Site Visit: Persistence pays off for INV Metals at Loma Larga

CUENCA, ECUADOR — Richard Spencer likes to think that there is a fine line between tenacity and stupidity in the exploration business.

The South African geologist found himself walking that line 15 years ago, while working in Ecuador as Iamgold’s (TSX: IMG; NYSE: IAG) exploration manager for South America.

Spencer remembers the day he was sitting in Iamgold’s offices in Quito talking with industry colleagues at Cogema. It was the late 1990s, and the Cogema geologists were pressuring him to acquire their Quimsacocha concession in the Western Cordillera of the Andes, 480 km south of the capital and 30 km southwest of the city of Cuenca, in southern Ecuador.

Cogema and joint-venture partners TVX Gold and Newmont Mining (NYSE: NEM) had drilled 82 holes at Quimsacocha in the mid-1990s. The eleventh hole, drilled in 1996, returned a 2-metre intercept grading 83.5 grams gold per tonne and 317 grams silver per tonne. “It was one of the first holes they drilled, but it wasn’t what they were looking for,” Spencer says, noting that at the time, Newmont was the explorer for high-sulphidation epithermal gold deposits, having recently discovered Peru’s Yanacocha, the largest of its kind in the world.

“Quimsacocha didn’t fit with the Yanacocha model, so they didn’t take the bonanza grade seriously,” he continues, explaining that the gold at Yanacocha is distributed within areas of vuggy silica and quartz-alunite alteration, which are surrounded by clay alteration.

“The Yanacocha model would have been a few grams over wide Intervals in vuggy silica, and the three-way joint venture didn’t follow up on the bonanza-grade hole at Quimsacocha, because it didn’t fit the Yanacocha model of that time,” he continues. “At Quimsacocha, there isn’t that much vuggy silica — it’s there, but it’s subordinate to chalcedonic silica flooding. The absence of the large quantities of vuggy silica would have downgraded Quimsacocha in a classic Yanacocha model of that time.”

When Newmont and TVX walked away, the ground reverted to Cogema (now Areva), and that’s when the company urged Spencer and his exploration team at Iamgold to take it on.

At first, Spencer wasn’t interested. “I certainly remember not being all that keen to take it, because I couldn’t see how we could do anything better than Newmont had done,” he says.

But Iamgold agreed in 1998–99 to take over the project, which in the first few years sat dormant due to the downturn in the gold price, and because the company couldn’t afford much drilling.

But Spencer and his crew slowly picked away at it, and some drill targets were tested on the basis of alteration and prior drill intercepts.

“I remember abusing the patience of management, which had been generous in funding the drill programs that hadn’t intersected gold values of economic interest — but management did back the team to keep drilling,” recalls Spencer, who is now president and CEO of U3O8 (TSX: UWE; US-OTC: UWEFF). “We came so close to giving up on a couple of occasions, but fortunately we kept our heads and kept going.”

Spencer says it didn’t help matters that the company had invited a world-renowned epithermal specialist to review the project, who concluded the team was wasting its time, the vuggy silica target had eroded away and that there was no chance of discovering a significant deposit at Quimsacocha.

Spencer and his team were undeterred, however.

“We kept drilling — stretching that line between tenacity and stupidity — and switched consultants,” Spencer says, noting that the breakthrough came with drilling a line of long, tip-to-tail bore holes that helped the team map alteration on a vertical section over a horizontal distance of 1.5 km.

Although there were no intercepts of potential economic grade, for the first time Spencer and his team saw alteration packages arranged around centres of slightly elevated grade — and to define how the alteration changed over hundreds of metres in a vertical sense. “We got the first glimpse that weak mineralization cut-out upwards — that there was a roof to the mineralized system,” he explains. “And these patterns in vertical section allowed us to make more sense of the sporadic outcrops that poke through the glacial moraine that covers most of the Quimsacocha property.”

Spencer and his colleagues started to better understand the alteration patterns in plan-view, and the company’s new consultant Jeff Hedenquist gave the project a thumbs up, which was enough to extract a little more drilling money from Iamgold’s long-suffering shareholders.

“Had we not drilled that line of tip-to-tail holes, and without Jeff Hedenquist’s excitement about the project, I would be surprised if we would have vectored towards the deposit,” he says. “The thing that excited me was that the alteration patterns were big. They weren’t changing over a couple of metres. They were changing over tens or hundreds of metres, and that’s what really got me to put my hand on my heart in front of management and say: ‘There is something big here, and we just have to keep going.’”

One of the team members was Spencer’s wife, Camille, the geophysicist on the project. She also worked with detailed crystalinity of the alteration minerals, which turned out to be one of the key means by which Iamgold grew to understand the alteration. “When we were congratulating ourselves on an intercept, she was the voice in the background that was telling us there was something more — to swing harder, because the geophysics indicated something bigger,” he says. “Most of the geophysics was done by a specialized contractor, but Camille also spent time in the field and was integral to the interpretations and recommendations, identifying that the drilled results showed little correlation with Quimsacocha’s spectacular geophysical signature.”

Spencer and his crew drilled 40 bore holes before hitting the discovery hole in 2003, which cut 101.4 metres of 9.5 grams gold, 46.7 grams silver and 0.4% copper.

