Homestake bets on new zone as 116-year-old mine declines

San Francisco-based Homestake Mining (NYSE) is taking a huge gamble by running a US$23-million exploration drift north from its namesake gold mine in South Dakota, local geologists say.

The target of the drift, called the Black Tail-Maitland zone, lies three miles from the mine and more than a mile below surface. Tested by only three trunk holes and 11 wedged holes to date, the zone’s dimensions remain somewhat of a mystery.

Although they refuse to release details of intersections pulled from Maitland, on-site managers say both widths and grades have been unexceptional. “The intercepts were not that significant by Homestake standards,” said Richard Bachman, district exploration geologist.

But as operating costs continue to escalate and grades decline, the Maitland wager may represent the Homestake mine’s only hope for survival beyond the year 2,000.

“If this was a normal project, we would have drilled a lot more holes,” a mine geologist told members of the Canadian Institute of Mining, Metallurgy and Petroleum’s (CIM) Toronto branch when they toured the 116-year-old mine in May. “But this happens to be our best shot.”

In light of the proposed merger between International Corona (TSE) and Homestake, an underground tour of the latter’s largest producer held special significance for the CIM group. Homestake is to make a share exchange offer to Corona shareholders by June 15. The merged company would then become North America’s largest gold producer with annual production of about 1.8 million oz.

Although the Homestake mine recently surpassed the 37-million-oz. mark in terms of historical production, annual production dropped to 319,080 oz. gold in 1991, down from 388,312 oz. the year before. At the same time, cash production costs soared to US$377 from US$291 in 1990. By the first quarter of this year, costs had reached US$381, compared with Homestake’s average realized gold price of US$351.

So, despite an after-tax gain of US$6.3 million on the sale of several non-mineral properties, Homestake lost US$3.5 million (4 cents per share) in the first quarter.

Grade control difficulties continue to challenge the underground operation. Milled grades — which include ore taken from the open pit — dropped to 0.14 oz. per ton in 1991, down from 0.16 oz. the year before.

Although reserves stood at a substantial 29.3 million tons grading 0.20 oz. at the end of 1991, technical staff expressed concern about the life of the mine if current gold prices prevail. The operation employs about 1,300 people, and until gambling was introduced to neighboring Deadwood two years ago, was the lifeblood of the local economy.

“If you go strictly by tonnage, we’re looking at a 10-year mine life,” said mining engineer Doug Thompson. “But some of the smaller orebodies will not be mined on their own merit.”

A stratabound deposit, the Homestake mine is hosted by Proterozoic iron formation metamorphosed to the upper greenschist/lower amphibolite facies. Ore is controlled by major fold structures and is associated with the garnet isograd of the metamorphic gradient. Cummingtonite and/or siderite are the main indicator minerals.

Identifying this “structural-metamorphic transition zone” as a significant target, Homestake geologists postulated that a deposit should lie to the north of the mine in what is now called the Maitland zone.

Progressing at an average rate of about 400 ft. per month, Homestake expects to reach the Maitland zone sometime next year. At the time of the CIM tour, miners had drifted out to about 8,200 ft., with just under 1.5 miles to go. But even if the new zone, discovered in 1989, proves to be an orebody, evaluation will be time-consuming and Thompson estimates it will not be developed for at least seven years.

“We want that to come on line the year our Open Cut stops producing,” says Thompson. Open Cut, the pit portion of the mine, produces about 85,000 oz. gold annually and hosts 750,000 oz. of minable reserves.