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Mining News Review: Week of October 4th


The Metal Augmentor's weekly Mining News Review is updated daily at

Taseko Mines (TSX: TKO; AMEX: TGB)
Strong Third Quarter Production Results from Gibraltar Copper Mine
- October 4, 2010

During the third quarter, Gibraltar produced 25.7 million pounds of copper, a roughly 25% improvement over Q2 helped in part by improving copper recoveries. The mine is now well on its way to reaching its goal of producing 115 million pounds per year. Meanwhile molybdenum production came in at a healthy 265,000 pounds. Gibraltar boasts a mine life of at least 25 years. Just one more reason why we’re happy having implemented our speculative options strategy. [Zurbo]

Tanzanian Royalty Exploration (TSX: TNX; AMEX: TRE)
Closes Private Placements
- October 4, 2010

As Silverax wrote in a recent comment to subscribers regarding exploration companies in Africa:

I don’t think anything explains the enigma of TRE. Their only press releases seem to be about private placements. Their Tanzania properties are not in the newly-discovered gold belt where Canaco is exploring but rather in the original Lake Victoria belt. I am not in favor of companies that provide virtually zero information in terms of hard numbers but rather ask shareholders to trust the superior wisdom and intelligence of management.

And that’s not an exaggeration. A full 7 of the last 10 press releases have had to do with private placements, and minor ones at that for a company trading for well over $600 million. [Zurbo]

To be completely fair about it, those private placements were taken down by the CEO — Jim Sinclair, the gold bug who predicted $1,650 gold by January 2011 — and they have been favorable to the company with no warrants attached. But the point is still valid in that a “royalty” company with this group of assets and lengthy operations should be self-sufficient by now especially if it carries such a hefty market cap. [Silverax]

Southern Arc Minerals (TSX-V: SA; Pink Sheets: SOACF)
Vale S. A.
Southern Arc and Vale Enter Into Option/Joint Venture Agreement
- October 4, 2010

Vale’s interest in Southern Arc’s early-stage Indonesian projects is certainly positive, but the flexibility of spending commitments and long time lines involved in the agreement keep us from getting too excited. Vale has only committed to spend $1.2 million in a phase 1 exploration program within 12 months of exploration permits being received. From there, Vale has the option to proceed with a multi-stage Phase 2 program. According to the agreement, if Vale chooses to go ahead with the Phase 2 program, it has 7 years from when Phase 2 commences until it needs to produce a bankable feasibility study. So basically we will need to see indications of Vale moving much more aggressively before these agreements become of any significant interest to Southern Arc, although they do demonstrate once again that the majors are not afraid of getting involved in Indonesia despite all the recent hooplah concerning environmental and forestry issues. [Zurbo]

Kaminak Gold (TSX-V: KAM; Pink Sheets: KMKGF)
Kaminak Continues to Intersect Wide Intervals of Gold Mineralization at Latte - October 4, 2010

Kaminak’s Latte zone at the Coffee project in the Yukon is now recognized as containing two domains, an upper disseminated zone of oxidized gold grading up to 2 grams per tonne (gpt) across a structural width of up to 80 meters along a strike of 400+ meters and a lower zone of gold associated with sulfides (pyrite) grading 2-10 gpt across widths of up to 10 meters. The total strike length of the system remains unknown with both ends of the zone showing strong gold intercepts. Since the surface gold anomaly starts to get weaker at these end points, it is possible that the system continues under cover to the east and west. There is some apparent weakening at depth but the bottom of the mineralization is considered open as it has not yet been reached by the shallow drilling conducted so far. All in all, Latte is resolving as a ~1 million ounce gold deposit grading in the 1.5 gpt range combining the oxide and sulfide horizons. My guess for an initial inferred resource, on the high side, is 13 million tonnes containing 580,000 ounces of gold. As noted above, a portion of this resource appears to be unoxidized; if suspected to be at least partially refractory, it should ideally be presented separately in the resource estimate. With drilling at Latte completed for the current season, it will be a few months before we find out just how much larger the Latte deposit will get. In the meantime, assay results are pending at several other zones. Apparently some of the holes are visually well-mineralized so there is still hope for some excitement before the winter doldrums set in. Notably, the Double Double and Supremo zones to the north of Latte appear to generally have narrower widths but significantly-higher grade mineralization with the drill core textures and mineral assemblages suggesting the presence of both oxidized and sulfide domains being present here as well. It is encouraging that some of the high grade intercepts appear to be thoroughly oxidized; should these zones demonstrate continuity (there is some evidence for limited depth), these zones may quickly overtake Latte in economic importance. With two or three zones of mineralization on the scale of Latte, Kaminak arguably deserves its current market capitalization with plenty of upside remaining from future exploration success. [Silverax]

Endeavour Silver (AMEX: EXK; TSX: EDR)
Cream Minerals (TSX-V: CMA; Pink Sheets: CRMXF)
Endeavour Silver Commences All Cash Offer to Acquire Cream Minerals - October 4, 2010

The background to the offer provided by Endeavour Silver for Cream Minerals (TSX-V: CMA; Pink Sheets: CRMXF) is greatly appreciated as is the main risk facing the company:

Risk of Cream Resource Disclosure: Cream’s mineral resources as disclosed in their National Instrument 43 101 (”NI 43 101″) reports on the Nuevo Milenio Property were prepared by Cream’s second largest shareholder and a Director, not by independent consultants as required under NI 43 101. In Endeavour’s opinion, the resources are not compliant with NI 43 101 and a substantial amount of work will be required to confirm resources in compliance with NI 43 101.

