you cannot say fairer than that

February 24, 2010

Andean Resources Closes In On The Completion Of A Bankable Feasibility Study On Its Cerro Negro Gold Project In Argentina.

By Charles Wyatt / www.minesite.com

It is fascinating to look back at a piece written about a mining junior two years ago and see what progress has been made since then. Such a company is Andean Resources which, at that time, had repulsed an all-paper offer from Kingsgate Resources which valued it at around A39 cents. Just as well as the share price has since advanced significantly to A$2.55 under the leadership of Wayne Hubert who took over as chief executive in 2006. Prior to that he had been a geologist with Meridian Gold, the US company remembered in London for taking over Brancote Holdings for US$368 million in 2002 and then making a nonsense of its Esquel deposit through simply ignoring the sensitivities of South American countries by employing Chileans on an Argentinian project. Meridian made a further mistake when they ignored Wayne's advice after he came across the Cerro Negro project and told them it had the potential to be as good as Yamana's El Penon silver gold mine in Chile, where he had been manager. Meridian knocked him back and he decided to leave.

Where better to end up than at Andean Resources which acquired Cerro Negro back in 2004? Prior to that it had been discovered by MIM, but when that company was taken over by Xstrata it was one of many good projects that were dumped. Good timing, as within a year Andean found it's first high grade vein there and it was this discovery that brought it to the attention of Kingsgate. When Our Man in Oz interviewed Wayne in April 2008 he had certainly not changed his opinion. " The resource," he said, " is very high quality. On the western end of Cerro Negro we have the Eureka vein which has around 1.4 million ounces of material assaying close to half an ounce per tonne. In my opinion it is probably one of the best resources yet to be developed in South America. "

You cannot say fairer than that, and it looked like Wayne wasn't going to waste the opportunity to get development going. He was not spending the company's cash purely on drilling to get the resource as high as possible, like so many Canadian juniors do, as he had learned a valuable lesson at El Penon. " We started off with reserves of less than three million ounces and after 10 years still had the same. You learn more about the geology of an epithermal vein system all the time and this enables you to keep increasing the resources and reserves. " At that time, early in 2008, the thinking was that Cerro Negro would produce around 3,000 tonnes per day from the Vein zone and another 1,000 tonnes of high grades ore from Eureka to give 200,000 ounces of gold per year, with silver credits on top.

Then came the pre-feasibility study in October 2008 and investors realised that they had to take a whole new look at Andean. It was based on an updated resource estimate of 1.36 million ounces of gold and 22.7 million ounces of silver grading 12.3 grammes per tonne gold and 213 grammes per tonne silver at Eureka West, plus a rather more modest resource estimate for the Vein zone. Annual production was projected at up to 350,000 ounces of gold at an average cash cost of US$198 per ounce, and a 40 per cent IRR was anticipated on the initial capital expenditure of US$281 million which could be paid back in two years. Plenty more upside was envisaged from the promotion of 336,000 inferred ounces at Eureka West into the indicated category, from improving metallurgical recoveries and mining methods, and from future exploration success from brownfields exploration targets.

It was unfortunate that this study was announced just as the financial world imploded, as its impact was diluted, but fast forward a year or two, and the world is recovering its poise once more and a full bankable feasibility study from Andean is now due at the end of June. It will be based on the latest resource estimate, produced in June 2009 which gave Andean Resources 2.5 million ounces of gold, found at a cost of just US$15 per ounce. The grades in the indicated category at Eureka West of 12.5 grammes per tonne gold and 184 grammes per tonne silver make it one of the highest grade undeveloped gold projects in the world, according to Wayne Hubert. He would like to go for further increases too, and thinks he has every chance as the vein system is open along strike and to depth and only 25 per cent of it is included in this estimate. It is one thing, however, to have plenty of ounces in the ground and another to get them out and make a profit. What is quite clear is that Andean is not going to live off a valuation of its assets, as fast track production is now top of the menu.

It helps that the company has money in the bank - around $80 million at the last count - and that last November legislation was passed in the Province of Santa Cruz in Argentina creating an Area of Special Interest for Mining. Cerro Negro is right in the middle of that area. Crucially this legislation permits mining from four kilometres of the shores of lakes and the axis of major rivers, and from 10 kilometres of the city limits of towns. In addition, the new legislation also permits the processing of ores from 20 kilometres of these major water features. This helps to clarify matters from the point of view of the environmental permits, and the company is going out of its way to ensure good local relations. It has a team on site and an office in Buenos Aires.

A start has been made to driving a decline towards the level at which underground development will start at Eureka, and a contract to complete the underground development work has just been agreed with an Argentinean joint venture formed by Constructora Sudamericana and Mas Errazuriz. In the meantime exploration continues at the San Marcos veins which were discovered last November. Subsequently a further step-out hole was drilled 100 metres to the east, and this intersected three metres grading 13.7 grammes per tonne gold and nine grammes per tonne silver from 183 metres. The east-west vein at San Marcos therefore remains open to the east, and more drilling will follow. Three new veins have also been discovered at Mariana Norte which is about two kilometres southwest of San Marcos, so the picture of this high grade epithermal vein system grow and grows. What everyone is waiting for is Andean's bankable feasibility study, and that is now only four months away. Kingsgate certainly knew what it was about when it tried to grab this one.