GoldSource sees path to production in Guyana

VANCOUVER — Down markets can yield opportunity, and for junior GoldSource Mines (TSXV: GXS; US-OTC: GXSFF) that opportunity came in the form of a February merger with Guyana-focused explorer Eagle Mountain Gold (TSXV: Z).

Eagle Mountain shareholders  received 0.53635 of a GoldSource share for each share held. GoldSource was also required to raise a minimum $1.5 million, but raised a bit more in early February when it placed 17 million shares at 14¢ per share, for gross proceeds of $2.4 million.

GoldSource had been advancing a thermal coal discovery it made in 2008 at its Border project along the Durango trend near the town of Hudson Bay in Saskatchewan’s Red Deer Valley.

GoldSource chief operating officer Eric Fier and CEO Scott Drever are familiar names in the precious-metal community as a major component of the management team at Mexico-focused producer SilverCrest Mines (TSXV: SVL; NYSE-MKT: SVLC), which has found success at its Santa Elena operation, 150 km northeast of Hermosillo, Mexico.

“Right now thermal coal is not favoured, so with GoldSource we looked elsewhere for something with much more short-term value,” Fier says during an interview. “We wanted to come back and look on the gold side of things, and reviewed several properties globally. Because of our association with SilverCrest we wanted to stay out of Mexico. There are dividing lines there, since we share management between the two companies.”

Enter SilverCrest’s vice-president of corporate development Marcio Fonseca, who has extensive experience in the Amazon basin. Fonseca brought the Eagle Mountain gold project — located 200 km southwest of Guyana’s capital of Georgetown — to Fier and Drever’s attention two years ago, but it was not until the GoldSource shifted back into gold that the gears started turning on a deal.

During the interim, Eagle Mountain Gold president Ioannis Tsitos had been advancing Eagle Mountain towards production. The company had earned a 100% stake in the project from Iamgold (TSX: IMG; NYSE: IAG), which now holds an 8% equity position in GoldSource. Tsitos and his Eagle Mountain team have invested over $16.5 million in the project to date, and boosted global resources by 34%.

“We knew we had a good project, but it became evident during the market decline that we needed more mining people around us,” Tsitos adds. “We had a good resource that was close to surface at a grade that could support a mine in an open-pit fashion. At this point we need the capacity to advance the project, which includes both financial and technical elements. I’m always coming from a perspective that difficult times can present opportunities, and looking at SilverCrest we knew it was the best fit for us.”

The 50 sq. km Eagle Mountain property features gold mineralization related to low-angle, southwest-dipping, brittle and ductile composite shear zones hosted in a composite granodiorite pluton that intrudes older rocks. The mineralization is similar to deposits 40 km away at the historic Omai gold mine, where Fier had served several times in an operating capacity over the years.

“I’d been in and out of the country with Eldorado Gold (TSX: ELD; NYSE: ELD) as well. I actually spent three separate periods at Omai in different capacities,” Fier continues. “And Marcio is from Brazil so he’d done a lot of work up in the Amazon basin — he was also quite familiar with the region. It wasn’t a far stretch for us to look at what sort of technologies and processes would work at the project.”

Eagle Mountain hosts 3.9 million indicated tonnes grading 1.49 grams gold per tonne for 188,000 contained oz., with inferred resources standing at 20.6 million tonnes of 1.19 grams gold for 792,000 oz.

One big draw for GoldSource was that 40% of the global ounces sit in saprolite or weathered ore, which means a start-up facility — based on gravity processing and running at 1,000 tonnes per day — would only cost $5-6 million to develop.

And the company isn’t wasting any time. Fier and Tsitos say GoldSource could receive its operating permit in the next two months, and hopes to get Eagle Mountain into preliminary production by year-end. Fier adds that a lot of internal scoping studies have been done on the project, but the company won’t release a formal economic assessment before entering production, since it doesn’t need a large-scale construction loan.

“We’re looking at two paths when it comes to developing Eagle Mountain’s resources. The first would be to expand the saprolite because there is a lot of opportunity there,” Fier says. “But we also want to look at the bigger picture, where you can realize the value out of the hard rock. Having experienced that transition at Omai previously, it can be a challenge, but we think we can leverage our experience with SilverCrest as far as orchestrating a staged build-out strategy, which is something the market seems to respond to in a positive way.”

Eagle Mountain also has good infrastructure. Tsitos concedes that Guyana is challenging in regards to power and site access, but points out that Eagle Mountain is just a few kilometres away from a township of “a couple thousand people,” and that an airport and serviceable road to Georgetown are nearby.

The region is home to a large artisanal mining community, which provides a latent workforce developed to service the old Omai mining operation.

“You’re always looking for something else, though I think 90% of our effort needs to focus on getting Eagle Mountain into production,” Fier says. “That being said there are always other opportunities. I agree with Ioannis that Guyana is terrific ‘elephant hunt’ country with a lot of discovery upside. If we can prove this staged approach, the sky is really the limit.”

“I view this initial start-up as a demonstration plant,” Drever says of the 1,000-tonne-per-day operation. “It will do maybe 10,000 oz. gold per year, but the ability to multiply that fairly quickly is certainly there. Looking at it in terms of what SilverCrest is producing on a gold-equivalent basis, I really see the cash-flow potential.”

GoldSource shares have traded within a 52-week window of 12¢ to 35¢, and have shot up 78% over the first three months of 2014, en route to a 24¢-per-share close at press time.

Post-merger, the company has 75.5 million shares outstanding for an $18-million market capitalization.