THE GLOBAL SEARCH FOR GOLD SPECIAL — Canadian juniors learn art of joint-venturing, South African-style

Joint-venturing with junior exploration companies is proving to be a popular strategy for large South African mining houses, as political reform at home has allowed them to cross borders (notably into other African countries) in search of greener pastures.

This strategy is being pursued by at least five of South Africa’s mining companies: Anglo American, Gencor, Randgold, JCI and Iscor — all of which have entered agreements with Canadian juniors.

Few mining companies can afford to spend a large amount up front for a prospect. A joint venture, on the other hand, allows a company to earn a (normally controlling) share in a project through contributing to exploration expenses. Entry costs depend, of course, on the amount already spent by a junior on the exploration effort. The junior normally retains a participating share or some kind of royalty; this could serve as a handsome revenue source for other activities should the project become sizable.

Furthermore, the arrangement increases the availability of exploration funds and allows for several projects to be developed at the same time. An affiliation with a large and well-known mining company also builds up valuable market credibility for a smaller firm. Credibility, in turn, translates into bargaining power for a junior when it next starts negotiating other joint-venture deals.

Many of the partnerships being formed today with South African mining houses are with companies based in Toronto or Vancouver.

Promising projects

One such company is Pangea Goldfields (PGD-T) of Toronto, whose Golden Ridge project in Tanzania, a joint venture with Randgold Resources, comprises about 100 sq. km. A second drill program has been under way since last year to confirm the prefeasibility phase, and an inferred resource of more than 1 million oz. gold has already been established.

Randgold received an initial 25% interest in the property for US$1 million, and can increase this to 50% by investing another US$4 million, and to 65% by completing a bankable feasibility study and securing total project financing in five years. Randgold, which will be the operator, also has a 1-time option to buy an additional 5% of the project by paying Pangea US$30 per oz. for 5% of the total proven and probable gold reserves outlined in the feasibility study.

Randgold’s approach is to ensure it has the controlling interest in a project and provide management expertise in accordance with annually renewable contracts. It prefers that juniors earn their return through their share of profits rather than through royalties.

Randgold does not occupy interests in junior companies, though this approach is followed by other majors, including JCI, which acquired 15% of Tan Range Exploration (TNX-A), and Gencor, which recently bought into Eldorado and HRC Development in Vancouver through an asset swap.

Says Frank Gregory, spokesman for JCI: “Our approach is to come in with low exposure at the high-risk end, and, when we get to the low-risk end, we can, at a small premium, earn management control.”

The alliance with Tan Range gives JCI the right to get involved in any of the former’s projects in Tanzania and other jurisdictions. Once a project comes to fruition, JCI can raise its interest to 51% by financing a feasibility study, whereupon it can assume management.

“One of the crucial things about a `strategic alliance’ is that you have got to have good people running it,” stresses Gregory. “What we like about working with juniors is that they can move fairly quickly, and they can probably strike a deal at a lower premium than we, as a larger company, can.” JCI also has a joint venture with Patrician Gold Mines (PXX-A) on the junior’s Ikungu gold project in Tanzania.

At Patrician’s Forest Reef prospect, JCI has completed an 18-hole program of reverse-circulation drilling comprising 1,312 metres, to be followed by 1,230 metres of diamond drilling. The major can earn a 70% interest by spending $2.2 million on exploration, which would conclude with a third phase of infill drilling and reserve estimates leading to a prefeasibility study.

At two other Tanzanian properties held by Patrician, the Bunda and Kisamwe, JCI is conducting reconnaissance work, with more comprehensive exploration due to follow.

“The best way to increase ounces in the ground is through mergers and acquisitions,” says Gregory, “and obviously we would want these in our portfolios as well.”

Gencor’s deal earlier this year with Eldorado and HRC, while not covering properties in Africa, was innovative in several respects.

Through a swap of its overseas gold assets (most of them exploration holdings), Gencor took a 49.9% equity holding in Eldorado and HRC (which share common management). Among the assets acquired by Gencor are: the 95,000-oz.-per-year Sao Bento gold mine in Brazil; five other exploration properties in that country; 20 similar ventures in Turkey; and five more in North America.

In a more conventional joint venture in Botswana, Gencor has become partner to Canadian junior AfriOre (AFO-V)on five diamond licences. While Gencor was originally the major shareholder, with 60%, a recent decision by the company to move out of diamond exploration will leave AfriOre controlling the venture.

Meanwhile, back in Tanzania, Pangea is joint-venturing its 100-sq.-km Kahama licence (in the Lake Victoria district) with Anglo American subsidiary Anmercosa, which completed a first-phase drill program at Kahama last year, including 1,100 metres of reverse-circulation work.

Significant gold values have been confirmed near the surface on a deposit that is large, low-grade and minable by open-pit methods. The project is also attractive because it features easy access to railways, tar roads and the national power grid.

Anmercosa can earn a 70% interest once it has spent US$2 million on exploration; it can then carry out a bankable feasibility and exploit any deposit there within five years.

In Tanzanian developements, Pangea has entered joint-venture agreements with Iscor covering the Suguti and Ushirombo areas, measuring 280 sq. km and 390 sq. km, respectively. Activity has only just reached the drilling stage, but Iscor will be able to acquire 35% by spending US$3 million on exploration in either area, and 51% by spending US$5 million.

— Paul Crankshaw is a mining journalist based in South Africa.