Digging into China’s vast, untapped, interior

SITE VISIT

Xinhuru, Inner Mongolia, China — In the summer months, the sparse grasslands in this remote corner of China’s enormous Inner Mongolia Autonomous Region are used primarily by locals to graze their small herds of sheep and goat, or to grow sunflowers.

But on a recent bone-chilling winter day, the only signs of life here are the odd peasants, bent against the wind and grit, driving motorcycles along a highway that seems like it starts and ends in the middle of nowhere.

During a 3-hour journey from the industrial city of Baotou to the site of Jinshan Gold Mines’ (JIN-T, JINFF-O) open-pit mine near Xinhuru, our bus passes just one small cluster of low-lying buildings that couldn’t even remotely be described as a small town.

And then it is gone, almost in the blink of an eye. Most of the adobe structures along other stretches of roadway seem either derelict or abandoned.

Inner Mongolia is roughly six times the size of France with one-third its population. It is China’s third-largest province, stretching across 1.2 million sq. km with a population of just 24 million — most of which is concentrated in industrial and urban centres.

“It’s one of the best places in the world to have a heap-leach operation,” Roger Walsh, vice-president of Jinshan’s corporate development, says cheerfully. “We’ve got heaps of space with limited impact on the local community.”

Jinshan’s gold mine may be just a tiny speck in this vast, barren landscape, but the Vancouver-based junior is thinking big. It fervently believes its large-tonnage, low-grade gold mine will be just the first in a long list of successful projects it will operate in China.

“They’ve seen what we can do,” says Walsh confidently. “We have an advantage because people can come here now and see what we’re doing. And it’s not just the government. It’s the people who can see what we’ve done.”

In July, Jinshan poured its first 500-oz. gold dor bar from its Chang Shan Hao (CSH) 217 mine. As of Dec. 18, gold production had reached about 27,000 dor oz., or 19,000 oz. gold, and commercial production is on target to begin in the first quarter of 2008. (Silver makes up about 30% of each dor bar).

Jinshan is one of only a handful of foreign gold companies that have ventured into China’s highly fractured and undercapitalized gold mining industry. Until recently, only Australia’s Sino Gold (SIOGF-O, SGX-A) had actually produced gold in China.

Jinshan’s CSH 217 is now officially the second. It is operated by Ningxia Pacific Mining, a Sino-foreign joint venture between Jinshan Gold (96.5%) and the Ningxia Nuclear Industry Geological Exploration Institute (3.5%).

Jinshan sells its gold to the Shanghai Gold Exchange, which closely tracks the London gold fixing price. A shipment from CSH 217 in October sold for about US$749 per oz.

“We’ve got very good cash flow,” Walsh says. “We’re mining oxides now, but in about 18 months we’ll be into the fresh rock, which will require crushing.”

The oxide ore in the upper level of the deposit does not require crushing prior to leaching and is placed directly on the leach pad as run-of-mine ore, he explains.

The 217 mine has a measured and indicated resource of 2.92 million oz., plus 450,000 inferred oz. The resource from the feasibility study shows that at a cutoff grade of 0.5 gram gold per tonne, CSH has a measured and indicated resource of 110.1 million tonnes grading 0.83 gram gold plus 18.3 million inferred tonnes at 0.78 gram gold.

The plan

Under the current mine plan, the plant is slated to process 20,000 tonnes a day, or an estimated 117,000 oz. gold a year, at an estimated cash cost of US$290 per oz.

Now the company is studying to see if it can raise production to about 180,000 oz. gold per year.

“We have commenced a scoping study to determine the costs of increasing the production rate from 20,000 tonnes per day to 30,000 tonnes per day,” Walsh says. “There would be additional capital required and we are evaluating this along with the work we are doing on the second phase of capex.”

The study is expected to be released in February and will include updates to reserves, resources and production throughput. About 11,000 metres of drilling was completed in 2007 to target additional reserves and resources.

“We’re going to base a team of geologists here to extend the resource and do more exploration,” Walsh adds.

The mine plan and production schedule were developed based on drilling completed through 2005 and a gold price of US$425 per oz.

In the April 2006 feasibility study, the company estimated it would recover about 1.15 million oz. over about 10 years. But the actual ounces recovered and mine life will be higher and longer as the company has ounces in the resource category and has added to these over the past year.

“We are in the process of revising our mine plan based on a US$600 gold price, which will increase the number of ounces that will be mined as we can drop the pit lower,” Walsh explains.

Under the initial mine plan, the total waste to be mined is estimated at about 71.3 million tonnes, yielding a strip ratio of 1.07:1.

A total of about 66.7 million tonnes of ore averaging 0.75 gram gold per tonne will be placed on the heap-leach pads during the life of the mine.

Initial and future capital costs were initially estimated at US$61 million. But sustaining costs in the future will likely increase by about 20% from the 2006 feasibility numbers. So far, US$34 million has been spent and the remainder will be used over the next 18 months to pay for crushers, conveyors, expanded leach pads and other items.

Jinshan estimates the payback period will be less than 18 months, with higher gold prices or more ounces recovered shortening that timeframe.

Water resource studies indicate that there is more than enough water to sustain mining. The primary source: groundwater and alluvial aquifers from the Mo Leng River channel. The second source: groundwater from mine dewatering efforts.

