Queenstake to proceed with production at Magistral

The Magistral gold project in northern Sinaloa state, Mexico, will be pouring gold by September following a positive production decision by operator Queenstake Resources (QRL-T) and its joint-venture partner Midwest Mining.

Magistral, with a proven and probable reserve of 6.2 million tonnes grading 1.9 grams gold per tonne, is slated to produce 40,000 oz. gold annually from 1 million tonnes of ore. Magistral will be a heap-leach operation, with production to come from four open pits: San Rafael, Samaniego Hill, Sagrado Corazon, and Lupita. A small resource in tailings left by a previous operator is also scheduled to be leached.

Magistral’s heap-leach plant incorporates a 3-stage crushing circuit, producing a crushed leach aggregate in which 80% of the material is below 12.5 mm. The material will be stacked in 8-metre lifts and heap-leached for four months.

Capital costs over the life of the mine are about US$18 million, of which US$13.7 million will be up-front. The need for financing led Queenstake to form a joint venture to finance the project.

In September, Queenstake made a financing agreement with privately owned, Delaware-based Midwest, which committed to a US$6.1-million cash infusion (of which US$3 million has been remitted to Queenstake). Midwest now holds a direct 50% interest, plus a 15% interest in Queenstake’s U.S. subsidiary, Pangea Resources (which, in turn, owns the other half of Magistral through a Mexican subsidiary).

Queenstake will be receiving a US$300,000 operator’s fee during construction, and US$600,000 annually once the mine is in production. Once Magistral has paid back Midwest’s US$6.6-million (plus imputed interest at 12%), Queenstake’s management fee falls back to US$300,000 a year and the company begins to receive cash flow from the mine.

Also in September, Campbell Resources (CCH-T) dealt Queenstake an option on its Oro de Sotula subsidiary, which had operated the Santa Gertrudis gold mine in northern Sonora state. Equipment and buildings from the closed Santa Gertrudis mine will make up a large part of the capital at Magistral. The joint venture plans only to acquire new secondary and tertiary crushers and related equipment.

Permits for construction, and approval of the project’s environmental impact studies, came through from the Mexican regulatory authorities in December. The major surface rights holders have all reached land-use agreements with Queenstake.

Exploration drilling is scheduled to start at the La Prieta prospect, part of the Samaniego Hill zone, which holds the bulk of the resources at Magistral. Proven and probable reserves at Samaniego Hill have been estimated at 3.1 million tonnes grading 1.9 grams gold per tonne, but mineralization at the zone is open along strike and at depth.

Queenstake has also reached an agreement to convert an outstanding debt (held in the form of a convertible note to Landon Clay, a Boston investor) into shares. Clay will receive 9.7 million shares and 1.8 million warrants (exercisable until September 2002 at 18 and thereafter at 27, until they expire in September 2003).