As smaller gold producers continue to struggle with gold prices below US$300 per oz., Denver-based
Queenstake management envisions Magistral as a low-cost, open-pit heap-leach operation capable of producing 40,000 to 45,000 oz. per year over a 7-year mine life at a cash cost averaging US$215 per oz.
“It’s an ideal starter for a company our size,” Dusty Nicol, vice-president of exploration, told the The Northern Miner during a recent site visit. “It’s big enough to provide significant cash flow, ounces and the credibility of production, but small enough that we can finance it and manage it ourselves.” Capital costs, including working capital, are projected at less than US$10 million.
“A combination of low capital costs and relatively low operating costs makes it a project that, though you might not put it into production at US$250 per oz., would indeed survive US$250,” said President Christopher Davie. “We think the lowest price at which you could make a production decision is around US$270 per oz.”
Consulting firm Pincock, Allen & Holt (PAH) has defined a measured and indicated resource of 494,100 oz. contained in three distinct shear zones. The meat of the resource lies in the San Rafael and Samaniego Hill zones. Using a cutoff grade of 0.4 gram gold per tonne, San Rafael is estimated to contain 2.5 million tonnes grading 1.67 grams gold per tonne, equivalent to 135,800 contained ounces, whereas Samaniego Hill hosts 4.6 million tonnes grading 1.67 grams, equivalent to 246,200 oz. The Sagrado Corazon-Lupita zone contains a lower-grade 3.4 million tonnes averaging 1.06 grams, or 112,100 oz.
In addition, tailings from historic mining operations are estimated to host some 14,000 oz. in 274,000 tonnes averaging 1.58 grams. Stripping ratios are anticipated to be in the range of 3.5-to-1 to 4-to-1.
The geology in the project area is dominated by a lower Tertiary andesite sequence consisting of pyroclastic flows, tuffs and agglomerates. The andesites are overlain by an upper rhyolite sequence. Intermediate granodiorite intrusives are evident to the west. Mineralization is localized by a series of fairly steep structures that appear to follow the lithological contact between the volcanic units. The gold is associated with stockwork zones of silicification and brecciation. The quartz veinlets contain specular hematite, plus minor pyrite and chalcopyrite. “It’s a textbook low-sulphidation, epithermal system,” said Nicol.
The San Rafael structure trends in a west-northwesterly direction, dipping 40-50 to the southwest. The Samaniego structure is northwesterly-striking and dips 35-40 to the southwest.
Sagrado Corazon-Lupita strikes along a northeasterly direction and dips 80 to the southeast.
PAH is continuing with mine design and reserve estimates. A bankable feasibility study, under the management of Reno-based Kappes, Cassiday & Associates, is scheduled for completion in March.
The Magistral project comprises 22 contiguous mineral titles totalling 18.2 sq. km, 140 km southeast of the capital city of Culiacan. The project is accessible from the nearby village of Mocorito along 22 km of gravel road leading through El Valle and Lo de Gabriel.
The project area is sparsely populated. Ranching is the main occupation in the area. The topography consists of rolling hills and low mountains between 350 and 600 metres in elevation. A 33-kilovolt electric power line serving the municipality of Magistral runs through the project area. Water for project use will come from wells.
The land package centres on an historic mining area that produced gold from 1890 to 1910 at a central stamp mill, and again in the 1950s at a central mill that employed ball-mill grinding. Historic mining on the San Rafael structure focused on high-grade veins, with reported grades of 40 to 60 grams gold. Past production figures are not known.
More recently, in the mid-1980s, Mexican companies Materias Primas, Compania Minera Tormex and Vitro began exploring the Magistral area. This work consisted of geological mapping, channel sampling and a total of 40 reverse-circulation (RC) and diamond drill holes.
In 1995, Mogul Mining, an Australia company, acquired the project and completed 61 RC holes. In addition, more than 3,000 channel samples were collected from road cuts, outcrops, trenches and accessible underground workings.
Santa Cruz Gold acquired the rights to the project in 1995 from Mogul in consideration for 18 million shares of Santa Cruz valued at $9 million. During 1996 and 1997, Santa Cruz put down 616 RC and diamond drill holes totalling 71,931 metres into the project area. Eighteen large-diameter core holes were drilled to obtain samples for metallurgical testwork.
Based on this work, Australian consultants Computer Aided Pty. (CAG) estimated Magistral contained a measured and indicated resource of 14.7 million tonnes grading 1.18 grams gold, or about 560,000 oz. CAG also reported that the San Rafael zone was host to a potential open-pit resource of 3.5 million tonnes grading 1.97 grams, equivalent to 220,000 oz. PAH has since modelled a minable resource in the San Rafael area of about 1.5 million tonnes grading 2 grams.
Bottle-roll tests performed by Kappes, Cassiday & Associates on material collected from underground workings indicated the gold was amenable to heap-leaching. Material crushed to a quarter-inch size yielded a gold recovery of 81.5% in a 103-day leach cycle.
A prefeasibility study, completed by Scotia Corp. in April 1997, examined several operating scenarios for mining the San Rafael deposit. One scenario contemplated contract mining at a rate of 1.5 million tonnes per year and the purchase of crushing and loading equipment to produce an annual 70,000 oz. at a cash cost of US$170 per oz. Capital costs, including contingencies, were estimated at US$12.8 million.