A detailed water estimate indicated that the annual water flow through the aquifers is 1.2 million cubic metres per year — 20% more than the required water demand for the planned mining, leaching, processing and other uses.

Power, meanwhile, is generated at the Wu Lashan electricity power station and supplied to the national grid. The Xi Doupu substation is 82 km from the open pit.

CSH 217 was discovered by a geological team of the Bureau of Geology and Mineral Resources during a regional stream-sediment sampling program in the 1980s. The gold wasn’t mined, however, because Jinshan’s partner was looking for uranium at the time.

Since then, a lot of people looked at it, Walsh says, “but gold prices were low, so nothing happened.”

Jinshan has hired contractors to mine the project — a subsidiary of China National Railways — and gets most of its heavy mining equipment from Atlas Construction Machinery, a Sino-German joint venture with Germany’s Atlas-Terex, a world famous manufacturer of excavators, which has a state-of-the-art factory in the city of Baotou.

The CSH 217 mine, 126 km northwest of Baotou and 650 km northwest of Beijing, is situated in northern China’s Tianshan gold belt, which extends along the northern margin of the North China craton.

The mineralization is meso-thermal quartz mineralization. Gold is observed in sulphide ore zone samples and occurs as fine locked grains or attachments to arsenopyrite.

Gold is also seen as attachments and inclusions with pyrrhotite and as liberated particles. The ore mainly contains gold with minor silver, copper, lead and zinc.

The host rocks are mainly carbonaceous phyllite, schist, and slate within the lower members of the bilute formation.

The gold mineralization is composed of thin (1 to 10 mm) sulphide and quartz sulphide veins, stringers, and boudinaged lenses, which are concordant with the bedding and foliation and trend along the shear zone.

Three d
istinctive styles of mineralization are noted within the target stratigraphy.

In the upper third of the sequence, the mineralization is dominantly quartz-rich, with only minor sulphide seams.

In the lower third of the sequence, the mineralization is primarily of the sulphide vein type with only rare scattered quartz material. In the middle of the sequence, the mineralization is an even mixture of the two types.

The principal type of mineralization is native gold occurring directly with the sulphides in the seams and in association with the quartz vein material.

The Golden Dragon

China is the second-largest gold-producing country in the world. Last year, it churned out 247 tonnes of gold, second only to South Africa, with 292 tonnes, according to Gold Survey 2007, published by GFMS.

Of greatest interest is “the narrowing gap between South Africa, which has reigned supreme for just over a century, and China,” write the survey’s authors.

“With China’s strongly seasonal gold production favouring the second half, as well as the anticipation of meaningful production volumes from the new Jinshan CSH 217 and (Eldorado Gold’s) Tanjianshan mines, the balance or probability could favour “The Dragon” as the world’s largest producer for the full year,” the survey found.

“China is rapidly getting to the point where it will be the biggest gold producer in the world,” Walsh says. “And they want to bring in a Western approach to mining.”

The average gold price in the first half of the year was US$658.12 per oz. — a new all-time half-year record, the survey noted. (The previous high was US$639.04 per oz., in the second half of 1980.)

The gold market in China has been liberalized by reforms to banking legislation, reorganization of government departments and committees, and the founding of the Shanghai Gold Exchange (SGE).

Primary domestic producers sell gold on a commercial basis at world prices to any of the SGE’s 108 members. SGE members include 13 commercial banks, 24 gold miners, 61 consumer units, eight refineries and two mints from 26 regions in China.

Foreign-owned enterprises are not allowed to join the SGE, the survey notes. Only members can trade on the exchange and transactions are restricted to spot trades (that is, no forward selling or contracts).

Gold sold on the SGE must be refined to 9995 or 9999 fine ingots of 50 grams, 100 grams, 1 kg, and 12.5 kg with minimum volume of 6 kg per transaction.

Just the beginning

With Jinshan moving into production this year, the company is now starting to get overtures from the Chinese government to look at other areas.

The company also has a property in Dadiangou, in central China’s Gansu province.

The licence covers about 15 sq. km and is owned by the Northwest Industrial Nuclear Economic Technical Corp., part of the Shaanxi Nuclear Geology Bureau of China. The joint-venture agreement allows Jinshan to earn an 80% interest in the project.

In the first phase, drilling defined continuous gold mineralization over a 2-km strike length with true widths of up to 44 metres.

“What excited us about it was that it had never been tested below fifty metres,” Walsh says. “So we drilled twenty-two holes and by the end of the year we hope to have a resource on it.”

Jinshan is also targeting new gold discoveries in the prolific Tianshan gold belt and holds 13 exploration permits through a joint venture in which it holds a 99% stake. The Tianshan belt extends through Central Asia from Uzbekistan to China’s Inner Mongolia and Mongolia, and hosts many world-class gold and copper deposits, including the giant Muruntau and Kumtor mines. The Oyu Tolgoi copper-gold discovery occurs in the eastern extension of the Tianshan belt in Mongolia.

The company is also looking at the possibility of mergers and acquisitions in China, Walsh adds. Looking further ahead, Jinshan hopes to take the employees it trains in China to work for the company in other parts of the world.

“We’ll be able to take a lot of our expertise, our trained staff, to other places,” Walsh explains. “We’re looking at other areas too, such as Central Asia, Africa, across the border in Mongolia, and certain parts of Latin America.”