sitting precariously on a gold mine

Sitting precariously on a goldmine

Richard Hemming

April 8, 2011

Chalice Gold Mine's chief executive, Tim Goyder, is either a good poker player or he is very confident.

His company's operations are in one of the more dangerous countries, Eritrea, and he is literally sitting on a goldmine.

In the next month he believes that Chalice will get between $40 million and $60 million from the Eritrean government in return for 30 per cent of its Zara gold project (on top of its existing 10 per cent). It will also get the "complimentary" mining licence thrown in.

Chalice is sitting on something special. It has a reserve of 840,000 ounces. Based on a gold price of $1400 an ounce, the project will generate a minimum of $400 million over its seven-year life.

Chalice has about $5 million in cash, but with the money that is supposed to come in from Eritrea's government, Goyder expects to double the size of the reserves, and to start development in October and production in 2013.

Eritrea is a tiny country abutting the Red Sea in northern Africa. It has been subjected to UN sanctions since 2009 after accusations that it supplied arms to Islamist militants in Somalia. It is also in the path of the Jasmine Revolution that has been sweeping the region since Tunisia's ousted its president in January.

But Goyder is unfazed: "This is like walking into Kalgoorlie before it was discovered � it's a relatively stable country with an authoritarian government � No, we don't expect an uprising."

At 46�, Chalice's shares have fallen almost 40 per cent in three months, suggesting many others do have concerns. Its market capitalisation is now $100 million.

A big factor in Chalice's favour is that about two months ago the Canadian listed Nevsun Resources (market capitalisation $1.2 billion) started production from its Bisha mine in Eritrea, which is now producing 1000 ounces a day.

Could Chalice be the next Nevsun? So much depends on the money from the Eritrean government. Goyder says he is confident the government has the readies, because it borrowed $60 million in late 2007 from the China Import-Export Bank to pay for 40 per cent of the Bisha project.

Back then, though, there wasn't the pressure that the region is experiencing now.