According to Scotia, if all mining, crushing and loading were to be carried out by the contractor, capital costs could be reduced significantly to US$6.3 million and operating costs would rise to US$200 per oz.
In a 1998 due diligence report of the Magistral project, PAH concluded that the “exploration and sampling programs on the Magistral project have been carried out using standard practices and methodologies, and the resulting data are generally representative of the mineralization in the deposit.” PAH further stated that “the resource modelling based on these data was generally conducted using standard industry engineering practices.”
PAH made several recommendations in its report for improving the Magistral resource model for feasibility, including the checking and removal of insignificant discrepancies from the data base, better definition of historic underground workings, additional drilling to delineate the mineralization at depth in the Samaniego zone, further sampling to evaluate the change in metallurgical recovery with depth, and consolidation of the San Rafael and Samaniego models into a single model.
PAH further noted that a minor high-grade bias was present in the CAG model and that the modelling process was tightly constrained. PAH recommended that additional dilution should be taken into account in subsequent reserve calculations.
Santa Cruz was in the process of addressing PAH’s recommendations when, in December 1998, it entered into a reverse-takeover agreement with Castle Exploration, a private, Denver-based exploration company led by Davie and Nicol.
Castle Exploration had set out as a grassroots exploration company, acquiring several projects, including the right to earn an 80% interest in the Ceibo gold project in Belize, as well as a several projects in southern Africa. Davie said he quickly realized that, with limited resources, continuing with early-stage exploration was simply a way to run out of money. Castle began looking at development-stage projects.
“We were looking for a project that was big enough to make a really viable project but was still of such a size that we could handle it with limited resources, and at the end of the day be small enough to finance,” Davie explained.
The Magistral project caught the eye of Davie, who felt the importance of the metallurgical testwork had not been fully appreciated. Although Santa Cruz was planning a relatively fine crush, metallurgical tests showed that a size range in the order of 3 inches would leach to 70%, with no agglomeration.
“Our first thinking was that this project was relatively insensitive to gold prices, because one could get an adequate recovery at low costs,” said Davie. “That’s not to say it can’t be optimized to get a better recovery at a finer crush. Strangely enough, having thought we could do the whole thing as a coarse crush, we’re now coming back around to probably doing a finer crush, simply because the equipment is available so cheaply, and [we also think] it is worth putting in secondary and tertiary crushing for a 3-5% increase in recovery.”
Since acquiring the project, Santa Cruz had incurred a total of $9.5 million in exploration and development costs. In total, 698 RC holes representing 77,754 metres, plus 56 core holes totalling 6,150 metres, have been drilled. “We considered taking additional large-diameter drill holes and doing additional coarse crush test work, and we considered doing some exploration drilling as well, but, after consulting with Kappes, Cassiday & Associates and PAH, we decided there were sufficient data to develop a bankable feasibility study,” said Davie.
When Castle took over management of Santa Cruz, it had no cash. In March 1999, a deal was struck to merge with Queenstake, which held $8 million in cash, along with a portfolio of early-stage exploration projects focused mainly in Peru. Santa Cruz subsequently reached another deal to sell its suspended Lluvia de Oro gold mine in Mexico’s Sonora state for $184,000 and the assumption of liabilities of approximately $1 million. Santa Cruz had acquired the failed mine through a merger with Newmex Mining.
Queenstake has gone through several incarnations in the past 10 years, having shifted its focus from placer gold projects in the Yukon to exploration properties in Latin America. It acquired an extensive land package in Peru, Mexico and Chile in late 1995, when James Mancuso and Robert Miller vended their private company into the junior. The Latin American package was put together on the basis of satellite imagery interpretation. A great deal of land had been staked in Peru, including some ground close to Pierina. That ground is subject to a joint venture with
“This merger with Queenstake was a marriage made in heaven,” said Davie. “We had a viable project and they had the cash necessary to develop it.”
Queenstake bought the 450,000-oz. in situ resource for 35% of its capitalization, which, at the time, was valued at $3.5 million. Queenstake also took on US$1.7 million in debt from Santa Cruz.
“Until we get the feasibility study results finalized, it’s difficult to see what value the project will bring to the company, as one can see from the current stock price,” remarked Davie. Queenstake is currently trading at 15 in a 52-week range of 31-12.
Earlier this year, Queenstake announced results from 15 holes that were drilled as part of an infill program aimed at boosting the confidence level in the downdip extension of mineralization in the Samaniego Hill area. Highlights included:
a true width 11.9 metres averaging 4.21 grams, starting at a downhole depth of 153.5 metres, in hole 709;
20.4 metres averaging a cut 6.76 grams, beginning at a drilled depth of 126.2 metres, in hole 710;
21.2 metres of 2.52 grams, starting at 91.2 metres, in hole 720;
60.8 metres averaging 0.92 gram, beginning at 101.8 metres, in hole 721; and
8.6 metres averaging 5.51 grams, starting at a downhole depth of 132.2 metres, in hole 722.
A geotechnical hole, GT-10, which was deepened to test the downdip extension, cut 18.8 metres (true width) averaging a cut 6.64 grams. These results may allow Queenstake to deepen the projected open pit at Samaniego by as much as 30 metres. The downdip extension remains open on strike and downdip over a 150-metre strike length.
Queenstake has 30 million shares outstanding, or 34 million on a fully diluted basis. Cash on hand at Sept. 30, 1999, was $4.9 million, whereas long-term debt stood at $586,000.
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