Reserve Replacement - A Challenge for the Gold Mining Industry!

July 25, 2003

For years I've kept wondering how the major mining companies will be able to keep up their rate of production, never mind expanding it. Well, some did it by acquisition only - and it was a sad day for me when the over 100 year's old historical flagship company of US gold mining, HOMESTAKE MINING, was taken over by modern day buccaneers for, what I feel, was cents to the dollar. Of course, we all appreciate that Homestake had hit a low of $3.50 and appreciated more than 100% before it was sadly taken out by Barrick , a company I would suggest has been a politically correct entity, though still, or better because of it - a predator, or some would even call it a vulture fund.

Consolidation is not the Answer

Take-overs don't change the overall equation of adding to mine-able reserves, even if they boost the production of the acquiring company for a little while. On the other hand these increased reserves were hugely offset by "high-grading" existing reserves in the era of ultra depressed gold prices. - thus rendering large portions of former reserves unmineable at any future price and so reducing mine-life substantially, and in some cases lethally.

At the same time, exploration and development has been slashed to practically zero. Since 1996 almost all new projects have been put on hold as the price of gold tanked because of the announcements that Central Banks intended to sell most of their gold reserves - a redundant, non-interest-carrying, barbaric relic, as it was already termed by the likes of John Maynard Keynes, the "godfather" of deficit spending more than half century ago. This development now seems to begin taking its toll on the fiat monetary system, which is based on the US-dollar as reserve standard. And not only for the gold miners, no, that only was a side show!

The reality is that the fiat monetary system was construed to buy additional time for the global reserve currency, the fiat dollar. The quantity of dollars was already self indulgently over-inflated then. In recent years the flooding of the currency markets became exponential and as Bill Buckler of "The Privateer" has termed it, led to a "Potemkin" economy, where only the ever increasing creation of paper dollars out of thin air may keep up the delusion of GDP growth.

To return to the subject of gold reserve replacement in an environment where some major producers seem to have obligated years of future production at fixed lower prices. These allow accounting convenience, but limit potential value increase; You really can't sell your product twice. It also follows that the intelligence of financial markets prices these "obligated" producers accordingly. This is evident from the valuations of Barrick, Placer Dome and most Australian producers and others of the same ilk. "Remember the Ashanti" may become the war cry for gold bugs, akin to "remember The Alamo" for old timers in Texas. Declared non-hedgers like Royal Gold, Gold Corp., and even Newmont, the declared anti-hedgers instead are showing strong advances in valuation.

Nevada still has large Potential

My aim here is to initiate discussions on gold projects in North America, which may eventually become potential sources of reserve replacement for majors. Some may even find it more rewarding to go it alone, as Goldcorp. has proven this as it has been a valuation bonanza.

The first place I want to look at is Nevada. The state is producing about 2/3 of the US's gold, which is roughly 250 annual tons. Not bad at all for the former Silver State - though silver is still accompanying gold production.

The major strikes in the early 80's were along the Carlin, Battle Mountain, and Getchell trends. All located in North-Central Nevada. As Barrick, Newmont and Placer Dome seem to control most of it, the idea is to identify potentially prolific areas between these vast tracts of geography. After all, the controlling companies were not exempt from high-grading and so destroying some of their potential bonanzas in recent years. And to my knowledge, with the exception of Placer Dome delineating Cortez Hills and maybe ET-Blue, no other meaningful exploration has been conducted since than by the 3 biggies.

Properties of Merit

My initial thoughts are directed towards the Sleeper Mine and its adjoining areas. Amax, the previous owner, never explored any adjacent targets, nor depths over 500 ft. The original Sleeper Mine was developed and brought to production by Amax Gold, since taken over by Kinross Gold. The Sleeper open pit mine was among Nevada's most high grade gold deposits. It produced about 1.7 million ounces an average cash costs of 158 dollars per ounce of gold between 1986 and 1996.

X-Cal Resources Ltd., a TSE listed gold exploration company, holds three properties located in some of North America's most prolific geological settings known to have produced economical gold deposits. They have assembled a 30 square mile (20.000 acre) property at and around the Sleeper Mine. The property is jointly owned by Kinross Gold and X-Cal Resources each holding a 50% stake, except for 5.000 acres where X-Cal holds a 100% interest. Furthermore X-Cal has the option to buy out the Kinross stake until the end of 2003, which essentially means to take over the reclamation bonding from Kinross. In the case of exercising the option Kinross would still be a substantial shareholder of about 13%.

