Castle Gold hikes El Castillo resource (September 05, 2008)

Using a higher gold price of US$625 per oz., Castle Gold (CSG-V) has increased the resource on its El Castillo heap leach open pit mine in Durango state, Mexico. At a cutoff grade of 0.15 gram gold per tonne, the National Instrument 43-101 -compliant measured and indicated resource stands at about 94 million tonnes grading 0.39 gram gold per tonne, equivalent to about 1.2 million oz. gold, while proven and probable reserves (which are a part of the measured and indicated resources above) comprise 47 million tonnes grading 0.5 gram gold per tonne, amounting to 750,000 oz. gold. Castle Gold may be able to increase the resource by infill drilling, as well as drilling outside the pit, so it plans to drill in the fourth quarter of 2008.

The NI 43-101 technical report recommends raising annual mining to 5 million tonnes, and annual production to 52,000 oz. At this production rate, and assuming a gold price of US$625 per oz. and a ten-year mine life, the net present value of the mine is about US$54 million at a discount rate of 10%. Castle Gold believes that it can reach this production rate in the second half of 2009, and CEO Tom Atkins estimates that capital expenditure necessary to boost production will be minimal. El Castillo, which started operating in July, is currently producing at a rate of 15,000-20,000 oz. per year.

El Castillo’s net present value is affected by the gold price and the discount rate. For example, at the same $625 gold price, lowering the discount rate to 7.5% from 10% raises net present value to US$61 million from US$54 million. Alternatively, leaving the discount rate unchanged at 10%, but raising the gold price projection to US$750 per oz. from US$625, raises the net present value to US$80 million from US$54 million.

Castle Gold owns 100% of El Castillo. The mine is located about 120 km north of the city of Durango, capital of Durango state. The nearest town is San Juan Del Rio, about 10 km from the mine. Water is pumped from wells, and electricity is produced by small generators on site, and used to power a crusher and pumps in the heap leach circuit. The mine is accessible by paved road. It employs 60 to 80 workers, most of whom are contract miners.

Castle’s second producer is El Sastre mine in Guatemala, where it owns a 50% interest, with Guatemalan partners owning the balance. At a cutoff grade of 0.5 gram gold per tonne, proven and probable reserves are 500,000 tonnes grading 2.5 grams gold per tonne, equivalent to 40,000 oz. gold. Inferred resources stand at 300,000 tonnes grading 2.2 grams gold per tonne, or 21,000 oz. gold. This is also an open pit, heap leach operation, which reached commercial operation in 2007, and is currently producing at a rate of 10,000-15,000 oz. gold per year.

A satellite deposit named Arenal is 1 km from El Sastre, and it holds an inferred resource of 1.8 million tonnes grading 1.3 gram gold per tonne, or 76,000 oz. gold. Castle Gold’s ownership interest in Arenal is also 50%, and it can be mined as an open pit, heap leach operation. Atkins intends to bring Arenal to production, but he plans to drill the deposit first to firm up the resource to the measured and indicated categories, and follow with a scoping study. Infill drilling is planned for the fourth quarter of 2008, and a scoping study is expected by the second quarter of 2009.

There are 40 to 50 workers at El Sastre, most of whom are contract miners. The property is located about an hour’s drive north-northeast of Guatemala City, and Atkins reports good relations with both government and the community, and no security problems. Taxation is 5% on sales plus a 1% royalty on sales.

Turning back to Mexico, Castle Gold owns 100% of the La Fortuna development project in a remote location near the western boundary of Durango state, about 100 km from Culiacan. The 100 sq. km project holds a past-producing mine where gold, silver and copper were mined in the 1880’s, processing 200,000 tonnes grading 20 grams gold per tonne. A total of 121 historic holes (19,000 metres) were drilled from the 1970’s to the 1990’s by San Fernando Mining, while Alamos Gold (AGI-T) conducted bulk sampling.

At a cutoff grade of 0.5 gram gold per tonne, a 1995 estimate puts resources at 4.5 million tonnes grading 2.25 grams gold per tonne, or 322,000 oz. gold, with 30 grams silver per tonne and 0.23% copper. Castle highlights a number of historic holes (for which true widths are not known). For example, hole 7 returned 51 metres of 7.4 grams gold per tonne, 30 grams silver per tonne, and 0.5% copper, from a depth of 22 metres. Hole 6 cut 42 metres of 7.4 grams gold per tonne, 32 grams silver per tonne, and 0.7% copper, from a depth of 52 metres. And hole 3 cut 44 metres of 6.4 grams gold per tonne, 27 grams silver per tonne, and 0.45% copper, from a depth of 27 metres. Atkins says that mineralization is open along strike, laterally and at depth. Metallurgical tests by previous owners showed recoveries in a range of 84-98%.

Castle Gold is planning to proceed with an NI 43-101 resource estimate for La Fortuna. So far it has drilled six holes twinning historic holes, and is awaiting assays. Metallurgical testing is in progress, which will be followed by surface exploration, and later by drilling. A scoping study is planned for the second quarter of 2009. Since the mineralization is located below a hilltop, various mining scenarios will be contemplated, such as an open pit, an adit etc.

A new highway from Culiacan is currently being built, which will pass in the vicinity of La Fortuna, improving accessibility. Electricity is not available, so if the project goes into production, diesel generators will have to be used, while water could be pumped from area rivers or a small dam could be built. Atkins believes that labour would be available should the deposit prove economic, despite the remote location.

For the year to December 2007, Castle Gold had revenues of US$7.8 million and a net loss of US$1.5 million. For the six months to June 2008, Castle Gold had revenues of US$2.4 million and a net income of US$450,000. On June 30 the company had US$1.5 million cash and equivalents, while long-term debt stood at US$6.4 million. Castle Gold has 88 million shares fully diluted.