Indeed, that particular shortcoming was one of the first things that caught our eye a while back although we didn’t recall the details until Endeavour kindly reminded us and other investors. That said, the 12 cent cash offer appears to be firm and we see little risk buying Cream at that price based on the hope that another suitor might come along during the next month or so. [Silverax]

Amarillo Gold (TSX-V: AGC; Pink Sheets: AGCBF)
Amarillo Commences 5,000 Metre Drilling Program at Mara Rosa Project Brazil - October 4, 2010

The company continues to advance its feasibility work on the Mara Rosa project in Brazil yet the share price reveals neither the developmental progress nor the record high gold price. One possible reason the shares remainsmoribund is the somewhat complex metallurgy that continues to undergo further study and optimization of plant configuration: as reported on August 11, 2010, about half the resource at Mara Rosa is mildly refractory due to being tied up in tellurides. We expect a workable solution to be eventually identified and successfully tested but it could negatively impact project NPV via higher capital costs (though this might be offset by a higher gold recovery than the 80% currently modeled for agitated pulp leaching). Our suspicion is that things aren’t lined up yet for the big ride, but with that said, the shares are pretty cheap and won’t require much buying pressure to break out above a dollar, at which point C$1.50 seems inevitable. [Silverax]

Gammon Gold (TSX: GAM; AMEX: GRS)
El Cubo Labour Strike Declared Illegal - October 4, 2010

It doesn’t matter much whether or not the strike at Gammon Gold’s El Cubo mine is legal, what matters is how soon the mine can be placed back into production. Firing almost 400 union workers and filing criminal charges against 7 union executives might have been an appropriate action by the company but we don’t see how it was “in the best interests of the union employees” as claimed by CEO Rene Marion. If Gammon Gold can lose its “antiMidas touch”, it might be worth a punt considering what could be another turnaround in the making at the troubled Ocampo mine, one that might be more-or-less permanent this time around. What would probably help the company a bit is some additional perspective about how mining is done in Mexico — we suspect Dr. Luis Chavez is often a lone voice of reason at board meetings. [Silverax]

Searchlight Minerals (OTCBB: SRCH)
Searchlight Minerals Corp. to Pursue Autoclaving to Extract Precious Metals From Clarkdale Slag Project - October 4, 2010

After years of messing around with shortcuts leading to dead ends, it has finally come to this: high pressure grinding rolls (HPGR) followed by autoclaving of the iron-silica slag. Unfortunately, there are some hurdles to still overcome. First, HPGR can process the abrasive slag material but it probably needs to be integrated into a closed circuit milling flow sheet in order to ensure a consistent, optimum particle size. The company spent literally years experimenting with a vibratory grinding mill but it uses a wet slurry whereas HPGR is a dry grinding mill. As a result, the slag material will probably need to be dried out prior to introduction into the HPGR. While this isn’t likely to be a fatal flaw, it does add complexity and cost.

Second, the autoclaving of the slag has nothing to do with oxidizing or neutralizing sulfides/arsenides, which is the primary purpose of all conventional pressure leaching applications. Rather, the autoclaving at Clarkdale apparently helps the leach solution penetrate into the slag particles (which have been fractured along grain boundaries during the HPGR stage) in order to come into direct contact with the metals to be leached. Furthermore, the pressure and temperature are supposed to prevent dissolution of iron and silica into, and the interference of carbon with, the gold-bearing solution. Even if technically possible, this would be a novel application providing little justification to conclude the following:

Once the batch test results have been reduced and analyzed into a pre-feasibility document, a continuous pilot bulk test will be scheduled in a larger multi-compartment autoclave (30-50 liters) as part of the feasibility study. It is anticipated that this bulk test will be conducted in the fourth quarter of 2010, subject to completion of the pre-feasibility study and availability of the testing facility. This type of scale-up is common in the mining industry, and the majority of recent major autoclave installations have proven their feasibility utilizing bulk tests conducted with 30-50 liter autoclaves.

Those 30-50 liter autoclaves used in the bulk tests are for standard pressure leaching applications involving refractory gold or sulfide ores. These are primarily conventional chemical processes (oxidation or hydrometallurgical isolation of sulfides) whereas the slag application would be a combination mechanical (penetration of slag particles) and novel chemical process (hydrometallurgical isolation of silica, iron and carbon). Pilot plant testing of such a process might not guarantee scalability and therefore the custom construction of a large processing facility may ultimately be required for bankable feasibility purposes. Such a “pilot plant” could ultimately cost tens — if not hundreds — of millions of dollars, thereby obviating the need for the “bankable” feasibility study and thereby creating a Catch-22 scenario.

If the above issues are not as technically complex as we imagine them to be, then Searchlight could be a few months away from salvation and the shares might represent a good speculative punt. [Silverax]

Peregrine Metals (TSX: PGM; Pink Sheets: PTTDF)
Peregrine Metals: Measured and Indicated Resource at Altar Increases 74 % to 802 Million Tonnes Grading 0.44% Cu Equivalent Containing 7.41 Billion Pounds of Copper and 1.53 Million Oz. of Gold - October 4, 2010

The deposit growth has not added substantially to near-surface oxides and consequent the leached copper cap still does not represent a resource base that is compelling as a standalone operation despite management’s goal of evaluating Altar as an initial oxide copper heal leach mine. For this reason: “Peregrine Metals is proceeding with a Preliminary Economic Assessment (”PEA”) on a combination leach and concentrator mining operation to examine the best scenarios for mining and processing this large copper-gold deposit.” Alas, neither the overall grade nor the geometry and layout of the porphyry system at Altar suggest to us that a robust mining scenario can be outlined based on the discoveries made to date. The attraction of Altar for us was the oxide copper potential and, to a lesser extent, the peripheral gold potential but the company doesn’t seem particularly interested in pursuing them at the current juncture. [Silverax]

Heatherdale Resources (TSX-V: HTR; Pink Sheets: HTRRF)
Niblack Mineral Development (TSX-V: NIB; Pink Sheets; NIBMF)
High Grade Results Continue To Expand And Upgrade Lookout Zone At Niblack & High Grade Results Continue To Expand And Upgrade Lookout Zone At Niblack - October 4, 2010

It seems all the VMS (volcanogenic massive sulfide) exploration companies appear to have market caps in the C$50 million range and here are two more that get us there on a combined basis. The valuations are relatively even with Heatherdale about twice the enterprise value of Niblack, matching the eventual 70/30 joint venture split of their Niblack property in southeastern Alaska. The existing resource inventory is still on the smallish side although recent exploration success suggests that a meaningful increase will be made after the completion of the current drilling program. Stated another way, it’s not unreasonable in our opinion to hold the viewpoint that a VMS deposit or deposits located far away from an already-operating concentrator will probably need an in situ metal value of over US$1 billion before being taken seriously. By that measure, the Niblack project is at least half way there. [Silverax]

Donner Metals (TSX-V: DON; Pink Sheets; DONFF)
Donner Metals Ltd.: Xstrata Zinc To Conduct Definition Drilling at PD1 Deposit - October 4, 2010

