Farallon races to production

SITE VISIT

GUERRERO STATE, MEXICO–If there were a competition for the shortest timeline to move a discovery into production, Farallon Resources (FAN-T, FRLLF-O) might just win.

The junior company punched a few holes into the high-grade, poly-metallic G-9 deposit in 2005 but didn’t really start drilling the project until 2006. Now, less than two years later, the mill is going up and the underground declines are half done. Farallon expects to start producing in July.

“Speed is certainly the distinctive feature of this project,” says Michael Curlook, Farallon’s manager of investor relations. “We could have drilled more, expanded the deposit, all of that, but we might have missed the hot market. So we decided to build now, get a hold of some cash, and then continue exploring.” It’s all part of what Farallon president and CEO Dick Whittington calls “parallel-track mine development.” Whittington started purchasing major pieces of mill equipment before a prefeasibility study was complete. Earthworks for the mill site started far before the bulk of the resource definition drilling was complete. And he’s not planning on completing a feasibility study — the preliminary assessment came out only a few months ago, when mine development was already well under way.

The goal is to get the project into production in two years, rather than the four to eight years more often required.

Campo Morado, the larger project that encompasses the G-9 deposit, is in Guerrero state, Mexico, some 160 km southwest of Mexico City. The property hosts several polymetallic deposits and some 16 volcanogenic massive sulphide (VMS) occurrences within its 116 sq. km, on a northeast-southwest-trending belt.

The VMS deposits at Campo Morado are hosted in felsic-to-intermediate intrusive flows and tuffs and heterolithic fragmental rocks. The first deposit discovered in the area was La Reforma, a gold-silver-lead-zinc deposit a few kilometres northeast of G-9. La Reforma was mined for its precious metals on and off for 20 years between 1898 and 1940, financing part of Mexico’s revolution.

The Second World War brought an end to mining at La Reforma and until 1995, the region lay dormant, until Farallon optioned Campo Morado. Over the last 12 years the company has drilled over 100,000 metres in core holes, delineating five deposits and discovering numerous other occurrences on the property.

The Reforma, Naranjo, El Rey and El Largo deposits all sit along the same mineralized trend and in the same stratigraphic horizon. Though each is of reasonable size, all four arefine-grained, which makes metal recovery considerably more difficult and expensive. Then, in June 2005, Farallon cut its first hole into the property’s ninth gravity anomaly and found the G-9 deposit.

G-9 quickly became the focus at Campo Morado, for two reasons. First, the deposit quickly demonstrated higher grades than the previous four zones. Second, it soon became clear that the mineralization at G-9 is coarser-grained, making metallurgy much simpler.

Looking at core from G-9 is a lesson in geology. The copper is contained in chalcopyrite, a brassy yellow mineral. The mineral sphalerite, which has a brown-grey lacklustre appearance, hosts the all-important zinc. The lead comes through in galena, a slightly metallic silver-grey rock. And argentite, a similar-looking lead-grey mineral, carries the silver.

“Looking at this stuff, you can never really tell what’s going to run,” says Richard Niels, exploration manager for Campo Morado. “A core (sample) can look like nothing and run like hell.”

The deposit is laid out in a semicircle. The large, lower-grade Southwest zone runs up the left side and contributes 242,000 inferred tonnes grading 2.51 grams gold per tonne, 169.4 grams silver, 1.23% lead, 0.83% copper and 6.1% zinc. It is roughly 400 by 200 metres in area, but mineralization is confined to a thin layer and dominated by pyrite.

Across the top of the half-loop sits the high-grade North zone, home to 691,000 indicated tonnes grading 3.37 grams gold, 188.8 grams silver, 1.31% lead, 1.23% copper and 8.4% zinc, as well as 786,000 inferred tonnes grading 3.12 grams gold, 183.3 grams silver, 1.32% lead, 1.04% copper and 8.8% zinc. A stringer zone in the North zone footwall, modelled as a replacement zone, adds 42,000 inferred tonnes grading slightly higher. In places, the North zone contains multiple stacked VMS lenses, and base metal grades in the North stringer zone are the highest on the project.

Abajo zone

Just northeast of the North zone, creating a corner in the semi-circle, lies the underexplored Abajo zone. It hosts 313,000 indicated tonnes grading 2.4 grams gold, 181.2 grams silver, 1.28% lead, 0.96% copper and 10.1% zinc and 316,000 inferred tonnes at a similar grade.

The Abajo zone differs from the other regions of G-9 in that it sits below the major, southwest-dipping San Raphael thrust fault. Continuing northeast from Abajo one runs into the El Largo deposit, but drilling data suggests that the Abajo zone sits at a lower stratigraphic level than El Largo and so the two are independent.

And trending south from Abajo sits the southeast zone, a 200 by 300- metre area that contributes measured and indicated resources of 1.18 million tonnes grading 2.95 grams gold, 228.5 grams silver, 1.33% lead, 1.76% copper and 12.7% zinc and inferred resources of 192,000 tonnes grading 1.31 grams gold, 89.1 grams silver, 0.48% lead, 1.65% copper and 10.2% zinc.

All together, G-9 is home to measured and indicated resources of 2.18 million tonnes grading 3 grams gold, 209.1 grams silver, 1.32% lead, 1.48% copper and 11% zinc, as well as 1.6 million tonnes grading 2.72 grams gold, 178 grams silver, 1.24% lead, 1.11% copper and 9% zinc in the inferred category.

