Chelsea Striving for Turnaround at Spotted Horse

Since the official opening of the Spotted Horse mine in central Montana a little over a year ago, Chelsea Resources (VSE) has run into more than its share of problems. The company and its partners brought on stream a small, 50-tpd mine/mill complex targeted to produce about 10,000 oz of gold per year from ore with a head grade of 1.0 oz or better. Although this expectation has fallen well off the mark, Chelsea’s management maintains that a turnaround in mine operations is now being achieved.

To its credit, the company is quite candid about the various problems encountered since the October ’87 market crash. A $2-million private placement fell through that month, and although the mine produced 540 oz in November, winter’s arrival brought problems of another sort. The mine wasn’t fully winterized and problems set in, such as conveyor belts freezing and ore sticking to the bins. A lack of capital hindered efforts to deal with a number of start-up problems, including inadequate development, problems in filtering, crushing and screening, as well as limitations in hoisting and handling capacities. Unable to sustain production levels, Chelsea found itself in a cash crunch.

That was alleviated when a $2.5- million private placement was completed in February, 1988 with Northgate Exploration (TSE), then shopping for investments with the proceeds from the sale of its mining assets. But by spring another financial crisis loomed for Chelsea, compounded by the withdrawal of a $1-million line of credit with a Canadian bank based on sustained production levels. (Production figures for the six months ended April 30, indicated the mill had processed 5,650 tons of ore and produced only 1,786.5 oz of gold, averaging about 35 tons per day.)

Chelsea said the main reason for the shortfalls in mill throughput and gold production was “the inability of the mine to supply enough ore, and the low grade of ore.” Proper mine development wasn’t adequate to determine the grade or tonnage available in the mining blocks, the company said, or to allow an immediate start on stoping from several working areas. Consequently, most ore for this period was derived from development work and had to be fed to the mill without prior knowledge of its grade.

In May of this year Northgate loaned Chelsea $1.2 million(US) for two years at 10% and also provided Chelsea with technical and managerial assistance. Dr. Gerald Harper, vice-president, development of Northgate became chief operations manager. Chelsea in return agreed to grant Northgate a 20%-direct interest in the mine. In addition to this, Northgate also has about an 18% equity position in Chelsea.

Chelsea was given an option to repurchase the 20%-direct interest on or before August 31, for the sum of $1.5 million, together with repayment of whatever had been expended from the $1.2-million loan. Although this deadline has passed, Fernando Nuflo-Moya, chairman, said the company is still interested in repurchasing the 20% interest at some point, and is initiating negotiations with Northgate for an extension of the option.

Chelsea is now in the process of finalizing a revolving line of credit with the Royal Bank of Canada in the amount of $2 million, the proceeds of which, Nuflo-Moya said, will be used to retire its indebtedness to Northgate, and to provide the company with a financial cushion.

Since June of this year, the Spotted Horse mine was considered in commercial production, and no longer in the pre-production phase. Gold produced for June was 890 oz at an average grade of 0.79 oz gold, an improvement over May’s 350 oz at 0.38 oz. Production costs of the cut and fill mining operation have been estimated at about $225 per oz.

“We now feel that we’ve passed by the technical and start-up problems on site,” said Charlie Bauer, general manager of the mine. Production figures released for the weeks ended August 6, indicate the mill processed 2,853 tons of ore and produced 1,744 oz of gold. Average weekly gold production wa s reported at 174.4 oz, more than double the weekly average for the six months ended April 30. The mill is now reported to be achieving 58 tons per day with a recovery of 90%.

Bauer said the minesite is now winterized and he expects the enclosure of the new headframe and the new larger hoist will be complete by late October, which will serve to make ore handling more efficient. The company is also building a new tailings pond on an expandable site.

“One of the aspects of our tailings is they still carry between 0.02 and 0.05 oz gold per ton and we know we can leach those. So we are considering the possibility of either a seasonal heap leach or an enclosed static vat leach operation in the future.”

To address the reserve question, Bauer said the mine is now developed to the 8th level and is being deepened to about 650 ft vertical on the 9th level. Sinking of the main shaft is also under way and in several months the company expects to have the 9th level fully developed at the shaft. Bauer said recent work underground, including up-hole drilling into the ore shoot extensions, has generated confidence the shoots are consistent vertically and extend at depth. (The ore zones had to be drilled up-hole as the vein systems are softer than the rock around them and it was found to be the only way to get good representative samples.)

“If we’ve proved anything by our work over the past two years, it’s that these things do keep going down. We’ve penetrated the downward projections of the shoots by drifts and raises and found ore between the levels,” he said. There are seven major producing shoots and each is characterized by high grade, narrow veins. Chelsea estimates reserves (proven, probable and possible) of 71,000 oz of gold at the Spotted Horse.

Bauer said the reason the company is also seeing a more favorable gold/silver ratio (its first bar was about 80% silver) as it is getting a better handle on the different types of ores at the Spotted Horse. “They are all the same mineralogically, but they occur in different zones and have different silver relationships. So the ratio depends on how much ore we’re blending from which stope.”

“We are also meeting our targets for an improvement on our grade- control curve,” Bauer said, although he indicated the grade is still less than anticipated a year ago. Cost control is also being given a good deal more attention than last year, Bauer adds.

Chelsea now controls over 725 acres of ground surrounding its Spotted Horse mine and is also negotiating to enter into a joint venture for the exploration and development of its Gold Hill property (a bulk tonnage prospect) with a Vancouver publicly traded company.