Click to enlargeInvestors who love to dig deep into the nitty-gritty of an emerging gold mine have just been handed a superb opportunity to get their hands dirty by Cluff Gold (OTCPK:CLUGF).
For, by virtue of Cluff's TSX listing (CFG), an in-depth NI43-101-compliant project report - produced by SRK - on their 2.4 million ounce Baomahun project has just been filed on SEDAR. The report encapsulates all there is to know about Baomahun - from its earliest days right up to the fast-track treatment currently being meted out to it by Cluff - London investors are rarely given such a treat.
Since Cluff's two operating mines at Angovia in the Cote d'Ivoire and Kalsaka in Burkina Faso emerged from their commissioning phases and began producing gold in earnest, Baomahun - located in Sierra Leone and 100% owned by Cluff - has become the company's flagship development project.
Baomahun - no "fly by night" nor "johnny come lately" - has a long history. The project was discovered back in 1929 and initially explored and mined for its alluvial gold in the 1930s. The Sierra Leone Geological Survey took over exploration in the 1960s, and ran a drilling programme as well as conducting geochemistry. Winston Mining (HWD) undertook a program of underground development and set up a pilot heap-leach pad, though the work was curtailed by the civil war. Winston hung on to the rights to Baomahun. In 2004, Cluff entered a 60% earn-in arrangement with Winston, and eventually purchased the remaining 40% and the surrounding licences to become the 100% owner.
Baomahun lies towards the southern end of the largest of Sierra Leone's four Archaean greenstone belts, the north-south trending Kangari Hills-Sula Mountains Belt, comprising metasediments/schists of the Kambui Group. Greenstone belts are invariably prolific gold hosts, Tanzania's goldfields being a classic example, and this one - which contains more than half a dozen gold deposits including Yirisen and Lake Sonfon, and was host to a flourishing alluvial gold mining industry in the 1930s - is no exception.
At Baomahun, the gold is hosted in steeply dipping sulphide pods and lenses, in zones up to 20 metres thick which tend to be found in the areas where banded iron formation (BIF) units meet adjacent metasediments. This is typical of many such deposits, as hot mineralizing fluids rising from below have exploited any weakness – such as the contacts between different rock formations - and forced their way into gaps, cracks and fissures before cooling and solidifying to form the mineralized pods. The fluids also tend to exploit any other weaknesses in natural folds - as at Baomahun's fold zone - and fault zones.
The strong correlation between the BIFs and mineralization in the project area has proved useful, as Cluff have been able to use the BIFs – identified by airborne geophysics - as markers for gold occurrences. In days gone by, the artisanal miners used precisely the same technique – using visual observation rather than modern technology - to site their small mining operations. Whilst the deposit is primarily contained in sulphide mineralization, there is a shallow oxidised layer of around 20 metres above the predominant sulphides: pyrrhotite, arsenopyrite, and pyrite, the last often in conjunction with mineralized quartz veining.
The whole mineralized package strikes roughly north-north-west over approximately 12 km, and surface work has shown strong potential for additional mineralization outside the currently drilled areas. The currently defined resource covers only 3 km of strike, in four separate but contiguous zones – east, central and western, with the fold zone lying between east and central. The deposit is still open along strike and to depth.
Most of the mineralization dips steeply to the east-north-east, but this is locally interfered with by a strong folding event which has altered the general direction of strike to east-west in the fold zone and in the east zone which abuts it. A large part of the resource lies in the eastern zone, on the southern flanks of a steep sided hill, where an adit had been driven by earlier explorers and was developed further by Winston Mining prior to Cluff’s earn-in. Sampling and fan diamond drilling from the adit has allowed inspection of the inner structure of the deposit, giving better confidence and understanding.
Cluff's own exploration work moved to diamond drilling in 2007, and to date, 343 drillholes and some 78,137 m of drilling have been carried out on the property, enabling the current NI43-101 compliant resource to be assessed by SRK. As per the recent announcement, Baomahun is now estimated to contain 510,000 ounces of gold in measured resources – as good as it gets without being proven reserves - 910,000 ounces of gold in indicated resources, and a further 1.030 million ounces of gold in inferred resources. All at a 1 g/t cutoff, leading to a princely total of 2.45 million ounces.
SRK do however add a rider to their estimate. Much of the resource can be exploited by open pit methods, but gold has been traced down to at least 550 metres below ground in a number of locations, and it is likely that underground techniques will be used to follow the dipping lenses to depth where practical. In this case, say SRK, a higher cut-off grade might be advisable.
In fact, the Scoping Study prepared by SRK for Baomahun following the resource update does indeed suggest underground mining for the deeper mineralization. The study assumes the construction of three open pits – eastern, central and northern – feeding a central process plant at the rate of 1.6Mtpa from the surface mineralization. These pits presently contain a Mineral Resource of some 12Mt with an average grade of 2.7g/t of gold, some 85% of which is within the Measured and Indicated Mineral Resource categories as reported by Cluff.
To access the mineable ore lying below the pits, currently estimated at 333,000 ounces at a grade of 4.3 g/t, SRK have postulated a figure-of-eight shaped decline from surface which then splits into two to access the lower levels of the eastern and central zones respectively. It's expected that a combination of both mining methods will generate tonnage of 1.9 Mt per year running at an average grade of 2.9 g/t, over an eight year mine life from the currently defined resource.
Average gold production is estimated at 157,000 ounces a year, generating free cash flow – after allowance for capital expenditure - of $438 million over the mine life. At a gold price of $1,100 per ounce, this translates to a pre-tax NPV at 10% of $172 million. Initial capex is anticipated at approximately $200 million – with a fast 2.3 year payback - and cash costs are forecast at $500 per ounce. Metallurgical testing suggests the free-milling ore to be amenable to partial gravity recovery followed by conventional carbon-in-leach processing, with a recovery rate of approximately 92%.
Much work remains to be done to firm up and increase resources, optimise pit layout and design, complete environmental studies and build a mining plan, but the company are pressing ahead with speed, and working towards a bankable feasibility study for delivery around the middle of next year. Expenditure of some $12 million is planned between now and then, to include the costs of infill drilling at the existing resource, and exploration drilling at defined targets along strike to expand the resource.
The company is also conducting studies on the possibility of generating hydro-electric power locally, which will reduce the reliance on the planned site-based heavy fuel oil generating plant, and make a significant improvement to power costs. And interestingly, with mineralization in the area being so prolific, there will need to be sterilization drilling carried out before the final plant site is selected.
Meanwhile, at Kalsaka and Angovia, production is now forging ahead, and cash costs are steadily reducing as the mines build up towards their design production levels. Output in 2009, during most of which both were still in their commissioning phases, was 75,000 ounces. Cluff are confident of achieving their planned 100,000 ounce output forecast for 2010, and judging by performance in Q1 of 2010, the required run-rate is being comfortably achieved. The company is also actively exploring in the locality of each mine for satellite deposits which can be incorporated into future mining plans.
So all systems are go for Cluff Gold. Following the termination of an offer period earlier in the year, occasioned by unsolicited approaches, Cluff is determined to continue to increase value for shareholders, and feels that now is not the right time for considering the sale of the company. Not, at least, before it achieves its ambition of fully developing its existing properties and joining the ranks of producers of more than 250,000 ounces of gold a year. And provided that all goes according to plan, the company should be well on its way to achieving this during 2013 when Baomahun emerges from its development phase and enters production.
Disclosure: No position