Elko, Nev. — During the year and a half following
“We have the thought processes of a junior explorer with the production to pay for it,” Davie told The Northern Miner during a visit to the property, 50 miles north of Elko, last summer. The comment neatly summarized both the amazing gold-exploration potential of Queenstake’s large landholdings and the company’s cool confidence that Jerritt’s historic, substantial gold output could be maintained under Queenstake’s operatorship.
Queenstake bought a 100% interest in the mining complex on June 30, 2003, for about US$50 million, including 32 million shares, from 70-30 partners AngloGold (now
Overnight, Queenstake became the fifth-largest gold producer in the U.S., and the junior’s market cap swelled from US$13.4 million at the end of 2002 to US$206 million a year later.
Fast forward to today, and Queenstake has been humbled by a particularly rough fourth quarter, when Jerritt produced 60,383 oz. gold, or 19% less than expected. For the year, output totalled 243,333 oz. gold — well off a downwardly revised goal of 270,000 oz. and even farther behind the original 300,000-oz. estimate. Cash costs for the year stayed above US$300 per oz.
While production in the first quarter of 2004 was hobbled by unusually deep snowfall, which blanketed northern Nevada, thus blocking roads and dampening ore, the shortfall in the October-to-December period was caused by mechanical problems with mining and milling equipment, and with stope scheduling.
This contrasts with Queenstake’s first-ever two quarters of production at Jerritt, in the second half of 2003, when the company confidently met its target of 150,001 oz. gold.
“Our 2004 gold production was hampered by a chronic backlog of development and consequent shortage of ore that was ready to mine when scheduled,” said Davie. “We understood this condition, caused by the previous owner’s closure plans, when we bought [the mines] but, clearly, we underestimated the full impact of this shortage.”
For 2005, Queenstake has downwardly revised its plans and now intends to produce 275,000 oz. gold, deriving 1.14 million tons of mill feed from underground ore grading 0.26 oz. gold per ton (8.9 grams per tonne) and another 300,000 tons from lower-grade, surface stockpiles.
In January 2005, Queenstake produced 17,594 oz. gold, up 60% from the previous January. This latest January tally is still in line with the 275,000-oz. target for 2005, as the company produces less-than-average amounts of gold during the winter.
Updated reserves
At the end of 2004, and based on a gold price of US$360 per oz., mine reserves at Jerritt Canyon totalled 824,607 oz. gold contained in 3 million tons grading 0.274 oz. gold per ton (9.39 grams per tonne). An additional 50,740 oz. of reserves lay in surface stockpiles of 503,000 tons grading 0.101 oz. gold per ton (3.46 grams per tonne).
In the underground mines, an additional 6.7 million tons grading 0.282 oz. gold (1.8 million oz.) lie in the measured-resource category, and 3.2 million tons grading 0.232 oz. are inferred.
From a mining complex that was slated by its previous owners for closure at the end of 2004, Queenstake has done a superb job of adding gold reserves quickly: since buying the mining complex in mid-2003 with 524,000 oz. of reserves, the company has added 732,000 oz. in 18 months, or 40,667 oz. per month.
All told, Jerritt Canyon — this former castoff — today boasts 875,000 oz. of reserves, 2.4 million oz. of measured and indicated resources, and 888,000 oz. of inferred resources, for a grand total of 4.17 million oz. gold.
Let the records show that Jerritt Canyon’s vendors, AngloGold and Meridian, walked away from 4.2 million oz. of gold sitting in the ground in Nevada in return for US$50 million, or about US$12 per oz.
History
Gold was discovered at Jerritt Canyon in 1972 by FMC (renamed Meridian Gold in 1976) while exploring for antimony. In 1976, Meridian formed a 30-70 joint venture with Freeport Minerals Co. (later renamed
The partners celebrated their first gold pour at Jerritt in July 1981, when the mine had 23 employees. From 1981 to 1999, they exploited several open pits, which fed a central processing facility, though as the ore became more and more carbonaceous and refractory in the mid- to late-1980s, a dry mill and roaster were introduced. (Coincidentally, Davie helped design and build Jerritt’s roaster while he was working for a consulting firm.)
In 1990, South Africa’s Minorco arrived on the scene and bought Freeport’s 70% stake for about US$705 million. (In another interesting connection, James Mancuso, the head of Minorco’s North American operations at that time, became a Queenstake officer and director in the mid-1990s, and served as chairman until his recent retirement.)