X-Cal has undertaken an extensive program of geophysics, geochemistry, satellite imagery, and soil sampling as well as 3-D modelling and a thorough review of all data from Amax Gold. Past and recent drilling programs seem to verify the potential of multiple Sleeper-like and other major Nevada-type deposits. Gold deposits throughout Nevada occur as clusters. Identified drilling targets in the Sleeper area may host up to 35 or more of these potential deposits.

The company has identified above-ground resources of value and has also measured, indicated and inferred resources in the immediate vicinity of the existing Sleeper Pit.

A recent major drill program confirms the above statements, though I would like to direct you to www.x-cal.com web site to study in diligent detail the potential I foresee for the future.

Some top notch people advising X-Cal are Keith Blair and Win Rowe. Both have expediently furthered the coompany's exploration and development process and added hugely to the geological interpretation of property, by organizing and building the vast database. Over the past year two top Nevada geological guns were enthused to accept the call to participate in the ongoing exploration program - please read their endorsements on the property following below. Both Ken Snyder (K.Snyder Mine, Midas) and Larry Kornze (Gold Strike, Betze et al) have multi million oz's to their credit in Nevada. They have also kindly given permission to publish their endorsement on a broader scale. Larry Kornze is essentially saying that the property has enormous potential of reserve replacement, being both ideally located in terms of its geological promise as well as being in the epicentre of the major mining facilities of the area. His endorsement for the property was already published on The Metropole Café a few weeks back. I will therefore quote only Ken Snyder's letter to X-Cal's management in its entirety:

 

Kenneth D. Snyder, Ph.D.

Consulting Geologist

17 June 2003

After several years of having a favorable impression toward the general exploration potential of the Sleeper Mine district (but no direct involvement), I was pleased when you asked me to become acquainted with the specific technical data on the mine area. I must state that after six months of this more in-depth study of the data, I am even more excited and confident about the future of mining in the district.

In the immediate mine area, there are numerous high-priority target areas remaining to be evaluated. Having studied the MapInfo tables and maps, it seems that the entire area remains largely unexplored at depths greater than 500 feet. Judging by the few deeper drill holes that are available, high gold grades certainly exist at depth in most of the areas tested. The reason for this lack of exploration effort at depth in the past caused me some wonder; presumably it was due to a concern over water volumes - but we certainly haven=t seen any water volumes in the deep X-CAL drilling to justify not exploring.

Mine Area Exploration

The area from the Wood Pit to the south and west, where drilling has been focused this summer, still remains open at depth and laterally in all directions. Multiple bonanza veins are likely to occur throughout that area.

The Aready line@ area to the east and southeast of the Sleeper Pit is an attractive target with essentially no drilling greater than 500 feet deep. The best geochemical anomaly of the mine area bounds this target on the east side and probably represents a zone of significant hydrothermal solution influx along the volcanic/metasediment stratigraphic interface. A number of the shallow old Asterilization@ holes in this zone encountered strongly anomalous gold values. Future holes in that area should extend to the volcanic/metasediment interface (I am suggesting a modified Hishikari model setting here).

The west side of the Sleeper Pit is also an attractive target. The northwest-trending zone which piqued Placer=s interest in the area still remains to be tested. The potential dimensions of that mineralization is essentially unrestricted.

The northern end of the Sleeper Pit remains a very attractive target although exploration in that area is somewhat hampered by the old leach pads. This is a problem which will be resolved with time and will ultimately become a very extensive area of potential for multiple bonanza veins trending north-south, northwest, and northeasterly. The potential extent of the zone in these directions appears to be totally unrestricted.

District Exploration

The broader district-scale exploration potential remains as attractive as ever. While district-scale potential has been relegated to a lower priority for the time-being, there are several areas having exceptional potential for the future.

The pediment southeast of the mine area (south of X-CAL=s AArea 1" target) has long been my personal favorite because of my interpretation of regional structure. As near the Sleeper Mine itself, the highest rock chip geochemistry of the district occurs at the volcanic/metasediment interface immediately east of the pediment (another zone of strong hydrothermal solution influx perhaps). Unfortunately, there is currently has no available geophysical coverage in that area. Soil sampling of that pediment would probably not be productive because of the thickness of wind-transported sands. Therefore, geophysics followed by drilling will probably be required to explore this target. The current detailed geological mapping program in this area will be extremely valuable.

