Exeter expands La Cabeza

SITE VISIT

Agua Escondida, Argentina — The La Cabeza gold project being explored by Exeter Resource (XRC-V, EXRCF-O) near this small village isn’t the biggest or richest gold discovery in Argentina, but it does appear to be one of the fastest growing. New zones and exploration targets are being defined and expanded at a steady pace, pushing the company closer to its goal of boosting existing resources to a threshold of 2 million contained ounces for initial mine-planning purposes.

“We have no shortage of targets to achieve that goal,” Exeter chairman Yale Simpson told mining analysts, brokers, fund managers, and other guests during the site visit.

That’s an understatement, as six major zones — Cuello, Labio, Luna, Mandibula, Cachete, and Ojo — have been identified and given Spanish names reflecting parts of La Cabeza, or “the head” in Spanish. The four largest of these collectively host resources of 890,000 contained ounces, while at least a dozen nearby exploration targets have been identified that warrant drill testing.

La Cabeza is a low-sulphidation, gold-silver epithermal system with low pyrite and minor clay alteration. The property was discovered in 1996 by a group of Australian geologists investigating Landsat colour alteration anomalies. Exeter president Bryce Roxburgh led the discovery team and his Aussie crew felt right at home in the arid Outback-style terrain. The team’s early exploration efforts, composed mostly of geological mapping and rock-chip geochemistry, led to the discovery of widespread gold mineralization within a 4-sq.-km area of altered volcanics and sediments. Their early exploration programs, which included more than 16,000 metres of diamond and reverse-circulation (RC) drilling, delineated eight separate zones of mineralization.

Work ceased in 1999 because of the industry downturn, but resumed after Exeter acquired the project outright (except for a production royalty that can be purchased for US$1 million) in 2003.

“We also gained all the past exploration data on the project, which doesn’t often happen in Argentina,” Simpson says. “There’s no requirement here to file assessment reports with government agencies.”

Exeter also gained the Aussie geological team and, as a result, the company is now a Canadian-Australian hybrid with a strong contingent of Argentine geologists and technicians. Having a strong local presence is important, Simpson says, as there is no metal-mining activity anywhere near the project, which is situated in southern Mendoza province, about 500 km by road south of the city of Mendoza.

“In the early days, some locals thought we were ‘taking out gold’ in the sample bags,” Simpson explains. “They know how exploration works now because they felt comfortable asking the Argentine geologists and our other local employees to explain the process.”

Exeter’s initial exploration efforts were focused on defining resources amenable to open-pit mining techniques, starting with the Cuello, Luna, Ojo and Mandibula zones. With the exception of Cuello and some newer exploration targets, the zones all outcrop on surface, generally on topographic highs. Even so, the terrain is not high altitude, or difficult to explore and drill. Domestic goats, sheep and horses routinely scamper over the small hills that resemble those dotting parts of eastern Nevada.

Exeter’s subsequent work programs boosted drilling to 34,000 metres, and total spending to $9 million, resulting in several resource estimates. The most recent, compiled in mid-2005, puts indicated resources at 6.2 million tonnes grading 2 grams gold per tonne, or about 390,000 contained ounces, using a 0.5-gram cutoff grade. Inferred resources add another 12.1 million tonnes grading 1.3 grams gold, or about 500,000 oz. The resources are within quartz veins, quartz stockworks and siliceous jigsaw breccias located close to, or on, the contact between rhyolitic ignimbrite and fine-grained porphyry.

The largest resource defined to date at La Cabeza is within the Cuello zone, which unlike other zones, is located in a topographic low and is almost entirely concealed by sand and stream gravel. Recent exploration has revealed extensions to the north, south, east, and west, which, in turn, spurred efforts to look for extensions of known zones, or parallel zones, under sand cover elsewhere on the property. Fortunately the sand cover typically ranges only from 1 to 15 metres in depth, and occasionally up to 20 metres.

The newly discovered zone extensions push well beyond the limits of the initial conceptual pit model for the Cuello zone. For example, gold mineralization at Cuello West appears to have potential to replace waste-rock in the proposed open pit on the main Cuello vein. A revised pit model could also lower the estimated stripping ratio of about 5:1 waste-to-ore, assuming infill drilling confirms the continuity of the mineralized extensions and parallel zones.

Cuello has the added bonus of higher silver grades than other zones, as well as potential for bonanza grades in some of the vein systems, such as 6 metres of 15.5 grams gold, and even better grades at depth.

The Central Vein zone, which comprises the Mercedes and Labio vein systems (situated midway between the Cuello and Ojo zones), has also produced some spectacular grades, such as 60.5 grams gold over 6 metres in one vein, and 33.9 grams gold over 3 metres in another. One of the best holes on the Labio vein intersected 15 metres of 24.8 grams. The vein has a mapped strike length of more than 300 metres and is open for expansion.

New mineralization

During the time of the site visit, Exeter reported the discovery of a new zone of gold mineralization adjacent to the Luna deposit, in an area not previously sampled. Two sets of quartz veins were mapped at surface over a length of 250 metres. The discovery is thought to be an extension of the Luna zone, or a faulted offset to the known deposit.

Three RC holes tested the outcropping portion of one of the two vein sets and intersected 6 metres grading 2 grams, 6 metres of 2.5 grams, and 6 metres of 1 gram, respectively. Continuous rock-chip sampling over the outcropping portion of the veins returned widths of 29 metres at 1.8 grams, 9 metres of 3 grams, and 8 metres of 2.7 grams.

