Meridian eager to drill Machacala (May 22, 2002)

Meridian Gold (MNG-T) is gearing up for its first round of exploration drilling at the Machacala gold-silver property in Peru, held by Montreal-based junior Gold Hawk Resources (CGK-V).

As operator, Meridian plans to carry out about US$800,000 worth of work for 2002. The company is currently mapping and selecting the drilling sites; in July, it will begin 5,000 metres of infill, reverse-circulation drilling and 2,000 metres of reconnaissance diamond drilling.

Meridian has already purchased all the surface rights at Machacala, though, if the drilling strikes out, Gold Hawk can buy those rights for a nominal amount.

Meridian’s work program stems from the closing of an agreement that could give the mid-tier producer a controlling interest in Gold Hawk within the next two years.

Under the deal, Meridian has so far subscribed to a private placement of 6.5 million Gold Hawk shares at 20 apiece for a 20.4% interest. Meridian also received 6.5 million share purchase warrants, with one warrant allowing Meridian to buy another Gold Hawk share for 20 for 18 months, and subscribed to a one-year, $1.3-million convertible note from Gold Hawk. The note can, at any time before maturity, be converted into 6.5 million Gold Hawk shares at a conversion price of 20 per share; the shares would be accompanied by a 2-year purchase warrant good for one share at 20.

If the warrants and debentures are all converted into shares, Meridian will hold 26 million Gold Hawk shares, or about 50.7% of the junior’s then-outstanding 51.2 million shares.

As part of the deal, Meridian will receive one seat on Gold Hawk’s board of directors. Meridian vice-president and chief financial officer, Edward Colt, is the current nominee.

The 39.2-sq.-km Machacala property is beside a caldera, some 42 km east of the Peruvian coastal city of Trujillo, at an elevation of 2,600-3,700 metres. More than 12 sub-parallel gold-silver-mineralized quartz veins, ranging from 500 metres to more than 2 km in length, have been mapped on the property. These low-sulphidation, sub-vertical veins vary in width from one to 30 metres.

Gold Hawk President Jean Depatie, who is also a director of Glamis Gold, Richmont Mines, Novicourt and other companies, personally bought the Machacala property six years ago and gave the Peruvian vendors a 30% net profit royalty that can be bought at anytime by Gold Hawk for US$1 million.

Then, with the help of some $500,000 of seed money from a small group of Montreal investors, Depatie was vended the property into a Bahamas-based corporation set up with the National Bank of Canada.

After that, the Montreal group enacted a reverse-takeover of a small company called Consolidated Gold Hawk, headed up by Mackenzie Watson of Freewest Resources (Watson has since resigned as Gold Hawk director for personal reasons.)

“Two weeks after we closed the deal, the Bre-X collapse happened and I could never raise money to do justice to this property, except a bit of money two years ago,” says Depatie. “It was frustrating, coming to Toronto: no one wanted to talk to me. But as soon as I signed with Meridian, then they called me ‘Mister.'”

The property had never been drilled before. Gold Hawk drilled it and had good values of up to 17 grams gold across mining widths.

“These veins are spectacular — you can follow them for kilometres,” says Depatie. “Looking at the veins, they seem to be curving — there’s something happening there and we don’t know what it is. But all those veins carry gold, and when you see chalcedony, you know you’re going to hit.”

Depatie particularly likes the location of the property, which is near extensive infrastructure and the ocean. “I’ve worked a long time in Peru: if you have a project up in the Andes, you are going to have problems, because no one wants to stay. But when you’re close to the ocean, people kind of like it.”

The property was first commercially mined by an American company named Acre in the mid-1950s, before the mine was nationalized. Acre’s production came from adits. “There are about 700 metres available to mine before you even need to think about sinking a shaft,” comments Depatie.

From 1979 to 1991, Minera Santa Isabel, a Peruvian company, mined another 230,000 tonnes averaging 6 grams gold and 340 grams silver per tonne from the property. Some 200,000 tonnes of tailings from concentrates remain on-site, and these run 1.23 grams gold and 68.6 grams silver.

In 1994, the property was optioned to the Peruvian mining company Simsa, which carried out a geochemical survey. This work delineated a 2-by-1-km anomaly that coincided with a vein system with anomalous concentrations of gold, silver, arsenic, lead, lead, copper, molybdenum, cobalt and zinc.

“Some parts they mined by open-pit, and some parts they high-graded, but how much could be an open pit?” asks Depatie. “We don’t know. That’s why we have to drill.”

In 1997, Gold Hawk carried out magnetic and induced-polarization geophysical surveys which delineated nine anomalies.

A first round of drilling in 2000 returned an average of 11.6 grams gold-equivalent from three veins. All five of the widely spaced short drill holes cut economic values over intervals measuring 1.5-3.5 metres.

In late 2000, Gold Hawk drilled eight holes on the property. Highlights included 3.7 metres (from 189 metres) grading 11.32 grams gold and 23.6 grams silver per tonne in the Casa Fuerza vein in hole 2, and 3.2 metres (from 156 metres) of 13.55 grams gold and 164 grams silver in the Fragua vein in hole 4.

“What’s important for me is the geological setting and the volume of mineralization that is there,” says Depatie. “The grade — I don’t know. If we have the answer, we’ll either not talk about this anymore, or it will be one of the best mines in Peru.

“The story behind it is that it’s gold country — it’s a mining camp that produced around 11 grams gold and silver combined, and it’s very easy metallurgy. There’s room for a big deposit. That’s what Meridian likes, and that’s why they’ve been after us right from the very beginning.”

Depatie likes the terms of the deal with Meridian “because, if they go all the way, for two years all the good news or all the bad news will come out through Gold Hawk. So Gold Hawk is going to be the winner — which is what I want for all the small shareholders who have supported us.

“This could be either a real good surprise or a real big flop,” says Depatie.

Gold Hawk currently has almost 32 million shares outstanding. The stock has performed well since the start of the year, rising from around 20 to above 70 at presstime.