The deposit sits at a depth inside a steep hillside, some 600 metres from surface. But the steep ravine running along the hill’s west side provides an entry point for the underground operation. Two declines are currently under way, entering the hillside at the base of the ravine 15 metres apart. They descend into the hillside atan 8angle, with crosscuts every 200 metres.

The more northern San Agustin decline will be the main production conduit for the operation. The southern ramp is the ventilation tunnel. Once the parallel tunnels are advanced 1 km into the hillside, they will diverge. San Agustin will continue in the same direction at an 8 decline, while the ventilation tunnel turns to the south and starts to gently incline in order to access the Southeast zone.

Farallon’s team has advanced both tunnels roughly 800 metres so far. The goal is to complete two 3.5- metre blast cycles each day in each tunnel, so as to advance 7 metres each day on either side. The cost is averaging US$2,700 per metre.

Once the declines reach ore, it will be mined using mechanized cut-and- fill. Mining costs are expected to be around US$50 per tonne.

“With such high-grade ore, you don’t want to do room-and-pillar — that would leave too much behind,” Niels says.

The plan is to target the high-grade material from the Southeast zone and higher-grade material from the North zone at first, in order to maximize revenue in the first three years while expanding and developing the rest of the mine.

Zinc is the biggest story at G-9. While the gold and silver grades are impressive, unfortunately the precious metal mineralization is refractory and much of it will end up in the tailings. For the base metals, four phases of metallurgical testing have indicated that G-9 ore is amenable to conventional flotation processing. Some 92% of the ore’s zinc can be gleaned to achieve a concentrate running 54%. Copper recovery runs around 84% to produce a copper concentrate at 24%. Recoveries for lead and silver sit at 40%, and only about 20% of the gold in the rock can be extracted.

In terms of development, for a short whi
le in late 2007 things weren’t working smoothly for Farallon. To improve progress the company hired Canadian contract miners from WABI Iron and Steel and from JDS Energy, fresh off developing Sherwood Copper’s (SWC-V, SWOPF-O) Minto copper mine in the Yukon. Since the two contract teams arrived on scene things have improved, though ramp development is still behind schedule. Decline advancement averaged only 3.5 metres a day in each tunnel from November to February, roughly half the target rate. Now that both tunnels are advanced past a section of bad ground, rates are again expected to improve.

The permitting process for Campo Morado went well. The government approved the G-9 mining permit within the allotted 60 days, and more recently approved the company’s permit to develop a power line. Farallon also had two archaeological sites examined.

The milling plan sees ore fed into ajaw crusher and stacked on a 4,000- tonne stockpile. Two feeders will move 1,500 tonnes of crushed ore each day into an autogenous grinding mill. Following rougher flotation there are two optional regrind mills, then ore is fed into the various concentrate circuits. The lead circuit can be brought into or out of the plant circuit depending on the lead grade of the mill feed.

On the fast track

Interestingly, the components of the mill are a testament to the fast-track program Farallon is using to get this project going.

“To get the mill going quickly we went with what was available,” Curlook says. “For example, we couldn’t find a low-speed motor that would have been available in time, so we went with a high-speed motor and a gear reducer.”

Tailings will be contained in the alley north of the mine portal area. The lined impoundment area will be sufficient for five to six years of production; if more volume is required, another site is lined up to the northeast.

The site is road-accessible from Mexico City, on paved highways until the final 30 km on a graded dirt road. Farallon also developed a second dirt road, some 25 km long, to facilitate workings at Campo Morado. It runs from the state highway to the west and passes through many small communities, including the town of Arcelia, and is expected to be the route with lower maintenance costs.

The new road is also essential to Farallon’s housing plans. The company is going to develop a small camp at the mine site but expects to house the majority of its labour force in Arcelia, a one-hour bus ride away. It has purchased a small hotel in town for that purpose.

And Farallon is building a 22-km power line into the project. The government dictated the company put in an 80-megavolt line, even though the mill’s average power draw is only 7.2 megavolts. Roughly half of the power line’s 64 towers are in place to date.

To pay for all of this, Farallon inked a deal with London-based Rothschilds & Sons for a US$20- million bridge loan to pay for pre-development work and a US$70- million refinance and development loan. Farallon started to draw on the bridge loan in March.

When that is spent, Farallon will start drawing on the larger loan, US$20 million of which will be used to refinance the bridge loan. By August, the company plans to have the mill running and so have cash coming in to start repaying the larger loan. Curlook says the short time-frame takes a big chunk of the risk out of the project, from a banking perspective. That is perhaps why the agreement did not include any hedging requirements. To date, Farallon has not hedged any of its production or signed any offtake agreements.

And Farallon is by no means done with exploration at Campo Morado.

In fact, once G-9 is in production, the company’s stated goal is to find another G-9. Given the number of massive sulphide occurrences already discovered in the area, analysts think the likelihood of finding more significant mineralization is high.

Two exploration targets immediately present themselves. The first is expansion of the Abajo area. The fact that Abajo is lower strati-graphically than El Largo, to the north, leaves Abajo open to expansion northwards. The difference in grain size between Abajo (coarse) and El Largo (fine) also supports this conclusion.

The second obvious exploration focus is the remaining gravity anomalies on the property. Farallon discovered G-9 by blind drilling a gravity anomaly and half a dozen major gravity anomalies are yet to be probed.

Farallon currently has two drill rigs on-site, with a third arriving soon. For the short term the rigs are all committed to infill drilling at G- 9, for mine planning purposes. In the longer term, however, the drill will shift to exploration, starting with drilling north of the San Raphael fault.