Uruguay’s Only Miner Searches Out More Gold

Uruguay’s relative obscurity as far as mining countries go has generally worked for Uruguay Mineral Exploration (UME-V, UGY-L).

While other companies have dipped a toe in the temperate South American country’s exploration scene, unlike Uruguay Mineral, few have stayed long enough to really test the potential of Uruguay. With little competition, the company has been able to amass a stable of 19 projects throughout the country — plus Uruguay’s only mine.

“There have been quite a lot of people who have been in and out over the last fifteen years, but it’s typically been a country that when exploration budgets get cut, probably the first thing that gets cut is Uruguay,” says Uruguay Mineral’s non-executive chairman Tony Shearer.

Over the 11 years since the company was founded by a pair of Australian geologists enchanted by both Uruguay’s mineral potential and its charm, Uruguay Mineral has made full use of that advantage. While there is a lack of mining tradition in the stable, democratic country, it is still prospective, with gold mining operations dating back to the 1880s.

“What we basically did was when one company got fed up (and left), we started gathering and have continued to gather all the geological work that’s been done in the country and we put it together in a big database,” Shearer says.

The result is that Uruguay Mineral holds 6,400 sq. km of prospective land in the country and a gold operation — the San Gregorio mine — that targets production at close to 100,000 oz. per year. Located about 450 km north of the capital of Montevideo, in the Isla Cristalina Belt, San Gregorio provides the funds for Uruguay Mineral’s extensive exploration program. This year, targets on the 110 by 40-km Isla Cristalina Belt will see 50,000 metres of drilling.

Bought in October 2003 from Crystallex International (KRY-T, KRY-X) for US$2 million in cash, plus payment of US$2.7 million in debt and hedging obligations, San Gregorio has been in production since 1997, when it was owned by Rea Gold.

Uruguay Mineral’s plan at the 1.2-million-tonne-per-year open-pit operation is to find nearby resources to blend with current resources to maintain production in the neighbourhood of 100,000 oz. gold annually for another three years. The company is looking for additional high-grade open-pit ounces that can contribute to production within the next two years and underground resources at San Gregorio that can be brought into production within the next three.

San Gregorio is a shear-hosted gold deposit located in the Isla Cristalina Belt, an erosional window of Proterozoic granites and greenstones. Anomalous gold mineralization, which occurs along the entire belt, is associated with the Rivera Shear zone. The principal alteration consists of chlorite-carbonate- sericite-silica-pyrite. The mineralized system at San Gregorio covers a 7-km shear zone.

As of June 2008, total measured and resources in the Isla Cristalina Belt (including the three open-pit deposits that constitute San Gregorio, plus five smaller ones) totalled 19.6 million tonnes grading 1.22 grams gold per tonne for 773,600 oz. gold at a cutoff grade of 0.5 gram gold. (That includes reserves of 5.6 million tonnes grading 1.35 grams gold for 244,830 oz.) Uruguay Minerals wants to eventually prove up reserves of at least 700,000 oz. gold to support a 10-year mine life. Both the Arenal and San Gregorio deposits show potential to be extended underground; exploration is also ongoing in areas outside the mine property.

While San Gregorio has the resources to keep going for at least another five years, production has declined in the past year or so, causing costs to spike. During the most recent quarter ended Nov. 30, the company produced 15,837 oz. gold at San Gregorio instead of a targeted 20,500 oz. gold. The mill processed 303,740 tonnes at a head grade of 1.72 grams gold over the period.

Production this fiscal year was originally forecast at around 80,000 oz., but lower grades at the Arenal open pit mean that will be closer to 72,000-75,000 oz. gold for the year.

“While the mine plan for Arenal was based on an independently estimated resource model, drill density where the production shortfall occurred was lower than in other areas of the resource model,” said David Fowler, Uruguay Mineral’s chief executive in a statement.

Resources to be mined during the second half of the fiscal year have a higher drill density, the company says.

Shearer adds that Arenal is near the end of its life — it will be exhausted within a couple of months.

“The Arenal grade has been very variable, especially as it’s got to the end of its life and we’ve got to the outer edges of the orebody,” he says.

The lower grades at Arenal inflated cash costs to US$811 per oz. gold for the last quarter — the second quarter of Uruguay Mineral’s fiscal 2009. That compares with US$374 per oz. during the same period a year earlier, or US$792 in the previous quarter. The company now expects cash costs for the year to average US$600-630 per oz.

Shearer says the cost escalation is “purely down to grade” and that the company expects grades to be more consistent in future. High fuel costs and a strong Uruguayan peso also contributed to higher costs, but both of those factors have started to ease.

At the end of its most recent quarter ended Nov. 30, Uruguay Minerals had US$6.5 million in cash, considerably lower than the US$9.5 million it had budgeted.

Uruguay Minerals posted a net loss of US$7.9 million for the quarter on revenue of US$11.7 million, compared with net income of US$4.3 million on revenue of US$21.2 million in the same quarter a year earlier.

To improve its financial footing, the company has implemented a cost-cutting plan that will shear US$1.25 million off its US$11-million exploration budget for the year (spending less on greenfield exploration), and is reducing its staff by 20%.

It’s also moving forward with plans to interest other companies in its non-gold properties. Negotiations to joint venture the company’s Cinco Rios diamond property, on the Rio de la Plata craton in northern Uruguay, are under way.

It’s also looking at potential acquisitions outside of Uruguay that could raise its production profile.

In the meantime, the company is focused on its next big find.

“What we haven’t done in the last couple of years is replaced in total the ore that we’ve been using,” Shearer says. “We’ve been finding the 5,000, 10,000 ounces of ore near to the mine. The challenge for us in the next year is to find the next big orebody.”

Uruguay Minerals recently traded at 26¢ in a 52-week window of 20¢-$3.55. The company has 48.7 million shares outstanding.