Colombia surging ahead

The past year has been a pivotal one for the Colombian gold sector, as explorers demonstrated much more of the geological promise the country holds.

Explorers, generally well-funded in late 2010 and early 2011 by the Canadian financial market’s appetite for a piece of the Colombia action, had a mandate to aggressively drill — and that they did.

Aggregate National Instrument 43-101 compliant gold resources grew by 10.7 million oz. gold, or 26.2%, to 51.6 million oz. gold in 2011 from 40.9 million oz. gold in 2010.

There were maiden resource statements from Continental Gold’s (CNL-T) Buritica project at 3.1 million oz. gold, Bellhaven Copper and Gold’s (BHV-V) La Mina at 1 million oz. gold, and Seafield Resources’ (SFF-V) Dos Quebradas at 921,000 oz. gold.

There were also resource updates from Gran Colombia Gold’s (GCM-T) Marmato at 12.4 million oz. gold, Sunward Resources’ (SWD-V) Titiribi at 8.3 million oz. gold and Seafield’s Miraflores at 1.2 million oz. gold.

But these achievements were tempered by Eco Oro Minerals (EOM-T) — formerly Greystar Resources — watching its resource fall 79% as it changed its open-pit resource to an underground resource after halting an open-pit project. This decision pared its resource to 2.4 million oz. from 8.9 million oz. gold. However, the company expects to expand this as it undertakes deeper drilling to build the underground resource.

The frenetic exploration pace continues with several companies due to post maiden resource figures, including Galway Resources (GWY-V) at California, Batero Gold (BAT-V) at Quinchia, Antioquia Gold (AGD-V) at Cisneros, CB Gold (CBJ-V) at Vetas and Colombian Mines (CMJ-V) at Yarumalito. Resource updates are also expected from Continental Gold and Sunward.

A number of juniors began first-phase drilling in 2011, including: CuOro Resources (CUA-V) at Santa Elena, Quia Resources (QIA-V) at San Lucas, Bandera Gold (BGL-V) at Belmira and Calvista Gold (CVZ-V) at California. Early stage drilling is also getting underway on Solvista Gold’s (SVV-V) Guadalupe project and Colombia Crest Gold’s (CLB-V) Venecia-Fredonia project, amongst others.

With several projects advanced past the maiden resource stage, project development definition is coming into view. Those companies with existing resources will update their resource figures at some point this year, and some will complete a prefeasibility study.

In 2012, prefeasibility studies are expected from Continental Gold at Buritica, Gran Colombia at Marmato,

AngloGold Ashanti (AU-N) and B2Gold (BTO-T) at Gramalote, Seafield at Miraflores, privately held AUX at La Bodega-Mascota and Eco Oro at Angostura, while Bellhaven hopes to produce a preliminary economic assessment for La Mina before the year is out.

M&A

As Colombia’s gold sector develops, it will likely become the focus of merger and acquisition activity, which has already begun.

Colombia’s gold sector has seen $2.2 billion in M&A in the past year with Eike Batista’s AUX buying Ventana Gold in a $1.5-billion deal, and Serafino Iacono’s team merging Gran Colombia Gold and Medoro Resources, which at the time of the merger had a combined market capitalization of $679 million.

Such activity could continue this year as major gold producers seek to add gold ounces to their books. The candidates with the most advanced projects and potentially the next candidates include Continental Gold’s Buritica project and Gran Colombia’s Segovia-Marmato project. Both are well funded, have eye-catching resource numbers and are continuing to develop and de-risk their respective projects.

Now tha Colombia’s reputation as a risky place to do business has subsided, mid-tier and senior gold companies are taking notice and dipping their toes in the water via strategic investment.

Last year the majors made seven strategic investments in juniors exploring Colombia.

Iamgold (IMG-T, AIG-N), Kinross Gold (K-T, KGC-N), Yamana Gold (YRI-T, AUY-N) and Hudbay Minerals (HBM-T, HBM-N) all bought equity stakes ranging from 5% to 14% in juniors, and this continued into 2012. The most bullish entrance was by Iamgold, which made three strategic investments in Colombia Crest, Bellhaven and Tolima Gold (TOM-V), in addition to hiring Nicolas Lopez as country manager from local producer Mineros SA.

Despite the boom in Colombian gold exploration, the major gold producers’ absence has been noticed. The exceptions are AngloGold, which was one of the first companies to enter when President Alvaro Uribe opened the country up to gold exploration in the mid-1990s, and Barrick Gold (ABX-T, ABX-N), which early on established a presence through local subsidiary Sorotama.

In particular, the majors are looking for porphyry-style, gold-copper deposits like those in Colombia’s Middle Cauca belt, which can host large gold systems offering a multi-decade mine life.

“This deposit type is the most popular target in the boardrooms of gold producers,” comments Hans Rasmussen, CEO of Colombia Crest.

Colombia’s traditional gold miners did not focus on these targets because they are too low grade for a small-scale mine. But porphyry gold deposits — despite low grades of 0.5 gram to 1 gram gold per tonne — can be quite large, like the 16.4-million-oz.-gold La Colosa resource being explored by AngloGold, and Gran Colombia’s 12-million-oz.-gold Marmato project.

While security has improved, Colombia remains a complicated place to work and is believed to carry political risk, as the government reforms the mining code and reorganizes the mining sector’s institutional framework.

