Chalice Gold Mines Ltd.

A top grade gold play emerges in Eritrea

Chalice Gold Mines Ltd is speeding towards taking one of the highest grade open-pit gold plays under Australian company development into commercial production.

Fresh from getting the green light from Eritrea’s government and the 18-year mining agreement for its $131 million high grade gold project (granted November 1), Chalice Gold Mines Limited (ASX: CHN) (TSX: CXN) (“CHN”) is forging ahead towards commencing project development in 2012.

Over this past month, the Perth-headquartered explorer has delivered a flurry of encouraging results to market, and it looks like the team armed with an outstanding high grade, open pitable project is on course to move rapidly into putting its project together while enjoying further exploration upside along the way.

The project lighting up stock forums is Chalice’s Zara gold project, run in joint venture with ENAMCO (Eritrea National Mining Corporation buying a 30 per cent participating interest and 10 per cent free-carried) in the highly prospective Arabian-Nubian Shield; a project area of 1,370 square kilometres, home to the Koka gold deposit with a JORC Indicated and Inferred Resource of 5 million tonnes at 5.3 grams per tonne gold for 840,000 ounces of contained gold, and plenty more besides.

By the year-end the mining license due to follow the recently approved agreement will be delivered. When this happens, it will be full steam ahead to funding for development modelled at producing 104,000 ounces gold for seven years, starting with 2012 project construction and a 2013 first gold pour.

It’s all about the grade

At around five grams at surface, providing highly attractive options for open pit operations, Koka’s grade takes the cake. Most of the mineralisation is within approximately 180 metres of surface, doing away with any need for a deep pit, and although its 10.4: 1 strip ratio is pretty high, it lowers to a production strip ratio of around 8:1 and all considered offers a veritable wealth of options for making it into a mine.

“It’ll be a low cost producer down at around $340 an ounce. It has simple metallurgy, which is critical, and test work indicates that recovery will be at around 95 per cent,” Chalice chief executive and managing director Doug Jones tells IRJ.

“About half of that gold will come out in a gravity circuit so you’re looking at simple processing: Crush, grind, gravity circuit recovering around half the gold, then the rest which will come out in standard CIL process. It’s a very easy project technically.”

The relative infancy of Eritrea’s mining industry presents some logistical hurdles—many of which are easily countered by the remarkable grades at Zara—and Jones says that the government appreciation for what mineral production may offer to the nation’s economy and export diversification is encouraging.

“It’s early days but we have a good relationship with the people running ENAMCO,” he says.

“A lot of African countries with growing senses of resource nationalism are after greater equity in projects. In Eritrea the bottom line is that they want 40 per cent, 10 per cent of which is free-carried—pretty typical in Africa—but they buy the remaining 30 per cent which is far better than some other countries within the continent.”

The Zara land package made up of six granted contiguous licenses (Zara 1, 2, 3 and 4, Zara North and Zara South) also warrants further interest beyond what is known about Koka. Chalice has run an active drilling programme around the deposit for the last five months, looking at various geophysical and geochemical targets as well as following up on targets identified by previous exploration.

“Koka South is shaping up to be a pretty interesting prospect. It’s got some narrow but very high grade intersections, open to the south and at depth, and it adjoins the Koka deposit to the north,” Jones explains.

“It’s really a continuation of Koka Main, but instead of being a wide 50-60 metre zone, it comes down to one or two metres with a high grade tail on the southern end.”

Chalice hopes that the continuation may redevelop further to the south and turn up another sizable ore body, but regardless, the team is confident that the mineralisation uncovered to date (let alone what may be to come) will be capable of contributing to the mine life of a future operation.

A strong second string

To date there is one mineral operation up and running in Eritrea and that’s Nevsun’s enormous polymetallic VMS Bisha mine which hit commercial output in February 2011. It’s a stellar project, Jones says, and it’s also conveniently located just 10 kilometres north of Chalice’s 550 square kilometre Mogoraib North exploration license; prospective for base metals VMS deposits within the same north-extending rocks that house Bisha.

“During the weathering process in Eritrea, you get intense sulphide oxidation during which the zinc and copper are leached out. The gold remains behind in the oxidised part of the ore body and offers great grades as a result,” Jones says.

“It’s essentially what Bisha is delivering at the moment, and that’ll produce something like one million ounces of gold over the first couple of years of production. It will subsequently become a supergene copper blanket and a sulphide zinc deposit at depth after that, and that’s what we’re looking for at Mogoraib North.”

Numerous high priority conductor targets have resulted from reviewing final data offered by Mogoraib’s airborne VTEM survey. In seeking out massive sulphides, Chalice hopes that its exploration endeavours may also lead to finding oxide gold deposits on top.

“We’re now following up on the geophysical targets with further ground geophysics and geochemistry, and we’ll probably drill there in early 2012,” Jones says.
Meanwhile, as Koka continues to spur Zara rapidly towards development, the next vital step for Chalice is that mining license due in December.

On track & top grade

With government approval, shareholder agreements and the mining agreement for Zara accounted for, Jones estimates that the mining license will arrive in around mid-December. The Chalice team has already compiled the draft and run it by the Ministry of Energy and Mines, and once the license is complete, the company will announce the appointment of the EPC contractor to kick of the project build, and focus on piecing together the necessary funding.

“We’ve been talking with various people over the last few months ranging from sovereign funds to regular banks for debt funding. At this point we’re looking at some combination of debt and equity,” Jones explains.

“We’ll decide on a ratio for that over the next month or two, but we should get all of that in place so that we can move forwards on the ground in the first quarter of next year.”

In keeping with ENAMCO’s 40 per cent holding in Zara (and the 30 per cent it will purchase) Chalice is also due to receive a cash payment totalling around $32 million in January.

The story attracting investor attention revolves around Koka’s grades, but there’s a lot of other multi-project multi-opportunity exposure on offer in this company. When the mining agreement was announced, Chalice shares stayed in the black while markets fell. When the mining license is announced within the coming weeks, the market reception will benchmark the company’s strong financial and operational setting going into a vital development year.

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