Similar quartz veining was discovered by several recent rotary air-blast (RAB) drill holes in an area about 200 metres southeast of the new discovery. Assay results are pending.

A few weeks earlier, the company reported that drilling had extended gold mineralization at the Cuello zone beyond the Cuello East and Cuello West discoveries made in summer 2005. Results include 6.6 metres of 4.8 grams and 4 metres of 4.5 grams in the Cuello Central vein, and 10.5 metres of 6.4 grams at the Cuello East vein.

Channel sampling late last year expanded the potential of the Mandibula zone by at least 80 metres of strike to the existing 220-metre-long conceptual open pit.

A new target under sand cover, south of the Ojo zone, returned encouraging results that also expanded the conceptual open-pit model. This target is considered important because gold mineralization appears to occur in sedimentary rock that wasn’t previously known to host gold grades of economic interest at La Cabeza.

While these discoveries represent tempting exploration targets, the focus of the current program is to expand and upgrade existing resources for a revised resource calculation later this year.

The current $5-million program will include at least 12,000 metres of drilling, divided equally between diamond and RC rigs.

A feasibility study will follow, scheduled for completion in the first quarter of 2007, with a view to reaching production by 2008.

The results of the final feasibility study could change the “base case” mining concept, which at this stage envisages an open-pit mining operation capable of producing about 100,000 oz. per year for at least an 8-year mine life. Production costs are estimated to average about US$
230 per oz. gold, based on mining multiple pits with an average strip ratio of 2:1.

Capital costs are projected at about US$50 million, including an estimated US$5-US$7 million to bring in a 200-km-long power line to replace diesel power. The company says government agencies are willing to forgo power fees for a year or more, as local communities that currently lack power would also benefit from the infrastructure improvement.

If all goes as planned, commissioning and initial production could begin in early 2008, which allows plenty of time for permitting. The long lead-time is deemed necessary as Mendoza does not have a single producing mine and local agencies are not familiar with the permitting process, which explains why Exeter appointed engineer Jerry Perkins as its vice-president of development and operations to get a head start on the process.

Early baseline studies

While not all companies initiate this work at the exploration stage, Perkins believes it was important to establish baseline social and environmental studies early, to avoid potential problems down the road. Particular emphasis is placed on protecting wetlands near the site that are used extensively by local ranchers and their livestock. Community consultations have also been under way for some time, starting at the local level. So far, local support seems strong, with no evidence of anti-mining sentiment.

Metallurgical work has also been carried out to determine the best processing method from both an economic and environmental perspective. While the mineralization cannot be heap leached, it has no deleterious elements and is not refractory. Metallurgical testing has confirmed recoveries of 91% for gold and 80-85% for silver, using a conventional gravity circuit and carbon-in-leach flow sheet.

Gold at La Cabeza occurs as free gold and electrum in iron oxides, silica and sulphides, and test work has shown that a gravity circuit could recover an average of 30%, and up to 50% from certain zones of gold mineralization. Another positive from an environmental standpoint is the low presence of pyrite and base metals, which reduces potential for acid mine drainage.

Flotation test work also returned good recoveries, which would allow for an alternative processing method, if necessary. The mineralized material is hard and abrasive, however, with high silica content, which means the work index would be relatively high.

Mining would be carried out by contract miners in typical Australian style, with ore stockpiled and blended to optimize gold and silver recoveries.

While the region is arid most of the year, the location in the foothills of the Andes means special attention must be paid to water inflows into the pits and tailings disposal areas. Rainy-season cloud-bursts are not uncommon, and surface and sub-surface runoff from the Andes also poses potential challenges at certain times of the year. Solutions such as paste-fill tailings dams are being investigated, with encouraging results. Studies related to mine hydrology and pit-slope stability have the company confident that overall slopes of 55 can be maintained because of the hard host rock.

Engineering studies are for planning purposes at this stage, and will be examined by independent consultants as part of the feasibility process. In the meantime, drilling will continue to test known zones and new targets for their potential to add to existing resources. Exploration will be an ongoing process as Exeter’s land package covers 400 sq. km, and now encompasses the entire emerging gold district. Access is by road from Mendoza, and other nearby communities. A small airstrip also serves the property.

Exeter views La Cabeza as its cornerstone project in South America, but has optioned, and is exploring, other gold projects in the Patagonia region of Argentina. The company is also evaluating gold-copper prospects in Chile’s Maricunga district, as well as epithermal gold prospects in southern Chile.

“The reason we’re doing these deals is to develop a pipeline of projects for the future that will allow us to determine where we’ll develop our next mine,” Simpson says. “Where we go next will be dictated by our success at La Cabeza, where discovery costs to date are five dollars (US) per inferred oz. That (criteria) is hard to beat.”

Roxburgh notes that Exeter has become the “junior exploration partner of choice” for major mining houses operating in Argentina and Chile. So far, the company has formed strategic alliances with Anglo American (AAUKF-O, AAL-L), AngloGold Ashanti (AU-N, AGD-L), and Rio Tinto (RTP-N, RIO-L). A number of projects are being examined and evaluated, and a decision will be made shortly as to which are best suited to the company’s future growth plans.

Exeter Resource has 28.4 million shares outstanding (38.4 million fully diluted).