Both AngloGold and Eco Oro have had problems trying to advance their projects from exploration to development. Despite spending hundreds of millions of dollars and contemplating a US$3-billion mine development, AngloGold sees its flagship La Colosa project crawling forward, while Eco Oro was forced for environmental reasons to switch from an open-pit to an underground mine plan, shaving millions of ounces off its exploitable resource.

Strategic investments for larger companies consequently make a lot of sense because of reduced exposure to this perceived risk.

“If the junior runs into troubles with local communities — the FARC Revolutionary Armed Forces of Colombia, or government regulators — the major is at arm’s length and its share price will probably not suffer,” says one of Toronto’s top mining analysts.

Last year was tougher than 2010 for explorer financing. But at least $372 million was raised from the capital markets for 30 companies according to the Colombia Gold Report, not including funds obtained from exercised warrants.

This dollar figure is somewhat down on the $597 million raised in 2010 for 18 companies. However, by stripping out the $275 million that Gran Colombia raised in August 2010 to fund the purchase of Segovia assets, the 2010 figure falls to $322 million. Putting this transaction aside, 2011 saw more funds raised for more companies.

The biggest financing of the year was Gran Colombia’s silver-linked note, which raised $79.4 million. In terms of a pure equity financing, the biggest was Sunward’s $51.3 million.

Reducing cash balances will see several Colombian explorers return to financial markets within the next few months, which could include Bellhaven Copper & Gold, Batero Gold, Colombian Mines, Rugby Mining (RUG-V) and Wesgold Minerals (WSG-V). All companies look to evade the unfortunate timing that saw Quia Resources’ 15¢ refinancing at the turn of the year.

Several 2011 financings were associated with listing events as part of initial public offerings or reverse takeovers based on Colombian gold exploration properties. These included the market debts of CuOro Resources,

Samaranta Mining (SAX-V), Wesgold Minerals, Red Eagle Mining (RD-V), Solvista Gold, Touchstone Gold (TGL-L), Quia Resources, Cabia Goldhills (CGH-V) and Tolima Gold.

The appetite for listing “Newcos” on the TSX Venture Exchange is still present, with several transactions in the pipeline that are ready to go, including: Cordillera Gold, Ashmont Resources, Atico Mining, Llave de Oro and Atlantis Gold.

Government

The Colombian government was good value from a journalist’s point of view in 2011 after awkward attempts to reform the mining code and regulations — an unfortunate side effect of the presidential system and deficient civil service.

The start of President Juan Manuel Santos’s administration in August 2010 meant sweeping changes at the Ministry of Mines and Energy, with officials who had reignited interest in the sector for eight years out the door and replaced by a new crowd with little knowledge or understanding of the resource sector.

However, a bold and controversial — although probably sensible — move followed as the new government tried to sort out major issues with the country’s concession system: it announced a 12-month moratorium on concession applications in February 2011 as it sought to clear a backlog of 19,000 applications and sanitize the concession system.

The government contracted a host of people to process the backlog chronologically. The backlog had grown after former President Uribe in 2002 opened the country to exploration without adequate personnel and resources to process new applications — as well as inefficiency, graft, corruption, speculation and working the system.

The moratorium has exasperated explorers looking to stake new ground and created uncertainty as miners sit and wait for their processed concession applications.

Deep down many explorers would view this as a necessary process for concession systems reaching an even keel. After a year’s delay the feeling is that this new process had better work, although the last time concession applications were suspended in Colombia to clear the system, there were no noticeable improvements. The process remains underway, and it will be April at least before the government receives new concession applications.

An addition
al shock came in mid-2011 when Colombia’s Constitutional Court ruled that Law 1382 of 2010— which amended the 2001 Mining Code — was unconstitutional following the government’s failure to have prior consultation with indigenous and black communities.

This presented the government with an opportunity to spice things up, and in August it discussed creating a National Minerals Agency based on the National Hydrocarbons Agency. This was created as 2011 drew to a close.

In terms of the new law, the Mining and Energy Ministry (Minminas) circulated a draft of the bill in which elements that could make life easier for explorers were counterbalanced by those that would make life more onerous. The bill has yet to be presented to the national congress.

The government began talking about adopting a grid-based concession system — as is the case with hydrocarbons — that caused real concern in November when the state geological survey revealed the idea of creating strategic-reserve areas that the government could explore and auction.

These areas are mainly in the central and western cordillera, which had gold explorers foreseeing reduced land packages. The government identified some 121,000 sq. km to which strategic-reserve status may be applied.

The timing was ingenuous with the Ingeominas decongestion plan in full swing with some 11,000 applications for processing, raising the concern of whether the state entity would complete the task in good faith.

At the end of January 2012 the government stated publically that it would not touch existing concessions or applications and that it would only apply strategic-reserve status to free areas.

With so much government activity it is little wonder that four explorers (Sunward Resources, CuOro Resources, Eco Oro and Calvista Gold) elected former government ministers or ambassadors to their boards in 2011.

At presstime all eyes are on the government and the mining code amendment bill due for Congress this quarter, and how it plans to operate the concession system in the future.

— Based in Medellin, the author has reported on the mining sector for 12 years. He has lived nine years in Latin America covering and analyzing copper in Chile and, since 2008, gold in Colombia, where he founded and publishes Colombia Gold Letter.

He also works with junior exploration companies and provides investor relations services to Gran Colombia Gold.