Minorco’s entrance also ushered in underground mining at Jerritt, beginning in 1993. To date, the underground workings have produced about 2 million oz., compared with about 5 million oz. from pits.
“The trend is towards deeper and deeper reserves over the life of the mine,” commented Davie.
In 1999, Minorco sold its stake in Jerritt to AngloGold as part of the massive reorganization of the
From 1984 to 2003, annual gold production at Jerritt usually ranged from 300,000 to 350,000 oz. at a total cash cost of US$190-275 per oz., peaking in 2001 at around 400,000 oz., when there was some 100,000 oz. toll-milled for
Through all the changes of ownership, many of Jerritt’s employees stayed on, and several geologists who drifted away have since returned to work in Queenstake’s reinvigorated exploration program.
Four mines
Today at Jerritt Canyon, Queenstake’s 450-person, non-unionized workforce is operating four portal-accessed underground mines — SSX, Smith, Murray and Steer — from which ore is trucked by mountain roads back to the 1.5-million-ton-per-year mill and roaster (see map, page C9).
All four mines have gold deposits that are irregularly shaped and exhibit complex grade distributions and metallurgical characteristics, which necessitate careful blending of ores.
Ground conditions in the mines are fair to good, and safe mining requires the use of rock bolts, expanded metal mesh and shotcrete for effective ground control. All the mines use cemented rockfill and full-orebody extraction.
Queenstake reports that underground mining costs have declined substantially since 1995 and have settled in the low US$30-per-ton area in the past few years.
What follows is a closer look at the mines:
n Open since 1997, the SSX mine is currently Jerritt’s flagship, and contains by far the largest reserve: 1.6 million tons grading 0.258 oz. gold, or 402,000 oz. gold.
Queenstake is expanding SSX southwest toward the Steer mine and expects 248 stopes to be available for mining this year — a substantial increase from 2004.
Four stoping methods — conventional sub-level, blind bench, ramp bench, and blind uphole — are used to move about 1,750 tons of ore and 500 tons of waste per day.
n Smith is one of Jerr
itt’s newer mines, and growing everyday. The mine’s portal has been built at the bottom of the mined-out Dash pit. Key new zones include East Smith and Mahala, at the eastern and southwestern extremities, respectively, of the underground workings.
In 2004, Smith produced a daily average of 775 tons of ore and 270 tons of waste using the same stoping methods as those used at SSX. The highest reserve grades in the camp, at 0.37 oz. gold, are in Smith’s zone 4, and the recently reached Mahala zone.
n Discovered during condemnation drilling for a waste dump, the Murray mine was Jerritt’s previous flagship, but it’s at a mature point, producing only 700 tons of ore and 200 tons of waste per day. Drift-and-fill mining is currently used, complemented by bench stoping. Ground conditions are much more difficult as the ore is found in a fault structure.
n Queenstake opened the Steer mine in mid-2004 to replace production from its MCE mine, which closed in the third quarter. Much of Steer’s future will be determined by ongoing exploration of the large, parallel gold-mineralized trends found between Steer and SSX, and which include the Saval zone. If this drilling proves successful, SSX and Steer could one day merge to form a single mine with two portals.
Meanwhile, at the mill-roaster facility, milling costs are about US$19 per ton, several dollars higher than in previous years, partly owing to substantially higher power costs since 2001. The overall gold-recovery rate is about 90%.
The roaster, the first built in Nevada, continues to perform well and is now one of only three operating in the state.
“We have not changed one single brick [in the roaster] in sixteen years,” said Mill Manager Blane Wilson. “Not bad for a roaster that was designed for eight years.”
Of note, the facility’s wet mill and chlorination plant were decommissioned in 1997, when the known oxide deposits in the district were depleted. The equipment was then put up for sale, but Queenstake’s grassroots exploration success has prompted the company to take it off the market.
At the end of the process, following standard carbon-in-leach recovery, Jerritt produces a dor that ranges between 95% and 97% pure gold (the cleanest dor in Nevada), which is then shipped eastward to the Johnson Matthey refinery in Salt Lake City, Utah.
Debt-free
Queenstake is a staunch non-hedger of its gold production and sells at spot prices, but when it first bought Jerritt Canyon, the company was forced by its lenders to spend US$4.1 million buying a strip of put options at US$330 per oz. to protect the company’s downside. The last puts were settled in August.
