Follow the money: Inter-Citic has backers equal to none and big dreams for Dachang

When two extremely prominent, high net-worth Chinese families back a Canadian junior mining company, people should probably sit up and take notice.

The Lee and Ho families, along with several other well-heeled Asian investors, own as much as 35% of Toronto-based Inter-Citic Minerals (ICI-T, ICMTF-O) and have a big stake in making the gold explorer in China a success.

That shouldn’t be too difficult given that pretty much everything the two families have ever touched has turned golden.

The Lees of Hong Kong are the founders of the multibillion-dollar Henderson Land Development group of companies, with assets of over US$5 billion. Founder Lee Shau Kee, who fled to Hong Kong from southern China a year before the Communist Revolution with $1,000 in his pocket, became a real-estate legend and one of Asia’s richest men.

The Ho family founded Tai Fung Bank, Macao’s second- largest bank, in which the Bank of China now holds an estimated 50% stake. And the family wields considerable political clout. Edmund Ho is the China-appointed governor of Macau and has been since the former Portuguese colony and gambling enclave reverted to Chinese rule in 1999.

With those kinds of influential backers behind it, Inter-Citic really just needs to show up and drill for gold in the remote alpine desert of western China’s Qinghai province.

Its Dachang project sits 4,400 metres up on the Qinghai-Tibetan plateau, 60 km away from the nearest village and 200 km away from the nearest urban centre (Golmud).

The remoteness of Qinghai was actually one of the reasons why Inter-Citic was initially drawn to the province. Qinghai — the size of France with a population of just 5 million people — would be ideal for an exploration project it believed, because the vast majority of China’s gold production has taken place in eastern China.

“We recognized that it had not really had the kind of exploration done to it that many of the areas in the more populated eastern part of the country had had,” explains James Moore, the company’s president and chief executive. “We knew that if we were ever to be a participant we had to be in areas where you have lower population densities because they are less explored.”

Inter-Citic started looking at properties across China in 2002 and after visiting some 40 potential sites, eventually selected Dachang, a promising grassroots gold project near the headwaters of the Yellow River.

In 2004, it signed a joint-venture agreement with the provincial government-owned Qinghai Geological Survey Institute.

Despite the fact that its stock price (less than a buck at presstime) is at roughly the same level it was when it started, Inter- Citic’s enthusiasm for the project hasn’t waned.

Last year, Inter-Citic mounted the largest-ever exploration program at Dachang with 28,000 metres of drilling. The result was the publication in April of an updated resource estimate that was 45% higher than its previous estimate.

That estimate shows Dachang hosts an inferred resource of about 24.9 million tonnes grading 3.63 grams gold per tonne, for a total of 2.9 contained ounces gold. And the vast majority of the resource estimate was based on mineralization at surface to depths of less than 150 metres.

With comfortable cash reserves, (the company closed a $16-million private placement in February), Inter-Citic is undertaking a 50,000- metre drill program this year, half of it allocated to resource expansion and the other half to detailed infill drilling along the current resource area. (A typical drilling season in this part of China runs from from May to November.)

Moore says he’s confident that Inter-Citic will see resource expansion through the second phase of this year’s drill program, which will end in December, and expects to publish a resource up- date in the first quarter of 2009. Preliminary work on a scoping study has also begun.

The Dachang claim area is about 300 sq. km and the main zone of the deposit is open at depth and along strike. During the 2006 and 2007 drill programs, the fault-controlled mineralization that hosts the gold at Dachang was extended off the eastern end of the Dachang Main Zone (DMZ) by about 1.5 km and now has a total strike length of 3.5 km.

The central and eastern portions of the existing DMZ remain open to additional resource expansion above 150 metres and will require further testing. Metallurgical analysis so far has shown that the ore is refractory.

The system of gold mineralization at Dachang is large and the area has been the site of extensive gold placer working in streams over the past two centuries.

Nearly 30,000 soil samples were taken in 2004 and 2005 over the entire property. So far Inter-Citic has pinpointed, through soil geochemistry, more than 50 major new gold anomalies in addition to the original inferred resource, along with dozens of smaller ones.

Trenching remains one of the most successful and cost-effective methods of exploration at Dachang due to the thin soil cover and near-surface mineralization, Inter-Citic notes on its website.

In 2007, the company completed 196 drill holes for a total of 27,926 metres of drilling. Of those, 24,312 metres of drill testing was on the DMZ and its eastern extensions.

Six drills are currently turning on the property. On Jan. 8, results came in from 25 new diamond-drill holes, 24 of which returned mineralized gold zones, with aggregate widths up to 34 metres within potential open-pit depths.

In early March, Inter-Citic reported on the final 27 diamond-drill holes of 2007 at Dachang of which 25 returned mineralized gold zones, with aggregate widths up to 44 metres within potential open-pit depths.

In August, Inter-Citic reported results from its third set of drill holes from the 2008 drill program. Twenty-five of 26 holes encountered multiple zones of gold mineralization.

Highlights included drill hole CJV-414, which intersected multiple mineral zones including 31.8 metres averaging 3.39 grams gold per tonne and another with 18.2 metres averaging 2.34 grams gold.

Hole CJV-370 intersected multiple mineralized zones, including 15.4 metres averaging 2.62 grams gold and hole CJV-397 intersected multiple mineralized zones, including 18.6 metres averaging 3.8 grams gold per tonne.

Inter-Citic holds an 83% stake in the joint venture and its partner the remaining 17%. But Moore says the company has the option to take that to 90% once a prefeasibility study is published.

The company is currently trading at about 82 a share and over the last year has traded within a band of 77-$2.50 per share.

But Haytham Hodaly, a senior mining analyst at Salman Partners, has a 52-week target price on the stock of $3.25.

“Inter-Citic’s near-surface mineralization and large prospective land package provides an opportunity to develop a large open-pit resource which can attract the interest of larger mining companies looking for a foothold within the country, not to mention those companies already within the country looking for further expansion through quality assets,” Hoday wrote in a February research report.

Hodaly estimated Dachang’s development costs will come in at about US$125 million with construction starting in early 2010 and commercial production in early 2012.