The potential upside and downside of the arrangement with Xstrata Zinc is demonstrated by the recent “positive” feasibility report published on the Bracemac-MacLeod deposit: highly sensitive to rising metal prices but potentially disastrous at lower metal prices due to the funding requirement. Simply put, if metal prices drop to or below those used in the feasibility study (U$0.80/lb zinc, US$2.50/lb copper), it would be nearly impossible for Donner Metals to raise the funds for its pro rata share of the US$163.7 million in estimated capital costs. Meanwhile, Xstrata Zinc might still go ahead with the project for its own reasons and it would likely be able to obtain the funds for construction. The result would be Donner defaulting on the joint venture agreement, the consequences of which we haven’t looked into but suspect cannot be very good. [Silverax]

On the plus side, Donner is not required to contribute any capital until May 31, 2011 so it still has plenty of time to arrange its share of project financing which is initially estimated at about US$40 million. This seems feasible, but only if metal prices–particularly zinc and copper–don’t take a significant hit between now and then. [Zurbo]

Soho Resources (TSX-V: SOH; Pink Sheets: SHRJF)
Soho Resources Corp. Announces Positive Preliminary Economic Assessment for Current Resource Identified on Its Tahuehueto Project - October 4, 2010

The project is coming together but there is much work left to be done and the company is scraping the bottom of the barrel trying to come up with the funds. There isn’t enough gold or silver in the resource category to get investors very excited at this point even if a decent and reasonably-profitable small mining operating can be established. On top of that, the combination of underground and open pit mining as well as the production of two concentrates makes this project as proposed quite complex for its size. [Silverax]

Dundee Precious Metals (TSX: DPM; Pink Sheets: DPMLF)
Sabina Gold & Silver
(TSX: SBB; Pink Sheets: SGSVF)
Sabina Gold & Silver Announces More Significant Results at Umwelt Discovery, Back River Project, Nunavut
- October 4, 2010

These are some phenomenal results, and remembering Dundee to be the company that sold the Back River project to Sabina in June 2009, we couldn’t help but thinking they must be kicking themselves as they watch the Sabina share price  power higher and higher. But then we recalled that Dundee was given 17 million shares and 10 million special warrants in that transaction, and that these share and warrants are now worth over C$150 million. That’s not too shabby! Meanwhile Dundee’s current cash position comes in at around C$100 million, leaving it sufficiently funded to complete a major expansion at the flagship Chelopech mining operation. We’ll have more to say about Dundee in the next update to our mid-tier Gold Producers Report. Preliminary it looks undervalued within our model, which gives it a base case valuation target of C$11.00 per share. [Zurbo]

Sabina is not in our analysis because there are no recent economic studies but clearly the Back River resource adds very significant value to the project and makes its remote location no longer the one critical issue that blocks development of the project beyond the resource definition stage. There is upside here but winter doldrums are likely to set in and we may see a decent pullback. Hopefully by then we will have more information about the economic parameters of a proposed mining  operation. This is one of the companies that we identified early on but never got on board because we did not formally document our thinking — that has  now changed with this Mining News Review approach.[Silverax]

Golden Minerals (TSX: AUM: AMEX: AUMN)
Golden Minerals Announces Equity Financing - October 6, 2010

Golden Minerals is now up 10x from where we originally featured the company (and up about 3 times from the level where we eventually sold the last of our position). There are few opportunities that are as certain as Golden Minerals trading at $2 with more than $8 per share in cash (as it did in June 2009), but this is a company that doesn’t like holes being burnt in its pockets — so it was quick to spend what it had on holes in the ground and is now on its second major financing during the past year. The current value of the company is primarily due to the bonanza silver located in the central and western Yaxtche zone at its El Quivar project in Argentine but the opportunity is no longer as certain. As noted previously, the company is doing the right thing by re-evaluating its initial proposal to build a low tonnage, low grade mine at El Quivar and we look forward to reviewing the results of the preliminary economics. Until then, we congratulate the patient shareholders who have held since those early days of certainty and wish them continuing success. [Silverax]

North Country Gold (TSX-V: NCG)
North Country Gold Corp. Announces $5 Million Private Placement Unit Financing & North Country Gold Corp. Announces Increase to the Private Placement Unit Financing - October 6, 2010

Do we detect a pattern here? Apparently the funds want into the gold and silver juniors bad. Be that as it may, the timing is pretty good for North Country Gold even though they won’t be putting the money to use until next spring. Unfortunately the half warrants at 60 cents are a giveaway and we are likely to get significant selling once the placement shares become free trading sometime in February. My guess, and it’s admittedly tinged with cynicism, is that the updated NI43-101 resource will be conveniently released sometime around then. With the mammoth issuance of stock options also out of the way, we hope to have no further distractions of the dilution frenzy-type going forward. In any case, the Three Bluffs project is one we can believe in and the primary question at this point is, when should we buy? [Silverax]

Megastar Development (TSX-V: MDV; Pink Sheets: MSTJF)
Eloro Resources (TSX: ELO; Pink Sheets: ELRRF)
Megastar and Eloro Announce Megastar Annual and Special Meeting - October 6, 2010

Let’s see, Megastar shareholders get 70 million shares of Eloro on a pro rata basis in exchange for Megastar selling its 50% share of the Simkar property in the Val d’Or gold camp of Quebec to Eloro. Megastar has about 45 million shares fully diluted so that is 1.5 Eloro shares for each Megastar share. Eloro currently trades at 10 cents while Megastar is at 13 cents. In other words, if you buy a Megastar share today for 13 cents you will in the future get 1.5 Eloro shares currently worth 15 cents assuming the deal is approved. That looks like a free lunch, or at least getting something for nothing, and we generally like that scenario even if there is a chance things can go wrong. That is called speculation. As for the Simkar property, it is what it is — a valid exploration project with fair odds of discovering a lode-style ore shoot below the historic mine workings. We probably wouldn’t pay more than $20 million for something like that at such an early stage but that is where Eloro will be when the deal is done assuming the share price remains the same. [Silverax]

Eastmain Resources (TSX: ER; Pink Sheets: EANRF)
New High-grade veins & Bulk tonnage targets at Clearwater - October 6, 2010