Earlier in 2004, Queenstake closed the sale of its small Magistral open-pit gold mine in Mexico’s Sinaloa state to Vancouver-based
A financial milestone was reached in August 2004 when Queenstake raised a gross US$17 million by issuing just over 34 million special warrants, each of which is convertible into a share and a half warrant. A whole warrant is exercisable at C65 until Feb. 10, 2006.
With that money, the company paid off the rest of its acquisition term loan, and repaid the remainder of a US$20-million senior project debt almost a year ahead of schedule.
Queenstake also used the funds to pay about US$6 million in deferred production payments owed to AngloGold and Meridian, and another US$3.5 million to buy up from the two vendors a net smelter return royalty, which was capped at US$4 million.
Lastly, Queenstake used another US$720,000 to pay out a note to AngloGold related to Jerritt’s oxygen plant.
“This series of payments effectively settles, two and a half years ahead of the original payment schedule, all material obligations related to the company’s acquisition of the Jerritt Canyon mine,” said Davie. “Going forward, with the elimination of debt and other obligations, we have more financial flexibility and more cash available for re-investing into Jerritt Canyon.”
One more reason Queenstake is now on a firm financial footing is that it already dealt with Jerritt’s closure and reclamation liabilities in the original purchase agreement. Specifically, Queenstake arranged a US$26-million reclamation-and-closure insurance policy from AIG Environmental, a unit of American Insurance Group (AIG), which ensures that all reclamation obligations will be met.
“We operate what we believe is the only gold mine in North America with a fully funded reclamation program,” said Davie.
Looking ahead, there are various ways the Jerritt Canyon mines could be developed, and the capital requirements are likewise various.
But, said Davie, “there is no doubt that the most efficient ways the mines could be developed — not just for this year but in the long term — are those that require the most capital.
“We believe the most efficient case for the life of the mine will be to capitalize aggressively now and reap the rewards in years six, seven and eight,” said Davie. “Those rewards will be greatly enhanced by the fact that acquisition obligations have been met, and the property owner is essentially debt-free.”
Although a figure of US$25-33 million has been bandied about, Queenstake has not yet made a firm decision on its capital-outlay requirements. Management continues to assess Jerritt’s operating and capital needs, and believes the operation will generate sufficient cashflow for both.
“It’s a bit of a juggling act, justifying capital expenditures based on a life of mine that is, based on our reserve situation, inherently uncertain,” said Davie.
Exploration
Outside the immediate area of the mines, Queenstake is engaged in a substantial, multi-year exploration campaign throughout its claim block, which is roughly 15 miles north-south by 10 miles wide and keeps growing toward the south.
Hosting an endowment of 11 million oz. gold (current reserves, resources and past production), it is the single largest land-claim block in Nevada. Said Davie: “In showing people our property, the part that’s least understood is just how vast our land package really is.”
The claim block sits in the northeastern part of the Basin-and-Range tectonic province, the same geological setting that hosts, to the west, the prolific Carlin and Battle Mountain-Eureka trends.
In a gross sense, Jerritt Canyon’s geology is similar to that seen at those large deposits found to the west: gold is found in very fine-grained, siltstone- and limestone-hosted deposits.
However, unlike the Carlin trend, the gold at Jerritt Canyon mostly occurs in different host units. The principal ore host at Jerritt is the Hanson Creek formation, and Queenstake is the only producer in the Great Basin that gets most of its ore from the Hanson Creek.
While there is gold in units 1, 2 and 3 of the Hanson Creek formation, the richest gold zones are found at the contact between units 2 and 3 and at the base of unit 3.
Another 30-40% of Jerritt’s gold comes from the Roberts Mountain formation, which overlies Hanson Creek and is a major ore host at the Carlin operations.
Jerritt’s deposits are also older than those seen at
“If there’s one word to describe the key to finding and mining high-grade ore here, it’s structure,” said District Exploration Manager Ted Wilton.
Structures, he said, played a role in localizing the gold-rich ore fluids, and an understanding of these structures — especially the high-angle, east-west oriented ones — allowed Jerritt Canyon’s operators to make the transition from open-pit to underground production.
The near-perpendicular crosscutting
of the east-west structures by later structures has created what is referred to by Jerritt’s engineers as a “tick-tack-toe” or “butcher’s block” pattern.
