a modern mining industry. Taking a cue from Chile’s mining boom, Venezuela promised to lift exchange controls and implement changes to the mining code in order to improve the odds of success for the influx of foreign investors. However, those changes, which included the right to export gold freely, were tortuously slow in coming.

Once oil prices recovered, most politicians ignored efforts to diversify the economy. The gold rush ended almost as quickly as it began, and without bearing much fruit. Even Las Cristinas has yet to reach production, though delays there also included an unsuccessful ownership challenge.

Monarch’s initial exploration in Venezuela also bore little fruit, so it turned its attention to an opportunity to build a mill in order to process gold-bearing sands feed near the town of El Callao. The project was an equal partnership with Corporacion Venezolana de Guayana (CVG), a quasi-state mining company then actively promoting the gold mining sector.

Construction of the Revemin mill was completed in 1989. However, initial operations were disappointing, owing to lower-than-expected grades at the sands feed and processing difficulties arising from higher-than-expected clay content. By early 1991, it was apparent that extracting profits from the Revemin mill would not be easy.

Fortunately, by this point, Monarch’s persistence on the exploration front had led to a gold deposit being outlined at La Camorra, on a concession covering a portion of the the Botanamo greenstone belt in the El Dorado district. A 1992 feasibility study showed that the project hosted a resource of 613,840 tonnes grading 20.3 grams gold per tonne, with the bulk of this classified as an underground resource.

The US$25-million La Camorra mine, completed on schedule and on budget, poured its first gold in June 1994. As with most new mines, there were startup problems, and some mill modifications were required. It also became apparent that productivity suffered from the lack of skilled workers and delays in receiving supplies.

Production in 1995 was generally disappointing. La Camorra turned out 48,850 oz. of the yellow metal that year, at a cash production cost of US$338 per oz., resulting in a US$3.1-million operating loss. A turnaround was achieved in 1996, when the mine produced 56,549 oz. gold at a cash cost of US$245 per oz. The operating profit that year was a healthy US$3.9 million.

The improvement was attributed to higher grades and recoveries and an overall reduction in costs brought about by workforce reductions and cost-control programs. Monarch also benefited from several market reforms introduced that year, including the lifting of exchange controls and the establishment of a floating exchange rate.

However, the Revemin mill was still struggling, battling high costs and dwindling supplies of feed. The mill posted an operating loss of US$1.1 million in 1995. This was followed by a loss of US$877,000 in 1996, which prompted Monarch to write down the asset at year-end.

In June of this year, Monarch sold its 51% interest in the Revemin mill to Bolivar Goldfields (BVG-T) for US$8.25 million and 1 million Bolivar shares. The sale of the mill, which had not been profitable since 1994, allowed Monarch to realize a gain of US$7.8 million in the second quarter of this year.

“The deal worked well for everyone,” Knight says. “Bolivar, which has the nearby Tomi [gold] deposit, no longer has to build its own mill.”

Eroding gold prices also took their toll on La Camorra, prompting Monarch to include a US$18.8-million writedown of the mine in the second quarter of 1997, as well as estimated restructuring costs of US$2.2 million.

Since then, Monarch has struggled to eke out profits from the underground operation. The latest quarter was a turning point, with La Camorra generating positive cash flow based on production of 12,550 oz. at a cash cost of US$253 per oz. The mine is expected to produce about 48,000 oz. gold this year at an average cash cost of US$264 per oz.

This year’s improved performance reflects, in part, outsourcing of the mine’s service requirements and a 47% reduction in personnel. Changes were also made to the methods used to develop and mine the high-grade, narrow veins at La Camorra, including:

* reducing the dimensions of the ramp and access drifts;

* long-hole drilling in many areas that previously were mined by jack-leg drilling;

* increasing the distance between mining levels; and

* developing on-vein where appropriate.

Monarch notes that the improvements were made while giving special attention to safety and health programs aimed at maintaining high safety standards.

As a result of these improvements, Monarch reported a net loss of US$310,000 from operations for its latest quarter ended June 30, greatly reduced from the US$2.4-million loss reported in the same period of 1997. The quarter’s positive cash flow of US$590,000 was a major improvement over the US$989,000 cash flow deficit for the same period in 1997. And administrative costs were reduced 37% year-over-year.

Still, Knight says efforts are being made to cut costs further. “To get costs down to where the big boys are, we’ll have to expand production to 75,000 oz. annually.”

The company’s ability to achieve this goal may depend, in part, on efforts to reduce short-term loan obligations of US$17.7 million, which will mature in June 1999. A portion of the proceeds from the Revemin sale will be applied for this purpose. The company will also seek to extend the term of the remaining obligations for another year.

Politics, too, may help or hinder Monarch’s efforts, as presidential elections are scheduled for late this year. Capital markets are already nervous because one of the leading candidates is a populist with nationalist tendencies. However, some observors expect that a more business-oriented candidate will prevail. And oil prices are once again in the trough, which means efforts to diversify the economy might find renewed favor.

Another issue of concern to Monarch and other investors is monetary policy, which is heavily focused on defending the domestic currency. A change in direction would help domestic industries become more competitive. “Devaluation would help us more than a higher gold price,” Knight says.

On the exploration front, Monarch has focused on its deep drilling program at La Camorra, and on follow-up drilling at two projects in Mexico.

This spring, an 11,000-metre program at La Camorra began testing the downward extension of the mineralized zone. Results from the first-phase program, which include 16.54 metres averaging 29.59 grams gold and 18.18 metres of 26.61 grams (carried by even higher-grade gold over narrower intervals), have confirmed that the ore-grade mineralization extends to depths well below the levels to which reserves and resources have been calculated.

“If confirmed through additional drilling, the results would add signific
antly to the current ore reserves/

resources at La Camorra,” the company states.

The second and third phases of this program will be completed by year-end.

Not content to keep all its eggs in Venezuela, Monarch continues to explore its San Agustin and Saladillo projects in Mexico. At the former, 29 reverse-circulation holes totalling 5,799 metres were drilled. When combined with previous drilling, the latest results delineate a 800-by-200-metre mineralized zone. This target is estimated to contain 73.8 million tonnes with an average grade of 0.5 gram gold, 7.2 grams silver and 0.33% zinc, which includes a 50-metre-thick oxide zone with an average grade of 0.65 gram gold and 13.5 grams silver.

A geological review and metallurgical testing are planned, to determine the economic viability of the project.

At Saladillo, 8,800 metres of core drilling were completed on the Francine and North veins. Results are still awaited from this work, which was aimed at expanding existing silver-gold resources.