The Eau Claire resource was previously modeled as a lode vein deposit. In fact, that is how the resource update due this past summer (and before that, in late 2009) was supposed to model it. But somewhere along the way Eastmain recognized the open pit potential of the project. Alas, the hand wasn’t speaking to the foot until somebody at SRK Consulting, tasked to audit the internal modeling as part of the NI43-101 process, pointed out the obvious: if you plan to potentially mine a portion of the deposit as an open pit, then you should resource model that portion as an open pit. The implications are two fold: one, the updated resource will take a while longer to complete, which is a negative; and (2) the resource number, when finally reported, could surprise some people, which is a positive. Even at a million ounces of open pittable resource this would be a valuable property given the nature of the gold (mostly free milling and contained in visually recognizable host rocks), not to mention the exploration upside. [Silverax]

Kodiak Exploration (TSX-V: KXL; Pink Sheets: KXLAF)
Kodiak Drills 35m Grading 2.21 gpt Gold including 4m Grading 16.6 gpt Gold at Milestone - October 6, 2010

Two holes about 200 meters apart had good results, the rest not so much. One hole (MS10-48) may be a fluke given the low grades of two other holes drilled from the same setup. Hole MS10-49, the other good hole from this set of assays is in the same smallish zone as holes MS10-38 to MS10-40 reported earlier. Much more needs to be done along the lines of finding similar high grade zones (shoots?) at Milestone before we start getting excited. [Silverax]

Eagle Plains Resources (TSX-V: EPL; Pink Sheets: EGPLF)
Eagle Plains Samples New High-Grade Gold Discovery at Yellowjacket Gold Project, Atlin, B.C. - October 6, 2010

What we are focusing on for a bit of perspective:

The 1903 Report of the Minister of Mines describes the Rock of Ages workings as: “…a shaft has been sunk 60 feet. From the bottom of this a cross-cut was run 7 feet and struck the hanging wall of the ledge. A drift was run down-stream 60 feet at this level, and one upstream on the 30 foot level. The ledge wherever tapped is about 14 feet in width, mostly low grade ore, although many extremely rich patches are encountered.” Eagle Plains geologists have mapped and sampled the local area and have now received partial results, including an interval which returned 51.36 g/t over 5.2m.

In light of the possible “extremely rich patches”, what we’d like to know is what are some of the other intervals in those partial results besides the 51.36 g/t over 5.2m. [Silverax]

Fire River Gold (TSX-V: FAU; Pink Sheets: FVGCF)
Fire River Gold Announces Mineral Resource Estimate For the Nixon Fork Gold Mine, Alaska - October 6, 2010

The resource estimate was from work performed prior to Fire River Gold taking over, consisting of 1,233 drill holes and 17,693 samples. You know that size is a concern when a company reports a gold resource in grams. We did some math and came up with 3,267 grams of resource per drill hole and 357 grams per sample. That probably includes some double-counting but it also should temper excessive hopes about the ongoing 28,000 meter drilling program. Namely, if we assume each drill hole will average 50 meters (it will probably be more than that from surface but less from underground), we get 560 total drill holes for the program. At the historic rate of 3,267 grams per drill hole, that is a level-set expectation of 1,829,520 grams of resource expansion. For the number-challenged among you, the converted figure is 58,821 ounces. All kidding aside, the Nixon Fork Gold Mine sits on top of a small, high-grade gold deposit. After the current drilling program or any other future drilling programs, the mine will still sit on top of a small, high-grade gold deposit. Not to say it can’t make some money — just a small amount of it. [Silverax]

Trevali Resources (TSX: TV; Pink Sheets: TREVF)
Trevali Commences Trading on Toronto Stock Exchange; Appoints Dr. Anthony Holler as Chairman - October 6, 2010

We are intrigued by the unique deal structure with Glencore at the Santander project in Peru that has the metals trading giant responsible for plant construction and mine operation while Trevali gets 100% of the upside in the form of potential mine operating profits. Unfortunately, there are no external economic studies and so we are left with back-of-napkin calculations that suggest the upside for Trevali may be limited in the near term assuming the market will value the company on the basis of its existing zinc-silver-lead resource at a 2000 tonne per day mining rate. We also assume that Glencore’s services don’t come cheap; Trevali will have to pay for them eventually out of future mining cash flows. In any case, trading on the Toronto exchange will hopefully create some liquidity in the months ahead so that we can take advantage of any attractive opportunities that may present themselves. [Silverax]

Atna Resources (TSX: ATN; OTCBB: ATNAF)
Atna Reports Strong Production at Briggs Mine - October 6, 2010

Higher gold prices might do wonders for companies like this with a small current gold production profile that also have one or more development-stage projects that together could make them a 100,000+ ounce per annum mid-tier gold producer. Unfortunately, Atna is partially hedged as a result of what appears to be a “mini-Barrick” delusion of grandeur (hopefully now cured given that even Barrick has stopped being insane) as well as a US$14.5 million “gold bond” issued in 2009 to provide funds for the purchase of equipment and for startup capital at the Briggs Mine in California(!). Terms of these gold bonds will make it somewhat difficult for Atna to generate significant cash flow in the near term from the Briggs operation even at $1,350 gold. Future drivers for the share price would include meaningful development progress on the company’s other projects, several of which appear to have solid prospects, and of course abstaining from hedging policies that eliminate upside leverage to higher gold prices (there are other ways to lock in minimum gold prices that don’t come at such a steep cost). [Silverax]

Amarok Resources (OTCBB: AMOK)
Phase I Drill Program Confirms Gold Potential of Rodeo Creek Project - October 6, 2010

How shall we describe this one, gentle reader? How about one word? Fraud. Of course if we need to tell you that, you need to immediately sell all of your gold stocks and buy a nice safe mutual fund (okay, it can be a gold mutual fund). And if you listen to anybody who has said anything positive about this company — Grass Roots Research, Liberty Analytics, Skymark Research, Emerging Stock Report, et cetera — even gold mutual funds are probably too much for you to handle. [Silverax]

Titan Uranium (TSX: TUE; Pink Sheets: TUEFF)
Titan Uranium Continues Baseline Environmental Studies And Engineering Design At Sheep Mountain Project, Wyoming - October 6, 2010

Is it considered progress when there is little chance you are going to get a mining permit? Titan Uranium was C$3 during the uranium boom of 2006-2007 but there is little chance of it ever trading that high again. It could go back up to its 2009 high of 60 cents for one irrelevant reason or another but unless you have strong faith in state and federal regulatory agencies approving open pit heap leach uranium mines ever again in the United States, it would be better to wait for the actual permits before jumping on board — even if the share price is 60 cents when that happens. [Silverax]

