Rusoro proves expansion potential at Choco 10

Vancouver – Rusoro Mining‘s (RML-V) Choco 10 mine could produce more than half a million ounces of gold per year for just over US$330 per oz., according to a new project expansion scoping study.

The Choco 10 mine, which is in the El Callao district of Bolivar state, Venezuela, currently produces 120,000 oz. gold annually from its 5,000-tonne-per-day mill. Rusoro bought the mine in late 2007 with visions of expanding the facility to process feed from not only the three open pits on site but also from the deposits at Increible 6, another gold project 8 km away.

The scoping study investigated three options to increase throughput at Choco 10. One option considered building and using only a new, 10,000-tonne-per-day mill. The other two cases allowed for twice as much throughput: either a new 20,000-tonne-per-day mill or a new 15,000-tonne-per-day mill used in conjunction with the existing 5,000-tonne-per-day facility. All cases used a gold price of US$700 per oz.

The third option gave the best results. Over the 12-year life of mine at the expanded Choco 10, the mine would churn through 7.3 million tonnes of ore averaging 2.72 grams gold per tonne to produce 553,000 oz gold annually. Cash costs over the life of mine average US$331 per oz.

In year ten of the expanded operation, the mine would produce over 700,000 oz. gold.

Expanding the mine with a new 15,000-tonne-per-day mill and more open pits is expected to cost US$307.5 million, including a US$30.8-million contingency and US$80.3 million in sustaining capital over the life of the mine. Once complete, the expanded operation should bring in US$77 million annually in average after-tax cash flow.

The expanded operation’s net present value, using an 8% discount rate, comes in at US$449.7 million. The after-tax internal rate of return is a healthy 51.7% and payback is achieved in 2.1 years.

The expanded mill would process ore from the three existing Choco 10 open pits – Rosika, Coacia, and Pisolita – and from the planned open pit at the Villa Balazo-Karolina deposit, which is part of the Choco 10 project. Choco 10’s current reserve count stands at 15.4 million proven and probable tonnes grading 3.4 grams gold for 1.7 million oz. gold. In terms of resources, the project hosts 56.1 million measured and indicated tonnes averaging 2.46 grams gold as well as 40.8 million inferred tonnes grading 2.2 grams gold.

The four defined gold zones at Increible 6 would also be developed into open pit mines to feed the expanded plant. The four zones are contained within a 4.5-km long, 1-km wide, east-west trending shear zone that crosses the centre of the project. Resources currently come in at 23.5 million indicated tonnes grading 2.11 grams gold plus 17.5 million inferred tonnes averaging 1.95 grams gold.

The average stripping ratio for all the pits over the life of mine is 5.73 to 1. Ore would be processed by conventional crushing, milling, cyanide leaching, carbon adsorption, electrowinning, and smelting. Total gold recovery is expected to average 90%

The study also investigated, for each option, whether owner-operating mine-haulage fleets or contract mining operations generated better results. The answer, for all choices, was contract mining.

Rusoro is already working on a feasibility study, which it plans to complete before the middle of 2010. Additional infill drilling at Choco 10 and Increible 6 is planned for the coming months. The overall goal is to complete the Choco 10 expansion by the end of 2012.

It has been a packed year for Rusoro. In June the company arranged an US$80-million exchangeable loan and immediately used a fair chunk of it to buy Hecla Mining‘s (HL-N) Venezuelan assets. For US$20 million plus Rusoro shares worth US$5 million, Hecla handed over the Isidora mining leases and the La Camorra mill, both in Bolivar state. The two projects produce roughly 100,000 oz. gold annually. And the mill is located just 2 km away from Rusoro’s San Rafael/El Placer (SREP) deposits, which are fully permitted for production.

Isidora and SREP are home to high-grade mineralization divided between the Isidora deposit and the nearby Twin Shear zone. The Isidora deposit currently hosts 470,000 measured and indicated tonnes grading 22 grams gold plus 100,000 inferred tonnes averaging 14.5 grams gold. The Twin Shear zone is home to 1.2 million inferred tonnes grading 12.5 grams gold. At SREP, mineralized deposits hold 640,000 indicated tonnes grading 19.4 grams gold and 700,000 inferred tonnes averaging 23.1 grams gold. Rusoro is currently developing a 1.8-km long underground ramp to access the main mineralized area at SREP at 200 metres below surface; it expects to hit mineralization by early 2010.

Shortly after, Rusoro revealed a deal with the Venezuelan government to create what the equal partners are calling a “mixed enterprise” to jointly operate assets acquired in the Hecla deal. It means that, while Rusoro paid the purchase price for the Hecla assets, it retained only 50% ownership as the other half went to the government.

But two deals marked Rusoro as a company capable of working in Hugo Chavez’s country. Other foreign exploration companies have not had such luck – Crystallex International (KRY-T, KRY-X) and Gold Reserve (GRZ-T, GRZ-X), which both own sizeable gold deposits, saw their development hopes dwindle when the government rescinded their environmental permits and indicated production permits are no tin their futures. The Rusoro difference certainly seems to be the company’s Russian connections: the company was founded by a Russian family that is still very involved in Rusoro’s operations and there are a number of other significant Russian shareholders.

And since the New Year Rusoro has closed another financing, this one and equity financing that brought in $80 million by selling 133 million shares at 60¢ a piece. Rusoro expects to produce 170,000 oz. gold in 2009, from Choco 10 and its 50% stake in the Isidora mine.

But not all is rosy for the Rusoro. The company is awaiting a court date to settle a nasty battle with Gold Reserve. Rusoro made a hostile takeover bid for its Venezuelan neighbour; three days later Gold Reserve filed an action seeking to stop Rusoro from proceeding. A short-term interlocutory injunction did just that, at least until the case goes to trial.

The issue is that Rusoro had access to, and likely benefitted from, confidential information about Gold Reserve as a result of its relationship with Endeavour Financial (EDV-T). Endeavour was Gold Reserve’s financial advisor; it also, without telling Gold Reserve, advised Rusoro on preparing its takeover bid. The morning the bid was announced Endeavour emailed Gold Reserve and terminated their business relationship.

Gold Reserve says it will seek $550 million in damages at trial. Rusoro will seek $102.5 million in damages. Rusoro also withdrew its bid for Gold Reserve hours after the interlocutory injunction was issued.

News of the Choco 10 scoping study left Rusoro’s share price essentially unchanged at 45¢. The company has a 52-week trading range of 23.5¢ to $1.40 and has 530 million shares outstanding, 669 million fully diluted.