Eritrea’s Potential Sees Canadian Miners Through Turbulence

Eritrea usually finds itself in the Western media’s headlines for its dispute with neighbouring Ethiopia over the border that divides the two countries.

But Western mineral explorers in the know are paying attention to the East African country for another reason: it is home to one of the world’s largest and most underexplored volcanic-hosted massive sulphide (VHMS) belts in the world.

Three Canadian-based miners have made significant discoveries along the belt over the last five years and they are intent on bringing the country into the centre stage of the mining world.

Nevsun Resources (NSU-T, NSU-X) has made the most significant find with its Bisha discovery. The project sits close to Sanu Resources’ (SNU-V, SNULF-O) Hambok discovery, both of which lie in the western lowlands portion of the belt. Sunridge Gold (SGC-V, SGCNF-O) has also made several discoveries at its Asmara project, which covers an expanse of the belt in the central highlands, near the capital of Asmara.

The flurry of discoveries is in keeping with the nature of VHMS belts, which typically host deposits in clusters.

The Iberian Pyrite belt of Spain and Portugal is a prototypical example, with some 88 deposits that combined, hold 1.6 billion tonnes of massive sulphides containing 63 million tonnes of zinc, copper and lead.

But if the belt has been somewhat overlooked, it is not without reason.

For such a small country — its population is just 5.5 million and its gross domestic product only US$1.5 billion — Eritrea has rather large issues.

It has been run by a transitional government since declaring independence in 1993 from Ethiopia. The two countries have held a fragile peace since a two-year war erupted in 1998 over the border town of Badme.

While a UN commission ruled the town was rightfully Eritrea’s, Ethiopia still occupies it. The latest attempt at peace is being brokered by Libyan leader Moammar Gadhafi, who is taking his turn as the head of the African Union.

But miners in Eritrea have waded through such uncertainty, partly buoyed by a mining code based on Australia’s Northern Territory — with a royalty of 5% on precious metals, 3% on base metals, and a tax rate of 35%.

And their patience was seemingly rewarded when Nevsun secured a mining licence for Bisha last year.

The licence came after a steady stream of accomplishments for Nevsun. It finished its feasibility study for Bisha in late 2006, got a stability agreement in place with the government by the end of 2007, and was awarded a mining licence in January 2008.

To get there, though, the company had to come to an agreement with the government that gives it a 40% stake in the project. In return, the government must contribute one third of the equity needed for construction.

Nevsun currently has roughly $40 million in its treasury and plans to raise the bulk of the rest of the $250 million it will need to get to production through debt financing — which it plans to have secured by the end of the first quarter.

The richness of the deposit, Nevsun says, allows for a higher than usual debt-to-equity ratio because the payback period is very short.

By Nevsun’s calculations, the project has an internal rate of return of 42% and a payback period of just 1.6 years.

The deposit’s 20 million tonnes of proven and probable reserves is held in three zones, with 4.02 million tonnes grading 7.99 grams gold per tonne and 33 grams silver in the oxide cap; 6.35 million tonnes grading 0.83 gram gold, 36 grams silver and 4.4% copper in the supergene layer; and 9.71 million tonnes grading 0.76 gram gold, 54 grams silver, 1.14% copper and 7.21% zinc in the primary zone, which is the deepest of the three zones.

The mine is set to go into production by mid-2010 and has an estimated mine life of 10 years.

As for Sunridge Gold, its chief exposure to the country is through its Asmara project, which sits just west of the city of Asmara.

The 925-sq.-km project hosts four deposits, three of which it describes as VMS deposits: the Emba Derho copper-zinc-gold deposit, and Debarwa and Adi Nefas, which are high-grade gold, copper, zinc, and silver deposits.

The fourth, Gupo, is a gold deposit that sits 8 km from Emba Derho. Mineralization there is associated with quartz veins along a shear zone and also occurs as free gold associated with sulphides in mainly quartz veins.

The government has a 10% free carried interest in Asmara with Sunridge holding the rest.

Emba Derho has an indicated resource of 38.4 million tonnes grading 1.02% copper, 0.99% zinc, 0.18 gram gold and 9.31 grams silver in the copper-rich primary zone. A second zone, the zinc-rich primary zone, has indicated resources of 20.5 million tonnes grading 0.28% copper, 2.35% zinc, 0.39 gram gold and 12.13 grams silver.

But Sunridge’s most recent work has been at Gupo. In early February, it announced metallurgical results for the gold deposit that returned recoveries of 98.4% for gold in the oxide zone and 95.6% for gold in the sulphide zone.

Sunridge says it will do a new resource estimate and scoping study on Gupo to determine the economics of a low-cost, open-pit, heap-leach gold operation.

At this point, Gupo has an inferred resource of 1.97 million tonnes grading 2.99 grams gold for 189,000 oz.

That resource estimate doesn’t include results from 26 holes that were reported back in January 2007. Results from that program were highlighted by: 38.5 metres grading 2.12 grams gold, 26 metres of 1.03 grams gold, and 59 metres at 1.52 grams gold.

The third key Canadian player in the country is Sanu.

Chaired by former Tenke Mining president Paul Conibear, whose experience in the Democratic Republic of the Congo makes him no stranger to working in politically difficult climates, the company’s key project is Hambok, just 15 km southwest of Nevsun’s Bisha.

At the beginning of February, the company announced an indicated resource of 10.7 million tonnes grading 2.25% zinc, 0.98% copper, 6.84 grams silver and 0.2 gram gold, plus 17 million inferred tonnes grading 1.74% zinc, 0.85% copper, 5.89 grams silver and 0.19 gram gold. Those numbers were calculated using a 0.75% zinc cutoff grade.

Sanu began exploring in Eritrea in 1998 and made the Hambok discovery in March 2006.

While such results are proving the richness of the VMS belt, for Canadian miners to truly flourish in Eritrea, peace and the rule of law must take a firmer hold.

The European Commission’s recent decision to spend y122 million ($194.2 million) on development in the country may be an encouraging sign on that front.

The commission, however, made it clear that all was not rosy in the country, taking the opportunity to voice concerns about human rights issues and labelling Eritrean president Issaias Afewerki’s government authoritarian.

Despite its reservations, the commission said engagement with authorities was the best way to improve the situation.

The jailing of Swedish-Eritrean journalist Dawit Isaak, who has been held without trial since 2001, is often cited by foreign observers as an example of the country’s poor human rights record.