Yukon-Nevada Gold (TSX: YNG; Pink Sheets: YNGFF)
Ketza IP Target Proves to Bear Significant Gold Intercepts - October 6, 2010

The headline is wrong on two counts. First, it is not “intercepts” as in plural but rather “intercept” as in singular. Second, it isn’t “significant” unless you consider 2.3 grams per tonne gold over 2.99 meters to be significant. It might seem nitpicky to focus on a press release about a minor exploration project but this stuff speaks strongly to a company’s credibility especially when you’re a gold mining turnaround play with a C$750 million fully diluted market cap — such a valuation suggests the market has come a long way in trusting the company’s contention that a turnaround is in fact in progress at Jerritt Canyon. So let’s look at the press release a bit closer. Note this statement by the company:

The top of the IP anomaly starts at approximately 700 meters below the surface. The first two drill holes (KR-10-1477 and KR-10-1478) encountered significant intervals of fault zones and failed to reach their target depths (IP anomaly zones) before being lost due to very poor rock conditions.

In other words, the IP target is located below 700 meters so none of the gold intercepts, significant or not, from the first two drill holes prove anything with respect to the IP target. Now let’s look at this statement:

Drill hole number KR-10-1479, was completed to 862 meters (2,827 feet) and encountered several zones of Au mineralization prior to reaching the depth of the IP target. The rock in the bottom half of this drill hole averages about 3 percent total sulfides and is sufficiently high enough to explain the IP anomaly. No intrusive rock was intersected.

The initial impression is that the third hole also failed to intercept any gold at or below the target level of the IP anomaly but the assay table does reveal the aforementioned 2.3 grams per tonne gold over 2.99 meters starting at a downhole depth of 743.9 meters. Then again, if this drill hole was inclined more than a few percent from vertical, that downhole depth would actually be less than 700 meters below surface and therefore it would actually be above the depth of the IP target as well. Indeed, that interpretation seems to be more consistent with the company’s own statement referenced above, rendering the entire headline a lie. [Silverax]

Oro Silver (TSX-V: OSR: Pink Sheets: OROSF)
Drilling Commenced at Oro Silver’s El Compas Project, Zacatecas, Mexico - October 6, 2010

It would have been nice to know in advance that the company has started a new drill program but nevertheless the initial results from the first three holes provide a bit of excitement. It should be noted that both the El Orito vein and the El Compas vein likely contain relatively small ore shoots that might each eventually host on the order of 100,000 - 200,000 ounces of gold (including equivalent silver). Thus they don’t represent major exploration targets or blue sky potential. There is some indication that vein extensions or new veins could host additional ore shoots but the real potential exists at depth. Alas, the company does not appear to have plans to drill deep targets in the near future. [Silverax]

Crocodile Gold (TSX: CRK; Pink Sheets: CROCF)
Crocodile Gold Pours 10,000 Ounces of Gold in September 2010 Setting New Monthly Record - October 6, 2010

Crocodile Gold is now officially a mid-tier gold producer according to our definition of 100,000 - 1,000,000 ounces of annual gold production and we will be adding the company to our Mid-Tier Gold Producer model that we are currently updating and will have ready in a few weeks (probably just in time for a gold correction knowing our sometimes-rotten timing). On initial look the company looks a bit expensive at C$1.50 but it does have some very decent assets, competent management and grand plans to grow production and resource base. Production growth so far seems to have been accomplished without many hitches, which is quite impressive given that several smaller, diverse (open pit and underground) operations are involved. [Silverax]

Corex Gold (TSX-V: CGE; Pink Sheets: CGEKF)
Corex steps out on two holes and Intersects 29.0 m of 0.71 g/t Au, and 56.4 m of 0.47 g/t Au including 6.1 m of 2.1 g/t Au - October 6, 2010

More potential open pit oxide gold in Mexico — this one has lots of “boring” drilling still ahead so no huge hurry to accumulate other than the fact that the shares are hitting a 52 week low just as gold is hitting yet another record high. Gammon Gold (TSX: GAM; AMEX: GRS) became involved with the company over the summer by way of an equity investment as well as a seat on the Corex Technical Advisory Board, but as noted elsewhere Gammon suffers from the “antiMidas touch” so it’s not clear if the association is negative or positive. In all seriousness, it is unclear what the potential tonnage of an initial 43-101 resource might be from the moderate-sized gold zones discovered to date and the timing of a resource estimate — assuming one is being planned — is also uncertain. [Silverax]

Medusa Mining (TSX: MLL; ASX/AIM: MML; Pink Sheets; MDSMF)
Medusa Mining Limited: Confirmation of Dividend Payment - October 6, 2010

It’s hard to blame new mid-tier gold producer Medusa Mining for not knowing what to do with all the cash the company’s Co-O Mine is throwing off other than to pay it out as a dividend. The market cap looks rich for the current production profile and resource base but the distribution, size and extent of the classic epithermal gold veins at Co-O suggest that the deposit could be world class. The mine is already producing gold at an extremely low cost thanks to the consistently-high gold grades and cheap cost of Phillipine labor. We wouldn’t buy here but then again Medusa doesn’t look all that different to us than Andean Resources (TSX: AND; Pink Sheets: ANDPF) and Goldcorp did cough up US$3.4 billion for that one. [Silverax]

Mines Management (AMEX: MGN; TSX: MGT)
Montanore Project Reaches Another Critical Permitting Milestone - October 6, 2010

If you need to understand why the Mines Management share price continues to struggle, you need look no further than this latest press release announcing a critical permitting milestone that heretofore was totally unknown to the majority of investors. Considering that permitting is the main risk at this point, one would assume the company is keeping shareholders updated on what has been accomplished to date and what still needs to be accomplished. But no such luck out of a management team who dared claim in 2004 that permitting would be a cakewalk because Noranda had already done most of the required work back in the 1990’s– only to be still several years away from completion in 2010. There is simply no urgency to own this stock, it will still be there in a year or two, probably at more or less the same price (unless the markets enter another all-boats-rise phase in the meantime). [Silverax]

First Majestic Silver (TSX: FR; Pink Sheets: FRMSF)
First Majestic Silver Corp.: Another New Record for Silver Production; 1,823,370 oz Silver Produced in Q3 - October 6, 2010