“This is a geological pattern seen throughout the district,” said Wilton.
Some of these east-west structures are occupied by dykes which are often referred to as andesitic but are actually basaltic. These older structures were intruded by the dykes 318-320 million years ago, creating fluid conduits, which allowed deposition of gold mineralization about 38-41 million years ago.
“There’s a pretty distinct break [in time] there,” said Wilton. “But the recognition of those dykes occupying those structures is an exploration tool that is as effective as anything we have here, and we’ve used it time and time again to get into ore.”
As Queenstake’s geologists probe deeper and deeper into the Jerritt Canyon district in search of blind deposits, Wilton said the keys to generating drill targets will remain geologic mapping, soil-geochemical mapping, and the understanding of structures and their inter-relationships.
Geophysical surveying, however, has been a dud: “This ground has been electrocuted like you wouldn’t believe, and geophysics has not really done anything for us,” said Wilton.
Meanwhile, Jerritt Canyon’s deeper gold potential beckons. Said Wilton: “The number of holes that have gone below eighteen hundred feet in this district is probably less than thirty, out of a population of nearly fourteen-thousand.”
Over the life of the Jerritt Canyon mines, reserves have been added at an average price of US$17 per oz. Queenstake is keen to continue the trend and has restarted district-wide grassroots exploration efforts that had been halted since 1994.
Queenstake’s total exploration expenses in 2004 were US$10 million, of which US$6 million was directed to district exploration, and the company is looking at similar levels for 2005.
At the height of activity last summer, Queenstake had six drill rigs operating underground and another 10 at surface (most surface drilling has to stop during the winter). Overall, Queenstake completed 360,000 ft. of reverse-circulation and core drilling in 2004.
“The near-mine exploration program continues to be highly successful,” said Dorian (Dusty) Nicol, Queenstake’s executive vice-president and director of exploration. “We’re seeing significant high-grade gold intercepts near, and adjacent to, current workings.”
That success, said Nicol, “continues to fuel our belief that we will consistently replace reserves and discover new orebodies that will prolong the life of the Jerritt Canyon district.”
Starvation Canyon
One of the new targets that is generating excitement is Starvation Canyon, the property’s highest-grade undeveloped deposit. The deposit is 12 miles from the mill in the southwestern, and more remote, portion of the claim block.
As a result of this year’s drilling of 58 holes totalling 45,000 ft. into Starvation, measured and indicated resources there now stand at 577,000 tons grading 0.271 oz. gold per ton (156,000 contained ounces), whereas inferred resources are pegged at 51,600 tons grading 0.227 oz. gold.
Gold at Starvation Canyon occurs in familiar tic-tac-toe structures in unit 3 of the Hanson Creek formation, and at the contact of units 2 and 3. One hole announced a year ago, TJ-108, returned 50 ft. grading 0.513 oz. gold per ton, and a more-recent hole, TJ-142, cut 110 ft. grading 0.252 oz. gold.
Said Nicol: “The Starvation Canyon high-grade zone is only one target on a mineralized structure that has a strike length that is currently mapped at more than three and half miles, and remains open in both directions.
“In terms of persistence of structures, surface geochemistry, and geological setting, this greater Starvation system is comparable to the belts of mineralization in the northern part of the Jerritt Canyon district, each of which hosted multiple orebodies totalling millions of ounces of gold.
“Jerritt Canyon is the most-prospective ground I’ve ever worked on, and I believe we’re poised for a major discovery.”
With its head office in Denver, Queenstake has traded on the Toronto Stock Exchange for more than two decades, and in December 2004 added an American Stock Exchange listing, using the ticker qee. There are 410 million shares outstanding, and these last traded at C45, or US37.
In the first nine months of 2004, Queenstake incurred a net loss of US$17.6 million (C5 per share) on gold-sales revenue of US$70.6 million. For all of 2003, Queenstake posted a net loss of US$7.8 million (C4) on revenues of US$54.9 million (the company had no production revenue prior to the Jerritt acquisition).
At Sept. 30, 2004, Queenstake had working capital of US$0.6 million, including US$2.5 million in cash.
After just a year and a half on the job, Queenstake’s chief financial officer, John Engele, has resigned in order to join a larger mining company. His replacement is Eric H. Edwards.
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