US Gold’s new El Gallo silver discovery in Mexico

SITE VISIT

EL GALLO, MEXICO — US Gold (UXG-T, UXG-X) is wasting neither time nor money advancing its El Gallo high-grade silver project in Sinaloa state’s Magistral district.

The company, which is 21%- owned by chairman and CEO Rob McEwen, is spending $18 million on exploration this year with a plan to go from early-stage exploration to starting a feasibility study by year end.

Expect to see regular drill results over the months to come as the company completes 100,000 metres of drilling on near-surface targets. US Gold has drilled more than 20,000 metres already and will be calculating an initial resource estimate with drilling done before the end of March and completing a preliminary economic assessment with an updated resource by the end of the year.

McEwen, the former CEO of Goldcorp who first got lucky with the discovery of a new high-grade zone at the Red Lake gold mine, is now poising himself for another big find.

“Anyone who’s been part of a discovery has a keen desire to do it again,” McEwen says outside the El Gallo core shack.

McEwen doesn’t hold back about El Gallo. He says he felt “fantastic” when the silver discovery was made and says he has a good feeling about where the project is going. “It’s high-grade silver and it’s going to be a mine and it’s going to be a mine soon.”

The core shack is located at the past-producing Magistral open-pit gold mine, which is part of the company’s expansive 2,100-sq.- km property. Queenstake Resources brought the mine into production in 2002, then sold it to Nevada Pacific Gold, which put the mine on care and maintenance in 2005 after 70,000 oz. gold had been produced.

El Gallo is about 5 km north of Magistral and about 11 km northwest of the historical Palmarito silver mine. Palmarito was the biggest producer in the state with about 15.3 million oz. silver and 49,000 oz. gold mined until 1950.

US Gold acquired the Mexican property when it bought Nevada Pacific (and two other companies) in 2007. However, the company’s focus wasn’t Mexico at the time. It was consolidating land around Barrick Gold’s (ABX-T, ABX-N ) massive Cortez Hills gold project in Nevada.

“At the time my management didn’t want to go to Mexico,” Mc- Ewen recalls. “They said they were all Nevada people.”

But McEwen says he was interested in exploring the property and expanding resources at Magistral where measured and indicated resources stand at 11.5 million tons grading 0.04 oz. gold per ton for 502,000 oz.

Exploration began in 2008 and it wasn’t long before one of the company’s prospectors had found a new zone.

Scouring 2,100-sq.-km of dusty rolling hills during the Mexican summer is not for the faint of heart, something that US Gold’s vice president of Mexico, Ian Ball, realized. “How do you incentivize your people to want to go out there and take samples and find something, because it’s summer, it’s hot, there are bugs and you really aren’t motivated.”

To address this, US Gold created prospecting teams and started a bonus program for samples found. A sample running 1,000 grams silver per tonne would pay $1,000, 5,000 grams silver per tonne, $5,000, and so on.

“All of the sudden you have people thinking, I’m not just working for the company, I’m working for myself, and you are out there trying to make a discovery.”

So far the company has taken 11,500 soil samples and 5,100 rock chip samples. It was just a 100 gram silver sample (plus 1.5 grams gold) that led to the El Gallo discovery. Consulting geologist John Reed later visited the area with the prospector. “We noticed an abundance quartz breccia silicification essentially everywhere we walked that day,” he says. “So our chip sampling continued from there and as it did the area of known anomalous silver and alteration continued to grow as well.”

From there, US Gold brought out its next secret to success, the blasthole drill, also known as a percussion drill.

“This is a large land package and when we came down here, we said, if we go out there and make this property look like Swiss cheese, we are probably going to burn through our money very quickly and find nothing,” Ball says.

Typically used in open-pit mines for grade control and putting explosives into the ground, blasthole drills aren’t common in exploration. They usually only reach a depth of about 30 metres and can only drill vertically. It’s also hard to find a drilling company that’d be willing to do this type of work, but US Gold has made blasthole drills a key tool for early-stage exploration in the Magistral district. The company adjusted the drills to go down as far as 55 metres instead of 30 metres and bought new drills that could drill on a 45-degree angle.

“It’s quick and it’s cheap,” Ball explains. “We can drill seven holes a day for the cost of $350 a hole or $2 a foot.”

These cost-cutting initiatives were a symptom of the times — back in 2008 the exploration industry was booming. Juniors had a lot of trouble finding drillers and when they did, they paid top dollar.

“The cost was through the roof,” Ball says. “It was taking six to seven weeks to get your assays turned around at the lab and you could easily blow through half a million dollars in drilling before you knew what you were hitting.”

US Gold bought new equipment for the old assay lab at Magistral and hired staff to work in the lab 24 hours a day.

“Our objective was, if we drilled a hole today, and we submit it to the lab, we want those results back tomorrow,” Ball says. “We don’t want to spend $5,000 testing a theory when we could spend $300 to test a theory.”

The results are mailed to the exploration team’s Blackberry phones as well as plotted on a map; much more efficient than the three to four week turn around in the industry now.

Ball notes that results from the blasthole drill can’t be used for a resource estimate but in the case of expanding the near-surface mineralization at El Gallo, it’s helping the company to drill where it counts.

Of the first 73 holes drilled at El Gallo, 71 of those hit economic mineralization (grading 75 grams silver per tonne or higher).

Highlights from the most recent drill results include 15.1 metres grading 647 grams silver in the central zone, 18 metres grading 228.3 grams silver in the North zone and 16.2 metres grading 108.1 grams silver in the Western zone.

At the moment, US Gold is stepping out from the Main and the Western zones to see if they connect, and the distance seems to be closing in.

Ball says that the best core intercepts at El Gallo have all been spread out in different areas, not clustered together.

Some of the best drill results so far include 117.9 metres grading 390.3 grams silver (starting from 32 metres depth), 31.7 metres grading 1,082 grams silver (starting from surface) and 40.9 metres grading 638 grams silver (from 33.1 metres depth).

Although Mexico is the world’s no. 2 silver producer after Peru, the Magistral district never became one of the more renowned mining districts found in Chihuahua or Sonora to the north or Durango to the east.

El Gallo is a low sulphidation epithermal system with a lot of breccia in the system. That means there aren’t the typical vein systems often seen throughout Mexico.

The host rock is andesite and the thickness of the host rock varies throughout the project from a minimum of 100 metres to about 220 metres as you go along strike.

“We find that quite encouraging because you find the mineralization increases as the host rock gets thicker,” Ball says. “Most of the mineralization at El Gallo is located at or near surface, occurring mostly between surface and 250 feet below.”

US Gold has encountered mineralization as deep as 500 ft. (150 metres) and the company is hoping that the long intercepts starting from surface will increase the odds that the project will be economic to advance.

The nearest community to the project is El Gallo where half of the
60 residents work for US Gold. Contractors and permanent employees total 150. The project has power supply and good road access and it borders on agricultural land (which is not an Ejito farming co-op).

At presstime, US Gold shares were trading at $2.78 apiece with a 52-week trading range between $2.16 and $3.92.

The company has 115.7 million shares outstanding and a market cap of $321.5 million.

US Gold is also spending $5 million on its Nevada Cortez Trend gold projects. The exploration program will include drilling, airborne surveys and sampling, however the emphasis for now is on El Gallo in Mexico.

“We came upon it in the summer of ’08, started drilling it in November ’09, and since then, we have one of the richer silver discoveries in Mexico,” McEwen says. “And this year we are spending $18 million exploring, drilling 100,000 metres, which will make it one of the largest drill programs in Mexico.”