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Cluff Gold’s Baomahun – a potential company maker?

It’s nearly five years now since John Gordon Cluff – better known to the mining world as Algy - spent $5 million to acquire the gold assets of his old company Ridge Mining, which had moved away from gold and into PGM developments on South Africa’s Bushveld. His new company. Cluff Gold (AIM:CLF – TSX:CGF), had claimed his allegiance from Ridge in 2004, and by early 2005, Algy had amassed a tidy stock of West African gold exploration assets.

Listing on AIM in December 2004, Cluff Gold set out with the intention of proving up 2 million ounces of gold, and delivering output of 150,000 ounces a year in the medium term….

Today, the company operates four projects in four countries in West Africa – Ivory Coast, Mali, Sierra Leone and Burkina Faso - and has two mines in production with more to come, and a global resource of 2.6 million attributable ounces.  Now focused on 3 million ounces of resource and a doubling of the production target to 300,000 ounces pa, Cluff have steadfastly stuck to their original aim of seeking and proving low cost, open pittable gold in West Africa.

At Angovia, owned 90% by Cluff, a combination of bad weather, unreliable plant and an inadequate fleet have prevented the mine from reaching its design production of 40,000 ounces pa. Since pouring its first gold in March 2008, the mine has struggled, although the considerable improvements completed this Spring will remedy the situation during 2009. Heap leaching, by its very nature, takes time to generate gold, but the company are confident that the stacking rate will reach budgeted levels for the rest of the year. Some 450,000 measured and indicated ounces of oxides and sulphides underpin the low cost, heap leach operation, with scope for further development as known satellite prospects are evaluated. There is also potential for developing the sulphide resource – which is still open to depth - but for the moment, at an anticipated cash cost of $450 per ounce over the life of mine, Cluff are concentrating on the low cost oxide “cap” to generate cash flow.

Kalsaka in Burkina Faso was the second of Cluff’s mines to pour gold, reaching that milestone during November 2008. Another oxide open-pit heap leach project, 78% owned by Cluff, the mine boasts almost 800,000 ounces of resource, and will deliver 60,000 ounces pa. Having successfully emerged from the commissioning phase in June 2009, Kalsaka is right on target, having generated almost 28,000 ounces in the first half of the year, at a cash cost of $632 per ounce inclusive of royalties and refining costs. As at Angovia, there is significant potential to increase the resources, as the current operation is based on just 30% of the known mineralised trend. There are additional drill-tested satellite prospects within five kilometres, and a further 20km of strike to explore, as well as the company’s nearby Yako deposit with its 150,000 ounces of resource. Cluff envisage Kalsaka – the first mine to be operated by a British company in Burkina Faso – as the hub for a whole new mining district, rather than a solitary operation.

But the project which Cluff consider to be their flagship and potential “company maker” is in yet another West African country - Sierra Leone. Ownership is now 100%, the company having purchased with Cluff paper the 40% still owned by Winston Mining – from whom they earned their initial 60% holding - during 2008. Situated about 180 km east of Freetown, in the Kangari Hills Greenstone Belt, the Baomahun Gold Project sits in a licence area covering more than 12 kilometres of prospective strike along the Kangari Hills, where the geological setting is similar to the Lake Victoria goldfields in Tanzania.. A 25 year mining lease was granted just over a year ago.

Approximately 1.5km of the potential 12km strike has now been drilled, and currently contains a 1.45 million ounce resource, of which over 1 million ounces is measured and indicated. Grades run at just over 3 g/t on average – although occasional intersections grade up to 26 g/t. Mineralisation is hosted in steeply dipping sulphide pods and lenses striking in a largely north-north-westerly direction in three separate but contiguous zones – Eastern, Central and Western. 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 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.

There is a strong correlation between banded iron formations (NYSE:BIF) and mineralisation in the project area, with the gold hosted in the hanging walls and footwalls of the BIF structures, in zones varying from 5-20 metres in thickness. This link has proved useful, as Cluff have been able to use the BIFs – identified by airborne geophysics - as markers for gold mineralisation. Predominant sulphides, which underlie a shallow oxide layer, are pyrrhotite, arsenopyrite, and pyrite, the last occasionally in conjunction with quartz veining.

A scoping study published in September 2007 demonstrated the viability of an open pit mining operation centred on the Eastern zone using a conventional carbon in leach (NASDAQ:CIL) processing route with a capacity of 1.0 to 1.5 mtpa, to generate 140,000 to 200,000 ounces of gold pa, and – importantly – metallurgical testing has confirmed the ore to be free-milling and non-refractory, with recoveries of around 92%.

However, previous drilling has demonstrated that there is scope for following the mineralisation underground - as grades increase with depth - and running both an open pit and underground operation at Baomahun, either simultaneously or consecutively. The results of a 7,000 metre drilling programme, designed to test this concept by targeting the known mineralised shoots at greater depth, have just been released, and strongly confirm the continuation of mineralisation. Nine of the eleven holes drilled encountered mineralisation, and most showed a significant increase in grade at around the 350-400 metre mark. The highest grade encountered was 2m at 22.5 g/t in hole DDH298, at 468m down-hole in the Eastern zone, whilst DDH301 in the Central zone showed a 10m intersection at 10.5 g/t at a similar depth. Star of the show in “gram-metre” terms, however, was DDH304, also in the Central zone, which intersected 60m from 637m down running at 3.89 g/t, with high grade inclusions of 6m at 11.7 g/t and 4m at 10 g/t.  Algy Cluff commented: “The grades are good, and do increase markedly at depth, and the widths are also good – these results are very encouraging.”

Cluff are now likely to move ahead with a new scoping study and a pre-feasibility study, which will explore all the options available. Soil sampling and geophysics point to significant potential along strike, outside the currently drilled area, and further exploration will continue to identify drill targets to expand the resource.

After bringing two mines into production for under $30 million last year, the delay in bringing Angovia up to scratch has dented Cluff’s treasury, and necessitated the raising of $11 million via a placing in March, as well as the establishment of a $10 million drawdown facility last September with RMB Australia, from which $6 million has been drawn. But with budgeted revenue likely to come in during 2009, this short term debt will not remain on the books for long, leaving Cluff debt free and cashed up. In addition, although they chose not to raise funds in conjunction, the company successfully listed on the TSX in February, which will, according to Algy Cluff: “enhance investor choice, improve liquidity for shareholders and provide greater access for investors in our stock.“

In common with all junior explorers, Cluff’s share price took a hammering in 2008, exacerbated by mine commissioning problems, but has now recovered from a low of 10p in October to 56p today, giving a market cap of approximately £65 million. Recent broker valuations are widely variant, with W H Ireland setting a target price of 85p based on DCF/NPV, and Evolution using a mix of valuation methods to arrive at 132p.  But in any case, neither have taken into consideration the potential of Baomahun – where less than 20% of the strike has been drilled – to become a true company maker and complete Cluff Gold’s transformation from explorer to producer on a grand scale.