Midlands Minerals grows in Ghana

Kim Harris is used to hunting in elephant country. As the former director for Africa of the Ontario International Corp., she spent more than a decade crisscrossing the continent looking for business opportunities for Canadian companies and brokering multimillion-dollar deals — including mining joint ventures — that went on to become huge success stories.

Her work took her to Uganda, where she helped a Canadian engineering firm literally turn the lights back on in that country by rehabilitating dams and laying transmission lines after the fall of military strongman Idi Amin. She was also the brains behind the creation of the first stock exchange in Ghana — which has grown from a two-room operation when it opened in 1989 to a few floors in an office tower in Accra.

Now she has a story of her own to tell. After leaving her job at Ontario International in the late 1990s, Harris set up Midlands Minerals (MEX-V), which holds a 160-sq.-km gold district on Ghana’s Ashanti gold belt that is coveted by just about every major in the country.

Midlands picked up its Kwahu Praso property in 2001 before adding the past-producing Sian gold mine in 2006. Harris — Midlands’ president and CEO — believes there is a combined resource of 2 to 5 million oz. gold on the properties, which sit right next to each other on the northeastern portion of the Ashanti Gold Belt.

The Sian gold mine lies about 30 km northeast of Newmont Mining’s (NMC-T, NEM-N) 8.7-million- oz. Akyem gold deposit, while Kwahu Praso is contiguous to Sian and Resolute Mining’s (RMGGF-O, RSG-A) Akaose property to the south.

“We’ve already confirmed that we’re on the same structure as Newmont because we’ve looked at their core and our core and the geology is the same and the mineralization is the same,” Harris says.

“We’ve also concluded through our huge soil anomalies, (induced-polarization) surveys, and five newly discovered gold zones, that Sian has significant potential to host several gold deposits. It is a gold district that is growing so there is a lot of interest from majors and we are in discussions with interested parties.”

Sian has a National Instrument 43-101-compliant resource of 200,000 oz. gold. It contains an indicated resource of 1.3 million tonnes grading 2.3 grams gold per tonne plus 500,000 inferred tonnes at 5.7 grams gold. Midlands has retained Geostat International to undertake a resource estimate and an updated resource is expected by the end of March.

The Canadian junior expects to bring Sian to the feasibility stage this year and move into production by 2010. In mid-March, it will kick off the next phase of drilling with a medium-term target to increase the 200,000-oz. resource to 500,000 oz.

“Given the intersections we are getting, that number in the short term is realistic,” Harris says.

Preliminary results from 12,400 metres of drilling completed between April and November last year indicate high-grade intersections and a continuity of grades and widths including 10.81 grams gold per tonne over 7 metres; 24.3 grams gold over 3 metres; 1.99 grams over 13 metres; and 2.25 grams over 15 metres.

Currently, Midlands is working in a 3 by 4-km area around the Esaase open-pit deposit, but the actual soil anomaly extends for 16 km.

“Sian Goldfields, a Chinese company that owned the mine before us, was primarily exploring in areas where they had visible signs or outcrops and were looking only at quartz veins,” the Zimbabwe- born Harris explains in an interview at her Toronto office. “They weren’t looking at any other types of mineralization that might have gold in higher grades than they had at that time.”

Sian Goldfields, a private company registered in Ghana with Chinese and Ghanaian partners, was set up by China’s state-owned Lanzhou Engineering and Research Institute for Non-Ferrous Metallurgy, and initially financed by the Chinese government through the Chinese Exim Bank.

But after pouring cash into getting permits, completing a feasibility study, relocating a village, building a carbon-in-leach (CIL) plant, roads and other infrastructure, the company started to run into problems. It produced nearly 16,200 oz. gold with recovery rates of 91%, but terminated production in 2004 because it ran out of money.

One problem, Harris explains, was that it supplied all the equipment and management from China and quickly ran into linguistic problems with its locally hired staff. The more serious problems, however, apart from

low gold prices at the time, were design issues with the mine.

The open pit was carved out of the ground without benches or shoring, Harris explains.

“There was basically no design and then they started to have problems with what they were putting through the mill. When they started running into stripping ratio issues, they had to close the plant for a while because they had no ore to process.”

Midlands acquired a 65% stake in Sian in August 2006. Under the deal, Midlands agreed to pay off about US$2 million that Sian Goldfields owed its creditors and assume future exploration costs. Sian Goldfields retains a 35% stake in the property.

“Sian had spoken with a number of other interested parties and I guess what we offered made a lot of sense,” Harris says. “Their portion is quite reasonable and it’s better than offers they were getting from larger companies who said, here is what we’re going to pay you, now take a hike. We kept them as a partner. It was a very good deal and it is a good partnership.”

Certainly, there aren’t many junior companies on the Ashanti gold belt with full mining licences and a mine only a few years away from production. The deal with Sian Goldfields allowed Midlands to bypass all the regulatory and other steps required — including relocating an entire village that previously sat where the Esaase open pit lies today.

It cost Sian Goldfields about US$7.8 million to move the village in 1993. The same relocation exercise today — given higher compensation rates and stricter laws — would cost between US$25 and US$30 million.

“That is already value in Midlands,” Harris says. “We do not have to do that. We do not have to build the roads, put in the water, bring the power in, or build the CIL plant. They did all of that. If one were to reflect all that value into Midlands’ share price, then our market capitalization should be several times what it is.”

The company is currently trading at around 29.5 a share. Midlands has a 52-week trading range of 21.5-43 and has 53 million shares outstanding.

About 40% of the company’s stock is in the hands of institutional investors such as RAB Capital, CIM Investment Management, AGF, and Humboldt Capital.

At the end of 2007, the company had working capital of US$2.1 million and cash and short-term investments of US$2.4 million. Midlands is currently debt-free.

In addition to Sian and Kwahu Praso in Ghana, Midlands holds mineral rights on the Kaniago concession on the Asankrangwa gold belt. The property is about 25 km east of AngloGold Ashanti’s (AU-N, AGD-L) Bibiani mine and is contiguous to Resolute Mining’s Obotan mine.

Apart from Ghana, Midlands owns mineral rights in the Lake Victoria goldfields of Tanzania. Its Itilima gold and diamond project is close to world-class gold deposits, including AngloGold’s Geita mine with 14 million oz. gold

and Barrick Gold’s (ABX-T, ABX-N) Bulyanhulu mine with 13 million oz. gold.

Indeed, diversification is part of Midlands’ strategy and a necessity in Africa, says Harris, who learned that lesson the hard way. After setting up a private exploration company in 1996 called SIKA Resources and raising financing to get silver, tantalum, and gold properties in the Kadoma area of Zimbabwe, the company lost everything when Robert Mugabe launched his nationalization drive of foreign firms.

“It was a very good lesson for us because we had put all of our eggs in one basket,” recalls Harris. “You have to mitigate the risk. You’ve got to be
in two different countries and you have to have several projects — no matter how good they are.”

But as Harris says, every cloud has a silver lining.

“The silver lining for us was to get us to look at Ghana and Tanzania where we quickly located some very, very good projects and we used our experience obtained in Zimbabwe to operate in those countries,” she says. “We know how these countries operate, we know how community relations should be handled, we are very well acquainted with being in the bush in Africa and that is part of why we are very successful.”