First Majestic is well on its way to producing over 10 million ounces of silver per year at which point it can arguably be considered a “senior” silver producer. We suspect First Majestic’s claim to fame as the “purest” silver producer was initially recognized as a result of the Silver Producers Report we introduced over the summer. In any case, the company has done extremely well the past few weeks and is now arguably fully valued and therefore likely to trade more-or-less in lockstep with silver prices (not a bad thing in, and of, itself). We look forward to adding the latest operating results to our model when they become available as well as modeling the proposed Del Toro Silver Mine, which may represent further upside once the economic parameters are better known. [Silverax]

Great Basin Gold (TSX/JSE/AMEX: GBG)
Great Basin Provides update on the Burnstone Mine Project - October 6, 2010

Full commissioning at Burnstone is nearly at hand and commercial production should be declared within weeks (possibly months, depending on the company’s interpretation of accounting or operational definitions). There is still a credibility gap that will probably only be cured by demonstration of competent, profitable gold production, at which point the shares should move toward full valuation in the $3.00 to $3.50 range (based on current gold prices). We just advised subscribers on the matter of the soon-to-expire warrants we recommended a while back, which are up a tidy 100%+. [Silverax]

Alexco (TSX: AXR; AMEX: AXU)
Alexco Intersects 10.4 Meters of 44.3 Ounces Per Ton Silver, Expands Onek Zinc-Silver Deposit at Keno Hill - October 6, 2010

The market reaction is arguably justified by silver prices over $23/ounce but not by these drill results, which look spectacular until we read the fine print that they define a compact area adjacent to the historic Onek mine area where past drilling identified about 1 million ounces of silver plus about 35 million pounds combined lead and zinc. The 2010 Alexco drilling program probably expanded on that, but not by much. In the meantime, Alexco continues to ramp up for production but frankly at a market cap above C$300 million the share price is getting a bit ahead of itself, silver prices notwithstanding. Resumption of underground mining in historic workings is always a difficult task as Alexco and its shareholders are about to find out. [Silverax]

American Manganese (TSX-V: AMY; Pink Sheets: AMYZF)
Expanding Manganese Resource at Artillery Peak Grows by 45% - October 6, 2010

This is purely for the manganese bug — all three of them worldwide. There probably will never be a manganese mania, which means Jim Dines probably won’t claim to be the “original manganese bug” either. But seriously, this idea is way out there and could actually work out. What’s needed are offtake agreements or industrial partners who will guarantee a market for the product and might even fund the mine construction. A separate issue is the patent-pending hydrometallurgical process developed for the Artillery Peak deposit. Anytime you have something brand new in mining, you are adding operational and execution risk to a business that is already inherently high risk. Ultimately, it comes down to whether or not the company can bring a credible partner to the table and we see no reason for the average investor to buy in until that happens. Unless of course you are a manganese bug, in which case please have at it. [Silverax]

AngloGold Ashanti (NYSE: AU)
AngloGold Ashanti eliminates hedge book, gains full exposure to gold - October 7, 2010

That was fast, over 2 million ounces bought back in under a month at an average price of US$1,300, which means most of that was in the past few days. That much gold buying could very well help explain the steep rise in gold prices so far in October. This will probably go down as one of the stupidest moves in gold mining history along with last fall’s mea culpa from Barrick, whose similar move a year ago was only a bit less stupid on account of it being earlier and at a slightly lower gold price. If you should ever again listen to either the “gold price experts” at AngloGold Ashanti or Barrick, then you deserve what the market is going to hand you. So now that the gold miners have finally bought back all the gold at record high prices (after having sold it forward at record low gold prices), let’s hope they all start putting out predictions for lower gold prices going forward. In a similar vein, if you should ever find yourself agreeing with any central banker about gold prices, consider banishing yourself from gold investing for the sake of your net worth. [Silverax]

Pelangio Exploration (TSX-V: PX; Pink Sheets: PGXPF)
Pelangio Exploration Announces Third Gold Discovery at the Manfo Property-24.7 g/t Over 5 Metres - October 7, 2010

These holes at Pokukrom East are decent but not spectacular. The soil anomaly suggested wider structures than what have been drilled although it is possible there are several stacked zones to account for the width. Note that the mineralization appears to dip west or northwest toward the drill hole collars and therefore the holes may have overshot the center of the system. Another possibility is that the mineralization does not extend very deep. In any case, it’s fairly obvious that there is potential for good continuity of a 25-50 meter wide gold zone along a strike of at least 500 meters and to a depth of 100 meters right from surface, open in all directions. With modest stepouts from these initial 5 holes, this could be a 250,000 oz. gold target grading ~1 gram per tonne of gold. That is not very interesting by itself because a multitude of similar targets will need to be drilled on the property before we can start talking about a mine, but ideally these separate gold systems will expand to depth and along strike beyond the surface contour of the anomalies. With five holes remaining in the inaugural program, we can’t yet consider our speculation (about prioritizing the highest potential targets last) to be finished but it’s a close call. [Silverax]

Cameco Corp. (NYSE: CCJ; TSX: CCO)
Steelworkers Vote to Strike at Cameco Mines
- October 5, 2010

Although the union members at Cameco’s Key Lake and MacArthur Lake mines won’t be in a legal strike position until October 22 and hope to reach an agreement before then, if none can be reached this could have a significant impact on the uranium spot price. A situation worth monitoring as it could lead to an overreaction and provide the fuel for a rally in the smaller uranium explorers and developers. [Zurbo]

Belo Sun Mining (TSX-V: BSX; Pink Sheets: VNNHF)
Belo Sun Mining Intersects 31.90 Meters Grading 3.05 g/t Gold Including 14.05 Meters Grading 5.13 g/t Gold at Volta Grande Project, Brazil
- October 7, 2010

In many ways Belo’s Volta Grande project is similar to Tocantinzinho, the flagship project of Brazauro Resources before it was acquired by Eldorado Gold (AMEX: EGO; TSX: ELD) for about $115 million or what would currently be equivalent to about $1.35 per share. Both projects are located in Brazil, are 100% gold, grade about 1 g/t, have total estimated capital costs of slightly over $300 million, and have life-of-mine estimated production of 1.6-1.7 million ounces at a cash cost of around $500 per ounce.