But even then, it wasn’t an easy deposit to define. Quimsacocha is blind, and the top of the deposit literally cuts off from one metre to the next. Like Newmont, Iamgold’s follow-up hole intersected above the roof of the system, returning nothing of interest. While Newmont moved on, however, having failed to find continuity, Iamgold stuck it out, drilling 65,117 metres between 2003 and 2008.

Spencer left Iamgold in 2004 to join Crystallex as vice-president of exploration, leaving exploration and a maiden resource at Quimsacocha in the hands of the Ecuadorian team with whom he had worked. And he remains convinced of the project’s potential to this day.

“The resource at Quimsacocha is 3 million oz. gold, but there’s no doubt in my mind that it’s going to be well north of 10 million oz. by the time it gets fully explored,” he says.

The 80 sq. km property has a number of o
ther targets to the northwest. Part of a large diatreme on the Quimsacocha property contains porphyry fragments that are mineralized with copper and gold, Spencer adds, making it, in his view, a classic system in which a high-level, high-sulphidation epithermal gold deposit roots into a porphyry at depth.

Spencer says the property holds more discoveries. “Whether that porphyry is within drilling distance or too deep to be economic I don’t know, but you do know there is an untested porphyry sitting at depth on that property, in addition to high-sulphidation epithermal showings that make it an incredibly exciting district,” he says. “And the thing we do know from Quimsacocha is that you can be a metre above the upper mineralized cut-off, and grades would be minimal. That change from bonanza grades in the deposit to trace mineralization above its roof is quite spectacular.”

In 2008, four years after Spencer left Iamgold, the government of Ecuador suspended all mining and exploration work in the country.

Iamgold eventually sold the project to INV Metals (TSX: INV; US-OTC: ILNLF) for US$30 million in November 2012, after the government approved a new mining law in January 2009 that reopened the country to foreign mining investment.

INV Metals renamed the project Loma Larga, and updated Iamgold’s resource estimate. Indicated resources now stand at 10.2 million tonnes grading 6.24 grams gold for 2.04 million oz. gold, 35.2 grams silver for 11.5 million contained oz. silver and 0.7% copper for 81.1 million lb. copper in the indicated category. Inferred resources add 0.3 million tonnes grading 15.14 grams gold for 0.14 million oz. gold, 123.6 grams silver for 1.1 million oz. silver and 1.7% copper for 10.4 million lb. copper.

The resource used a US$100-per-tonne net smelter return cut-off value, US$1,500 per oz. gold price, US$25 per oz. silver price and US$3.50 per lb. copper price.

In 2013, INV Metals drilled 12 diamond drill holes (3,700 metres) and worked on a prefeasibility study, which was completed in early 2015.

The study envisions an underground mine with a 1,000-tonne-per-day production rate and average annual gold production of 80,000 oz. over a 13.3-year mine life.

All-in sustaining costs are forecast at US$592 per oz. gold sold. The study calculates an after-tax net present value at a 5% discount rate of US$153.8 million, a 16% after-tax internal rate of return and an after-tax payback period for the US$218.9-million initial capital costs of 4.4 years. The study uses a US$1,350 per oz. gold price, along with a US$23 per oz. silver and US$3 per lb. copper.

Candace MacGibbon, chief executive of INV Metals, says the company is doing desktop studies to see where it can optimize capital, production and operating costs, while it waits for more clarity on taxation rates.

As a medium-scale mining operation under Ecuador’s mining code, the project would be subject to a 22% corporate income tax rate, 4% state royalty on metal sales, 15% profit tax for state and employee participation, and a sovereign adjustment, based on a 50% net benefit to both the company and the government.

“Positive changes have recently been made. However, the current tax regime remains high and is challenging for projects in the country,” MacGibbon says in an interview. “That will be one of the factors that may complicate mining investment in Ecuador.”

MacGibbon says Loma Larga needs returns that are financeable whene gold prices are relatively low and there is not a lot of available capital. “To compete for accessible mine financing dollars in today’s environment, some changes still have to be made,” she says.

At the same time, MacGibbon is optimistic that INV Metals can come to an agreement with the government that satisfies both sides, and notes that negotiations between Lundin Gold (TSX: LUG) and government ministries on the Fruta del Norte project should help provide a road map for other foreign mining companies in negotiating their own agreements. (The Ministry of Mines told The Northern Miner in late October that it expects to reach the broad outlines of a fiscal stability agreement with Lundin Gold before year-end.)

MacGibbon concedes that Fruta del Norte is an exceptional project in terms of grade and scale, which may help it thrive under the current tax regime, whereas other companies with smaller or lower-grade projects may struggle. “When you are the lucky recipient of having one of the highest-grade undeveloped projects in the world, you have a bit more economics to play with,” she says.

Still, she is hopeful that INV Metals can negotiate a fiscal stability agreement that is feasible to both parties, and says that in discussions she has had with Javier Cordova, the mines minister, and Rafael Poveda, the coordinating minister for strategic sectors, “they understand each project is different, and has different economics.”

She adds that “we’re optimistic, and while there are challenges we’re facing, we’re working together with the government to solve them, and there’s no indication that we won’t be able to solve them … the political will is there to move the mining business forward.”

And that’s good news for mining companies everywhere. 

“Ecuador is the only country [in the Andes] without significant operating mines, and the theory is that with similar and contiguous geology in the region, the potential is high for spectacular exploration discoveries,” MacGibbon says.

CUENCA, ECUADOR