The entire pediment area north of the Sleeper Mine is an attractive area for future exploration. Again, there are very few data at present other than surface observations; the proper volcanic host rocks crop out in the area but there are very few rock samples and fewer shallow drill holes from past exploration efforts. This area, from the outcropping metasediments toward the west onto the pediment is virtually an unexplored area. This is surprising since it is essentially adjacent to such a significant mine.

The pediment westward from the Sleeper Mine is an attractive target area (ABedrock Casino@ area and westward). Geophysical data indicates abundant potential for the existence of ore-conduit structures. In the past this area was hampered by thicker overburden and the fear of high in-hole water volumes. Problems associated with drilling through the overburden have been largely resolved and water problems have been discounted.

Summary

The X-CAL exploration effort appears to be proceeding in a logical and systematic manner. Of the currently active district exploration plays in Nevada, the Sleeper Mine district is the one having the highest potential for major success. In Nevada, major exploration programs are underway, or soon to be underway, at Aurora, Goldfield, Midway, Tokop, Montello, Robinson, Silver Cloud and McDermitt, as well as Sleeper. Sleeper is personally rated higher than the others for potential for both high grade and high tonnage. My recommendation is to continue exploring on the same course.

Kenneth D. Snyder (signed) ***

 

 

Another potential source of a major reserve replacement play is Coral Gold Corp., a VSE listed explorer with a 14.000 acre Tenabo Property on the Battle Mountain Trend. The property was put together under the guardianship of the famed geologist Dr. Ralph Roberts. Dr. Roberts worked for the USGS since the early 50's and has probably foreseen the new Nevada gold rush early on. After all, about 20 years ago he predicted that over the term of a generation or two, this North-Central section of Nevada will produce more gold than South Africa today. Well, it seems we're getting close to these numbers.

The history of the property, at least since Coral controls it is quite fascinating - as is its earlier history. Dr. Roberts has just published a book about the area, where Tenabo almost fills a chapter. Since Coral Gold got involved the board decided to develop the first delineated gold deposits into production, which started at about late 1987. Of course the gold price still hovered above $ 500/oz and the future seemed golden. The ensuing collapse of the POG has led to closing the production shop and the search for JV-partner, which soon was found in Amax Gold (editor's note: this company seems to haunt my Nevada experiences). Coincidentally, the VP-exploration of Amax Gold at that stage was a very able geologist, Bob Barker, who just happens to have accepted the same position with Coral about a year ago. You can't have a more knowledgeable guy for analyzing the vast existing data base, as well as delineating targets for major drilling programs.

These are now underway, on both the Norma Sass Claims as well as the 39A Zone within the core property. This zone is actually under-explored, even as former drilling came up with 150 to 250 high grade gold intersections, Amax Gold at that stage preferred to limit their commitment to the quick and easy. Back in 1995 they came up with a reserve of about 500.000 ounces of gold in the "Porphyry Zone", an attempt to earn their interest. Unfortunately half of these reserves was fractional ore and not mine-able with existing production means. A fierce battle evolved at their Cyprus, Amax headquarters, dubbed "Taj Mahal" by Coral's CEO, Lou Wolfin. As I've been the other "witness" from the Coral side, please remind me to tell the story of the negotiations at another time.

Anyway, some time later Amax Gold relinquished the property and Coral went its own way again. Suddenly, in the period of a rising gold price from 1993 to 1995 Coral found itself in the limelight again. Placer Dome, or better the Cortez JV has hit the famed bonanza of the "Pipeline Deposit" right next door to Coral's property. Negotiations began - though with a plethora of companies - and of course Placer Dome was a major contender. I still believe Coral would have made it to the finishing line at that stage - after all the share price went from cents to 6.40 dollars, OK, in Canadian Dollars - if the management of the POG had not set in at the time in earnest.

Soon after Placer offered a JV on the property. The extensive and deep drilling program Placer has commenced along the Pipeline Fault corridor did in reality prove up all the expected 'contact zones'. And that was that. Followed by a new manager of the Cortez JV, Coral managed to get more active by reclaiming the core property, though still retaining a carried to production interest of 39% in the now called secluded claims (see maps on the website).

So here's another great play in Nevada's epicenter of potential elephant size. The company's website, www.coralgold.com, host's a lot of great information and several mining analysts have recently endorsed the property as one of the exceptional plays on the Battle Mountain Trend.

This essay was written towards the intent of igniting discussions as to where major producers will start to look in their plight to find new reserves. More gold exploration properties in North America will be highlighted by intended future essays.

Small amounts of natural gold were found in Spanish caves used by the Paleolithic Man about 40,000 B.C.