According to our model, fair value for Brazauro based on its Tocantinzinho project was about C$2.70 per share, which means it was acquired at a roughly 50% discount to fair value. Belo Sun currently has a calculated fair value of about C$1.70 per share, so a similar offer would put Belo at roughly C$0.85 per share. [Zurbo]

General Moly (AMEX:/TSX GMO)|
General Moly Announces Hanlong’s Receipt of Key Chinese Governmental Approval - October 8, 2010

General Moly’s Mt. Hope deposit in Nevada is to our knowlege one of the only mining projects in the United States that is being financed by Chinese equity investments and loans. The Chinese have of course already moved into Canadian mining in recent years after getting comfortable in Africa and South America. The situation is interesting because China hasn’t had much luck with the mining sector in the United States. For example, the proposed purchase of a majority stake in Firstgold (Pink Sheets: FGOCQ) by a Chinese firm last year was scuttled due to politics and Firstgold subsequently filed bankruptcy. Now in the case of Mt. Hope the Chinese are not taking majority control and the Fallon naval air station is about 200 miles from Mt. Hope, so we probably won’t see a similar national security argument being made. Yet there still might be some debate given that Firstgold owns some minor gold projects whereas Mt. Hope is a major US$1 billion mining project. Mt. Hope still has significant hurdles to clear including securing water rights, completing the environmental review and obtaining permits, so hopefully the politicians will be enlightened enough by the time financing is at hand to give the Chinese investors and lenders a fair shake. In any case, the Chinese are probably watching this deal with great interest in order to get a better feel for exactly what, where and how they can invest in the U.S. natural resource sector (which would be a great way to cash in their dollars). [Silverax]

Gold Canyon (TSX-V: GCU; Pink Sheets: GDCRF)
Gold Canyon Intersects 305 Meters at 1.03 Grams Per Tonne Gold at Its Springpole Gold Project - October 8, 2010

To make sure that I wasn’t missing anything, I’ve re-read the 2006 technical report on the Springpole Gold Project, noting that historical estimates of the contained gold were in the 1 million ounce range. Drilling during the 1990s apparently defined a system up to 800 meters long and 300 meters deep despite a poor understanding of ore controls. The current drilling program has so far identified what appears to be the same 2 main areas of mineralization (in holes SP10-007 and SP10-008) along the Portage Zone that had been drilled historically. There is no indication so far that these areas, about 500-600 meters apart, are continously mineralized. Indeed, the technical report suggests that these are pipe-like or tabular bodies along trend without much continuity in between. Hole SP10-016 does admittedly demonstrate that the system is open to the southeast but the 50 meter distance from Hole SP10-008 does not represent a major stepout.

There are several other red flags here as well. One is that half of the holes in the current program are being drilled in other zones on the property that historically did not prove up significant gold despite drill hole density approaching swiss cheese. Some of these holes may have decent assay results — suggesting perhaps that numerous areas of the property are highly prospective for gold — but in the scheme of things this drilling is meaningless because there does not appear to be new geological or other information that is relevant for generating new targets. I would go so far as to suggest that drilling these other holes was a waste of money unless they result in the discovery of new high grade structures. Something else to notice is the following technical slip found in the paragraph describing Hole SP10-016: “the structure hosting economic gold mineralization in the Portage Zone”. This might not seem like a big deal, but the fact is that there has been no work done to determine what, if anything, constitutes “economic gold mineralization” in the Portage Zone especially considering it lies underneath a lake and the metallurgy/rock composition is complex. It’s little things like this that can sometimes illustrate management’s frame of mind and in this instance we suspect the operative word is “chauffeur” — as in shareholders are possibly being taken for a ride. [Silverax]

Rubicon Minerals (TSX: RMX; AMEX: RBY)
Rubicon Minerals Announces Closing of the Secondary Offering of Its Common Shares - October 5, 2010

I don’t know about the various tipping points for Rubicon to break out above $4 after the McEwen divestiture but but I doubt they will release a NI43-101 resource anytime soon and certainly not before the bulk sampling and underground drilling programs (if not several of them) and related evaluation work are completed. The F2 zone appears to be at an intersection between fold structures creating a central (core) area of dilation with stacked ore lenses and shoots having potentially-significant vertical extent but limited lateral continuity. Modeling something like this is very difficult and not within the capability of analysts.

If we look at the F2 zone closely, we’ll note that it has been defined so far on at least 1000 meters of strike and 1000 meters to depth in terms of a minimum “10 gram-meter” envelope with a 3 gram per tonne cutoff. You calculate gram-meters by multiplying the grade of a drill intercept by its width. The dimensions of this system suggest something really big but when you do the math we get 300,000 750,000 ounces of gold at the minimum threshold (don’t forget to apply the density factor like I did initially, I’m using 2.5). Now clearly there are numerous high grade structures within this envelope that can grade above 1000 gram/meters but the job of someone trying to take a guess at the overall resource potential is to determine what portion of the total area consists of such high grade structures. The exercise is complicated by the stacked nature of the mineralization such that it doesn’t represent a discrete vein.

Obviously, there isn’t 30 million ounces of gold (which would require the entire F2 zone to grade above 1000 gram-meters) so we are left with the possibility that the number is somewhere between 300,000 750,000 ounces and 30 75 million ounces.

You can get a feel for the range of gram-meter values by looking at the table of F2 drill results and while the numbers are all over the place, a common range of intercepts seems to be around the 50-100 gram-meter value, which would imply a possible overall resource in the 1.5 3.75 million to 3.0 7.50 million ounce range. But this is irrelevant for resource modeling purposes as drilling to date has not been able to establish grade distribution or continuity with any degree of accuracy.

Ideally, Rubicon would be able to define high grade zones that are several hundred meters long and tens of meters wide and thick. Such individual zones can contain hundreds of thousands of ounces of gold and represent obvious targets for initial mining operations. There are likely to be structures like this at F2 given the drilling results to date (e.g., the “core zone”) but that doesn’t mean they are easy to delineate. Moreover, the extent to which bulk sampling and close-up underground drilling can do so is also uncertain.

