Deals may bring Queenstake’s Magistral closer to production

Vancouver-based explorer Queenstake Resources (QRL-T) has entered into two agreements it says provide the financing and equipment it will need to put its Magistral gold project, in Sinaloa state, into production.

Queenstake and a private U.S.-based company, Midwest Mining, have formed a joint venture to pursue further feasibility studies at the project.

At the same time, Queenstake has taken an option from Campbell Resources (CCH-T) to buy Oro de Sotula, the Campbell subsidiary that operated the Santa Gertrudis mine near Magdalena in Sonora state (T.N.M., Sept. 10/01).

In the Queenstake-Midwest joint venture, the private company receives a 50% interest in the Magistral project, as well as a 15% shareholding in Pangea Resources, Queenstake’s U.S. subsidiary and (through a wholly-owned Mexican company) the land holder at Magistral. Midwest contributes US$6.1 million.

The initial expenditure commitment is US$475,000 for permitting work and further engineering, plus US$150,000 to cover initial option payments to Campbell. The joint venture must then make a production decision within nine months, or Midwest can drop out with US$750,000 in cash or Queenstake stock.

Queenstake would operate the joint venture, receiving US$300,000 annually in operating fees. Cash flow remaining after that payment would be distributed 70% to Midwest and 30% to Queenstake until Midwest has full payback plus a 12% return on its initial investment. That payback will have to be complete within 66 months, or penalties become payable.

At US$300 per oz. gold, Magistral has a reserve of 6.1 million tonnes grading 1.86 grams gold per tonne in four deposits: San Rafael, Samaniego Hill, Sagrado Corazon and Lupita. The average stripping ratio for the four pits is 5.6-to-1.

Metallurgical tests indicate heap-leach recoveries would average 73%, and operating costs have been estimated at US$180 per oz.

Permitting and design are expected to take about six months, and initial construction, a further six.

In Queenstake’s deal to buy Oro de Sotula, Campbell Resources will get US$25,000 monthly during the 6-month life of the option.

Queenstake’s actual purchase of Sotula would be paid for by US$2 million in two separate notes. Part of the first US$1-million note becomes payable once the gold price rises above US$315 per oz. for a minimum of 120 days, with additional portions becoming payable if gold rises above US$330 and US$350, again for a minimum 120-day stretch.

The second note, also for US$1 million, is conditonally payable, and the actual payment will depend on the reclamation costs and other liabilities at Santa Gertrudis.

What Queenstake has its eyes on at Santa Gertrudis are the plant and equipment. The company expects it could use most of the mill, though it would have to add secondary and tertiary crushers.

If there is a sustained rise in the gold price and the known, but currently uneconomic, resources at Santa Gertrudis become feasible to mine, Campbell will receive a 1% net smelter return royalty from any production by Queenstake. If Queenstake can sell the property, or interest a third party in a joint venture, Campbell will be entitled to one-third of the proceeds.