Petaquilla moves on Molejon

893,000

Ounces of gold outlined at Molejon using a 0.5 gram gold cutoff.

1,800

Tonnes of throughput on a daily basis.

35%

Internal rate of return providing for a 2-year payback.

10

Expected years of production.

Panama City, Panama — Petaquilla Minerals (PTQ-T, PTQMF-O) is aggressively advancing its plans to bring the Molejon gold-silver deposit, in north-central Panama, to production.

Proposed open-pit development of the project, which recently received Panamanian government approvals for a multi-phase mine plan on the large mineral concession, is now being advanced through infill, confirmation and advanced exploration drilling.

Molejon forms a portion of the 135-sq.-km Minera Petaquilla project area, which hosts several mineral deposits, including the large Botija and Petaquilla copper-gold-molybdenum porphyry bodies. The company is targeting the gold deposit as a stand-alone operation that may springboard future development of the copper deposits.

Petaquilla is fortunate to be able to leverage a significant amount of existing infrastructure and previous exploration work on the project area toward its goal. The ground was worked extensively in the mid-1990s when the company’s predecessor, Adrian Resources, along with partners Inmet Mining (IMN-T, IEMMF-O) and Teck Cominco (TEK.SV.B-T, TCKBF-O), drill defined resources on the Molejon gold and Petaquilla copper deposits, completing a bankable feasibility study on the latter. Petaquilla Minerals holds 52% and Inmet 48%, with Teck holding an option to earn half of Petaquilla’s interest by completing a final feasibility study (done in 1998) and funding the company’s entire share of costs to place the main copper project into production.

Petaquilla’s main exploration office, constructed in the 1990s by the partners, was built as a mine and administrative centre. The facility is ideally situated in central Panama, not far off the Pan-American Highway, and serves as an ideal staging post to the project, located farther north in the densely forested, tropical zone, near the Caribbean coast. The property is accessible primarily by helicopter, although during a recent visit by The Northern Miner, an access road was under construction.

In mid-2005, Petaquilla signed agreements with Inmet and Teck Cominco to acquire full title to Molejon and any other gold deposit on the Minera Petaquilla land package, subject to royalties. The move gives Petaquilla control of the project, aiding development decisions and project financing. Tenure to the entire project would convert from annual exploration licences to an exploitation permit for up to 60 years (three 20-year concessions renewable automatically) once a mine permit is received for Molejon, extending the window for possible future development of the large copper deposits.

The Panamanian government recently OK’d Petaquilla’s mine plan, under proposals initially tabled in 1997, providing the prospective developer guaranteed stable land tenure. In addition, a favourable tax structure has been tabled, allowing for accelerated depreciation and depletion allowances along with an import duty exemption for essentially all equipment and supplies necessary for the project. The operation will also enjoy an income tax holiday (except for a mineral production royalty) until all of the construction financing costs are retired. Further, there will be no withholding tax on interest or dividend payments to foreign lenders or shareholders, respectively.

Expanding Molejon

Petaquilla resumed activity at Molejon in 2004, triggered by an upswing in the metal price and junior mining equity market, looking to expand areas of known gold mineralization. In late 2005, SRK Consulting revised a 1995 resource estimate on the epithermal gold deposit, resulting in a 35% boost to 11.2 million tonnes of inferred resources grading 2.5 grams gold, or about 893,000 contained ounces gold, using a 0.5 gram gold cutoff.

Programs of trenching and drilling are providing infill confirmation of previous work, and are also aimed at expanding mineralized zones.

Last year’s trenching encountered significant high-grade gold in the Molejon Main zone. At the 244 area (defined by a silicified hill 45 metres in diameter), trench 205B returned 51.5 metres grading 16.9 grams gold per tonne, including 25.4 metres of 28.3 grams gold. Two consecutive 1.5-metre intervals in the trench averaged 106 and 101 grams gold, respectively. Exploration indicates the area is completely mineralized, with good extension potential both to the northwest and southeast. Additional sampling on the Central, Main and Northwest zones have also successfully tested extensions to known mineralization.

A 5,000-metre drill program, started early this year, is testing depth potential of the zones and will serve as a check to some previous holes. Previous drilling, conducted in 1994-95, consisted of 124 holes on a 50-metre grid with 40- to 70-metre hole spacing.

This year’s first hole, MO-06-01, was drilled about 5 metres from previous hole MO-95-244 and returned 8.5 metres (from surface) grading 32.5 grams gold per tonne in a quartz breccia zone.

The program will provide data for a feasibility study and the design of a planned starter pit for the operation.

Initial mine modelling at Molejon outlines a 10-year mine life with a 1,800-tonne-per-day operating rate, expected to begin with a high-grade starter pit in the 244 area. The project is anticipated to deliver a 2-year payback with about a 35% internal rate of return.

Petaquilla Minerals has been working with International Finance Corp. (IFC), the financing arm of the World Bank, which has carried out due diligence on the company’s development plans. Upon final mine plans, the IFC will review its involvement options; previous reports had it considering backing 25% of the project through debt financing and possibly taking a 10% equity interest in Petaquilla, thereby reaching its maximum exposure of 35%.

Divide and conquer

Petaquilla has tabled plans to split into two separate public companies, one developing Molejon and other possible gold deposits, and the other holding the large copper assets. Management says this will offer shareholders an improved valuation for the minerals portfolio. The process, subject to shareholder approval, is expected to be completed by mid-year.

The company recently entered into a preliminary agreement with one of China’s largest integrated metal producers for the development of the Petaquilla copper deposits. The agreement reviews a potentially significant equity investment in the new Petaquilla copper entity by the unnamed Chinese company, as well as the potential acquisition of the interests and rights currently held by partners Inmet and Teck Cominco. The Chinese mining group also proposes participation in project financing and construction, in addition to an offtake agreement for of copper concentrates.

The Chinese group was lured by the sheer size of the Petaquilla copper deposits. “In the mid-1990s, we were ranked as one of the top five copper projects by research group CRU International, and of those five, three are now in production,” says company director Richard Fifer. “Hopefully, Petaquilla will be the fourth.”

To generate the feasibility study, Fifer says the three partners spent $60 million and conducted 120,000 metres of drilling between 1995 and 1997.

The 1998 bankable feasibility study, completed by engineering firm AMEC, reviewed the three main porphyry deposits on Minera Petaquilla and indicated a pre- National Instrument 43-101 minable reserve calculation of 1.1 billion tonnes grading 0.5% copper, 0.09 gram gold and 0.015% molybdenum. The report proposed a 120,000-tonne-per-day throughput and a 23-year mine life with a relatively low stripping ratio of 0.97:1. Initial capital spending was pegged at US$1.1 billion to put the mine into production.

Minera Petaquil
la largely sat stagnant after 1998, following the commodity price collapse and a weakened junior mining market. Metals prices have improved significantly since the 1998 feasibility study, when gold was less than US$300 per oz. and copper traded around US70-US80 per lb.

Hydrometallurgical copper processing has also evolved dramatically since the 1990s, and may have application potential at Petaquilla, where significant amounts of secondary copper sulphides exist — specifically in Botija, Petaquilla, and Cuatro Crestas. The molybdenum component in the copper porphyry may also prove to be a sweetener given the metal’s recent price rally.

With 70.1 million shares outstanding, Petaquilla Minerals posts a $115-million market capitalization given its recent $1.65-per-share trading level. The company’s shares have traded in a 52-week range of 37 to $1.93.