For the above reasons, I don’t think a resource estimate is the tipping point for Rubicon but rather it is the discovery or delineation of a high grade zone or zones demonstrating grade continuity and predictable distribution. The presence or absence of such zone(s) at F2 is the main uncertainty that keeps the market cap from being larger and is also possibly why Goldcorp or others have not made a move (but if someone did so, Goldcorp would probably engage in a bidding war to keep Red Lake entirely in its own hands). By contrast, it was the recent discovery of structures with good continuity at Cerro Negro that resulted in Andean (TSX/ASX: AND; Pink Sheets: ANDPF) being acquired by Goldcorp over the summer.

Sorry for the long comment but in summary the tipping point for Rubicon is likely to be exploration success and as such the company very much remains a discovery play that will live or die by the drill bit. It is very possible that the “discovery” will be in an area that has already seen high grade results and certainly the “core zone” that is the target of the bulk sampling would be the top contender — so results from this program should be watched and evaluated closely. [Silverax]

Andean Resources (TSX/ASX: AND; Pink Sheets: ANDPF)
Andean Provides Corporate Update - October 7, 2010

Included in this update are the results of recent drilling including the Mariana Central zone that confirms the size of this ore shoot likely exceeds 1 million ounces at a grade that could approach 1 ounce per ton. This is world class and unlikely to be the last such ore body to be discovered at Cerro Negro. The key to the value of this deposit is the continuity of mineralization that allows the geologists to contour a grade envelope at various gram-meter intervals. Mining this ore shoot should be as easy as modeling it. Contrast this with Rubicon (TSX: RMX; AMEX: RBY) where ore controls and distribution are in the early stages of being understood. [Silverax]

Riva Gold (not listed yet)
Riva Closes $3.25 Million Private Placement and Grants Stock Options - October 7, 2010

This is a spinout from Wildcat Silver (TSX-V: WS; Pink Sheets: WLDVF) that is due to start trading on the TSX-V in a couple of weeks. The projects in Guyana are interesting for the possible extension of high grade veins and bulk tonnage potential. With ~50 million shares outstanding and an implied value of 50 cents per share based on the private placement, this company already has a significant market cap for an early stage exploration play but the projects appear capable of generating at least initial excitement so we’ll keep an eye on this one as it starts trading. Of particular interest is the Higgins zone at the Noseno project where the presence of several high-grade veins has been confirmed; drilling commenced in September. The thing to watch for are indications that there are additional gold-bearing veins or styles of gold mineralization that could together combine to form a bulk tonnage gold deposit that can be mined by open pit. [Silverax]

South American Silver (TSX: SAC; Pink Sheets: SOHAF)
South American Silver Announces New Drill Results Extending Higher Grade Mineralization at the Malku Khota Silver Indium Project - October 7, 2010

Cross sections reveal most of the silver value continues to be located near surface in association with the sandwiched Malku Khota sandstone. There is a large envelope of lower grade silver and indium that accounts for the sizeable resource of 300 million+ ounces  at the minimum cutoff grade but it would be a questionable decision to include these lower grade, deeper resources in any mine plan. There also appears to be a higher grade zone toward the bottom of the system as defined by recent drilling in the footwall sandstone but it has little meaning at this point because there does not appear to be continuity with the higher grade zone near surface. As such, talk of resource expansion based on deeper drilling is promotional fluff at best and an unnecessary distraction from rapid project development at worst. On a separate note, there are open questions about the relationship between the indium and silver given the occurrence of several zones of indium absence associated with higher grades of silver and vice versa. Metallurgy is an open question as well given management’s apparent preference for a run-of-mine heap leach plan to be followed by various hydrometallurgical processes to extract the metals from the leach solution. Things could get costly and complicated in a hurry whereas the situation is actually screaming for a simple startup mine plan that could potentially be put in place at a relatively low cost by focusing on the higher grade zone that outcrops at surface. Remembering that the project is in Bolivia should compel management toward simplicity and low cost instead of ambition and grandiosity, but the company’s statements and presentations tend to suggest an attitude infused with the latter. In conclusion, the Malku Khota project looks like a valuable opportunity that can be easily screwed up by bad strategy. The updated preliminary economic assessment due at the end of the year (we’d be suprised if it can be completed by then) should reveal more of the strategy, good or bad. [Silverax]

Evolving Gold (TSX-V: EVG; Pink Sheets: EVOGF)
Evolving Gold Reports Additional Gold Intersections from Rattlesnake Hills - October 7, 2010

We need to see substantial stepouts from the main gold zones at North Stock and Antelope Basin to get the market excited about drill results at this point. Both zones have structural controls that can presumably be systematically tested on trend yet the company has only been hitting gold in “spiderweb” drilling within close proximity to the smallish gold zones identified to date. This creates suspicion that the zones are closed off along strike yet that perception is misplaced because by their nature these porphyry-related systems can localize mineralization in multiple zones such as the diorite plug at Antelope Basin and the diatreme-porphyry breccia at North Stock. Find other favorable host structures or receptive rocks and you will likely find more gold. The deep porphyry target needs to show higher grades to become newsworthy given that a low grade bulk tonnage deposit is meaningless at the projected depth of 500 - 1000+ meters. The company also tagged on a Nevada drilling update to the bottom of the press release, which is a near-certain sign that results are not expected to be stellar — a guess supported by the verbal description given of the drill core. Evolving Gold’s projects remain prospective for the discovery of major gold deposits but we’ll probably have to wait until at least the next program. [Silverax]

Ucore Rare Metals (TSX-V: UCU; Pink Sheets: UURAF)
Ucore Comments on the Passage of Domestic Rare Earths Legislation by the U.S. House of Representatives - October 7, 2010

The legislation passed the House in a largely bipartisan manner although there was significant Republican opposition — including from the clueless Rep. Donald Young of Alaska –  probably because the proposed act is another alleged interference by government in the free markets. The same free markets, mind you, that have left China with 97% of global REE production and the United States in a strategic bind should there be an REE embargo by our good friends in China. In any case, the act still requires Senate approval and signing by the President; you can follow progress here. As previously noted, we won’t comment on the various early-stage light REE projects being explored during this latest investment craze but heavy REE is a different matter and Ucore’s Bokan Mountain project in Alaska is worth watching as one of few heavy REE dominant deposits in the world. [Silverax]

Disclaimer:  We own shares in several of the companies mentioned in this analysis (Metal Augmentor subscribers know which ones), but no compensation has been received from any of the companies mentioned. This is not investment advice; should you seek investment advice we recommend you discuss the company with a licensed investment advisor or broker.