Red Eagle grapples with ground conditions

VANCOUVER — Red Eagle Mining (TSX: R; US-OTC: RDEMF) announced first gold at its San Ramon underground gold mine in Colombia in late 2016, but ramp-up at the operation hasn’t gone according to plan.

The company has struggled with “geotechnical issues with ground stability” in the mineralized shear zone that have forced it to suspend mining activities and rethink its methods.

Red Eagle spent nearly US$70 million building a 1,200-tonne-per-day operation that it had hoped would generate free cash flow by the second quarter.

The company declared commercial production in March, but found poor ground conditions in the stopes, particularly near the saprolite contact and historic workings. The situation impacted mining rates and increased dilution.

Underground access at Red Eagle’s San Ramon mine in Colombia. Credit: Red Eagle Mining.

Red Eagle’s proposed solution involves swapping to conventional mechanized cut-and-fill mining, which it suspects will “[optimize] mining the narrower, high-grade veins and lower dilution and ore loss.”

The company’s feasibility study, released in 2014, recommended mechanized shrinkage with delayed fill, which was designed to “keep stability of the hangingwall and footwall until … ore is mucked out.”

“Underground gold vein mines are notoriously challenging during the initial ramp-up to full production,” president and CEO Ian Slater wrote in a July letter to shareholders.

“A tough decision was made in June to divert production crews to underground mine development while the add-on paste backfill plant is built. The primary issue is the lack of revenue from gold sales during the three-month construction period,” he said.

A site view of Red Eagle’s San Ramon operation 70 km from Medellin, Colombia. Credit: Red Eagle Mining.

The company says the plant additions and related capital requirements will total US$3 million.

Red Eagle reported it had completed 800 metres of decline development and produced 1,750 oz. gold during the first quarter at 90% average recoveries. It had anticipated annual production guidance of between 30,000 and 40,000 oz. gold.

A geotechnical analysis of San Ramon by Golder Associates indicated that “the quality for the hanging and footwalls could be good to very good, with minimal support requirements for [20-metre] spans, or less.”

Crushed material ready for processing at the San Ramon operation in Colombia. Credit: Red Eagle Mining.

The deposit is described as a single, east- to west-trending shear zone over 2 kilometres. San Ramon is part of Red Eagle’s 100 sq. km Santa Rosa project, where the company has outlined an intrusive-hosted, structurally controlled quartz stockwork system, 70 km north of Medellin.

San Ramon could have an eight-year mine life based on 2.4 million proven and probable tonnes grading 5.2 grams gold per tonne for 405,000 contained ounces.

Red Eagle announced a financing in June to boost its working capital position during the mine’s temporary suspension. The company put together a rights offering, wherein registered shareholders can acquire 35¢ units, which include one share and a 50¢ purchase warrant exercisable for five years.

Red Eagle reported that major investors Liberty Metals & Mining, Vertex Value Fund and Orion Mine Finance intend to “fully exercise their rights,” which would generate gross proceeds of $16 million. If the rights offering is exercised, it would make US$46 million in gross proceeds.

The company expects the paste backfill plant will take between three and five months to build, and “allow consistent production, resulting in 50,000 oz. gold produced during 2018.”

Shares of Red Eagle have plummeted nearly 60% since March to a 29¢ close at press time. The company has 265 million shares outstanding for a $77-million market capitalization.

Red Eagle raised $15 million with a bought-deal financing in February, where a syndicate led by BMO Capital Markets and National Bank Financial underwrote 20 million shares at 75¢ each.