Perseverance pays off for Avnel at Kalana in Mali

VANCOUVER — It’s been over a decade of preparation for Avnel Gold Mining (TSX: AVK) at its Kalana Main deposit in southwestern Mali, but now the company is on a path towards turning the small, former Soviet-run underground gold mine into a larger-scale open-pit operation.

The company is infill-drilling 30,000 metres to bulk up the resource and define its definitive feasibility study, due early next year.

So far, the results suggest the effort has been well worth it, as drilling has intercepted mineralization extensions within and around the resource pit shell.

The latest intercepts include 100.3 grams gold per tonne over 10 metres, with orebody extensions in the north returning 6.7 grams gold over 3 metres and 2.1 grams gold over 13 metres.

The resource at Kalana has climbed ever since Avnel’s former joint-venture partner Iamgold (TSX: IMG; NYSE: IAG) poured $32-million worth of work into the project between 2009 and 2011.

But when a military coup destabilized the country in early 2012, Iamgold walked away before vesting its stake, and left Avnel with full ownership.

Since then, the junior has operated a small, largely unprofitable 140-tonne-per-day underground mine as a gambit for the local community’s transition to the proposed open-pit operation it sees in Kalana.

In preparation, Avnel put out the preliminary economic assessment (PEA) early last year based on a 1.25 million oz. gold resource in 8.5 million indicated tonnes grading 4.53 grams gold, and 250,000 oz. gold in 2.1 million inferred tonnes grading 3.76 grams gold, using a 0.9 gram gold cut-off.

The PEA outlines a combined gravity and carbon-in-leach processing plant with a 138,000 oz. gold annual production in the first four years, at a low all-in sustaining cost of US$577 per oz. gold.

Indicated resources support a 14-year mine life, with annual production sliding to 98,000 oz. gold after year four. Using a US$1,110 per oz. gold price at a 10% discount rate, the project has a US$194-million after-tax net present value and 53% internal rate of return.

But since the PEA, Avnel has increased indicated resources by 67% to 2.15 million oz. gold in 15.2 million tonnes grading 4.4 grams gold, and increased the inferred by 24% to 0.38 million oz. in 2.2 million tonnes of 5.33 grams, using a 0.9 gram gold cut-off.

The upgrade largely owes to better estimating dilution, along with extra drill-hole data in the western part of the deposit.

And with the recent success of the drill program, Avenel chairman and CEO Howard Miller stated in a release that the company is confident the resource can grow after a “meaningful portion” of the inferred resource is converted into the measured and indicated categories, and in-pit resources are added from the extension drilling.

Gold mineralization at Kalana consists of shallow-dipping, high-grade quartz veins overprinted by sub-vertical, lower-grade veins within north- to south-trending structural corridors.

The overprint has led Avnel to explore the potential for lower-cost bulk mining, rather than the selective mining approach outlined in the first PEA.

Avnel says that adopting a larger operation than the 3,000 tonnes per day stipulated in the original study will “likely increase” annual production, and improve the economics.

Further upside includes the company’s “exploration target” — a poorly constrained resource between 0.7 million and 1 million oz. gold within 5.3 and 6.6 million tonnes, grading between 3.9 and 4.7 grams gold — that sits below the main resource, but within a conceptual pit shell.

The company says the target is not being drilled in the current program, but offers upside.

Avnel is fully funded to deliver its definitive feasibility study after closing a $12-million bought-deal financing in early May, but will need more financing before starting open-pit mine development next year.

The initial capital cost of US$147 million for operations could be within the junior’s reach, with its share price carving a route upwards after every milestone.

Analysts at Cormark Securities forecast a 70¢-per-share target price, based on a US$1,200 per oz. gold price.

Avnel has traded with a 52-week window of 11¢ to 31¢, and closed at 26¢ at press time. The company has 304.3 million shares outstanding for a $79-million market capitalization.