Gold Canyon tallies 3.7M oz. gold at Springpole

After delivering a string of exciting drill results over the past two years at its Springpole gold project in northwestern Ontario, Gold Canyon Resources (GCU-V) has released a long-awaited resource update totalling 3.7 million oz. gold and 16.4 million oz. silver — only to see its share price fall.

At a cut-off grade of 0.4 gram gold per tonne, the project holds 30 million indicated tonnes grading 1.26 grams gold and 5 grams silver for 1.2 million oz. gold and 4.8 million oz. silver. Inferred resources add 60 million tonnes averaging 1.27 grams gold and 6 grams silver for 2.5 million oz. gold and 11.6 million oz. silver.

The estimate uses a gold price of US$1,300 per oz. and US$15 per oz. silver. The resource is modelled within an optimized pit shell and incorporates 39,000 metres of drilling completed over the past two years.

Investors disappointed with the resource traded Gold Canyon shares down 56¢, or 23%, on the news, but the stock recovered somewhat to end the day at $2.10, or 15% lower.

In a conference call the day after the resource was released, Quinton Hennigh, the company’s technical advisor and a director, acknowledged that investors had been expecting a “much larger number” out of the resource.

However, Hennigh emphasized that the resource is based on conservative assumptions about costs, metal prices and recoveries in comparison to other resource estimates.

“I have worked for many major mining companies for many years of my life, and I feel it’s important to put numbers out that are realistic,” he says. “The assumptions, although conservative, speak volumes about this project. Basically, I feel one could throw an atom bomb at these numbers and it would not fall apart — these are as solid as rock.”

The resource is estimated based on mining costs of US$2 per tonne, processing costs of US$12 per tonne, general and administrative costs of US$2 per tonne and recoveries of 80% for gold and 60% for silver. The pit, which would extend as deep as 360 metres, is assumed to have a 3-to-1 stripping ratio.

The previous resource in 2006 counted more than 240,000 oz. gold, mostly in the inferred category. That estimate also combined open-pit and underground resources.

Drilling at Springpole, 110 km northeast of Red Lake, is ongoing, with 50,000 metres planned for 2012. About 80% of that will be infill drilling, which should help boost resources by converting in-pit material classified as waste to resources. Not enough drilling has been done in some parts of the deposit — at depth and in some shallow areas — to be able to classify all material within the modelled pit at Springpole as inferred resources.

Hennigh said the grades at Springpole set it apart in terms of quality from other bulk-tonnage gold projects in Canada, noting that even though grades are capped to negate the effects of bonanza gold in certain zones, the overall grades are still strong.

He anticipates that results from 25,000 metres to 30,000 metres of new drilling will find their way into a new resource update and a preliminary economic study on Springpole slated for year-end release.

The company has brought in two barges to the project for a total of four and expects to add ounces mid-year with shallow drilling at the Portage zone, which lies under Springpole Lake. Barge drilling at the project began last August, and was interrupted by forest fires that swept across northern Ontario.

With three drills already at work and two more set to start shortly, Hennigh noted the company should be able to make faster progress at the project this year.

“This resource gives us a solid foundation upon which we believe we can quickly build significant upside through ongoing drilling in near-surface areas proximal to this resource, along the strike of the Portage zone to the southeast, and at depth where drilling has recently encountered higher-grade mineralization,” Hennigh says in a press release.

He also expects an improvement in recovery rates, which, in the resource estimate, were based on limited bottle-roll tests. Metallurgical testing is under way, with results expected mid-year.

The company has $13 million in working capital with warrants expected to bring in up to $10 million over the next eight months. Gold Canyon expects to raise money again later in the year in conjunction with the PEA.

The Springpole deposit is hosted in an alkaline intrusion and has characteristics of Archean orogenic gold and potassic gold deposits, such as Cripple Creek.

Hennigh noted that drilling alkaline systems, which tend to be large, takes time, and that there is upside in known zones and new targets at Springpole.

Adam Graf, a senior mining analyst at Dahlman Rose, states in a note that “although this resource estimate was shy of what some may have anticipated, we remain confident of the company’s continued exploration success and ability to grow the Springpole asset.”

Graf has a $6.64 target on the stock.

There are several zones at Springpole. The Portage zone is a porphyry intrusion with gold hosted within polyphase, autolithic breccias. Rock in the zone is friable and difficult to drill, but could make for easy milling.

In other zones, including Main to the northwest and East Extension to the northeast, gold occurs in high-grade veins and pods hosted in diatreme breccias composed of intrusive and country rock fragments. Mineralized zones at Springpole occur within a 4-sq.-km area that represents 15% of the greater alkaline intrusive complex.

The company has a 52-week trading range of $1.60–$4.22, and 122 million shares outstanding.