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Hunting for Golden Resource Elephants in Chile

Commodities / Metals & Mining Nov 22, 2009 - 06:02 AM GMT

By: Sean_Brodrick


Diamond Rated - Best Financial Markets Analysis ArticleChile is prime hunting ground for “elephants” — large, undiscovered deposits of all sorts of minerals — copper, gold, silver and more. And last week, I visited this supermodel-skinny country, which is 4,022 miles long and an average width of only 100 miles across, on the trail of one of the world’s great undeveloped gold deposits.

“Chile is a toothpick of a country filled with a thousand geologic faults,” a mining engineer told me, “and every time one of those faults bends, minerals bubble to the surface.”

The first gold deposit I visited surfaced in spectacular fashion. About 22 million years ago, a giant volcano in what would become Chile blew its head off in Mt. St. Helens fashion. This sudden removal of a mountaintop lifted pressure from molten gold, silver and copper deposits deep beneath the earth, and the hot metal surged higher, over and over again, intruding finger-width thick veins of ore-bearing quartz through host rock.

Today, you can go see that gold, silver and copper yourself — as long as you’re willing to take a multi-hour ride up and down mountainsides, through one of the driest deserts in the world, to reach the Caspiche project, which at its peak is about 2.7 miles above the Earth’s surface.

At that altitude, the air is so thin that the light somehow seems different — sharper — and the wind howls over barren rock and patches of ice that refuse to melt even as the warmth of spring embraces the rest of Chile.

But that’s the kind of place you have to go in the world today if you want to find elephant-sized gold deposits.

And Caspiche is potentially very big indeed. The inferred resource is 19.6 million ounces of gold, 4.84 billion pounds of copper and 40 million ounces of silver.

The company that is developing Caspiche is Exeter Resources (XRA on the AMEX, XRC on the TSX). Their crews are drilling like crazy to prove up the resource at Caspiche. Four drilling rigs are on the site now, and soon there will be six.

Justin Tolman, the Caspiche Project Manager, told me: “Every dollar I spend, I find an ounce of gold.” And indeed, discovery costs at Caspiche run between $1 and $2 an ounce.

Along with proving the size of the existing resource, Exeter is also trying to find out just how big the resource is. Jerry Perkins, Vice President of Development and Operations for Exeter Resources, told me that the resource is open on three sides. As a result, there may be more than 19 million ounces of gold.

This company is exploring and much remains to be proven. But the potentials are tantalizing.

A Bargain in Search of a Buyer

The kind of mineral deposit that Exeter is developing at Caspiche usually occurs in clusters. And sure enough, Caspiche appears to be similar to the neighboring Cerro Casale project, a very large and low-grade deposit jointly owned by Barrick Gold Corp. and Kinross Gold Corp. Cerro Casale has a 23-million-ounce gold resource, along with six billion pounds of copper. There is another project to the North, Refugio, operated by Kinross, that produces 250,000 ounces of gold annually.

Because the Caspiche resource is so large, even at the inferred level, Exeter feels confident enough to proceed with the project on many levels — technical, environmental, developmental. The more quickly Exeter can show that Caspiche has a large resource, and demonstrate the economic potential for the project, the more likely it could sell Caspiche to one of the major gold companies — and fetch a better price for it in the bargain.

Steel-pipe manufacturer Tenaris (TS) is an Argentinian stock that trades here in the United States.

Companies that have resources that are in the measured and indicated category, and have a mine development plan in place, are typically valued at between $40 to $60 per ounce of gold when gold is $800 an ounce, according to Exeter. Using an average of $50 an ounce, that would give Exeter a value of $980 million on its gold at Caspiche alone. The company’s current market cap is just $348 million.

And I don’t need to tell you that gold is trading far above $800 an ounce.

Why would Exeter want to sell Caspiche? First, Exeter’s Chairman Yale Simpson explains, the company understands the alternative is a joint venture with a big miner. That would probably involve Exeter ending up with a small participating interest and then waiting while the larger company slots the discovery into their project pipeline. In other words, Exeter loses control of its destiny.

And there’s another good reason — Exeter has another gold project it wants to develop — one with bonanza-grade discoveries.

Hidden Gold Slumbers in the Port of Desire

Stomping around on the mountaintop at Caspiche was impressive enough. But then I traveled with the Exeter team by small plane, down the coast of Chile, through the Andes and over to Argentina. Then we flew further south … down to the windswept Patagonia region, to the Port of Desire (Puerto Deseado).

Anybody who could name that treeless, bleak, straggly area, — notable only for its native penguin population and excellent seafood — as “Port Desire” had to be at sea too long. And sure enough, it was named by privateer Thomas Cavendish in 1586. He named it after his ship.

Ton versus Tonne

A ton is a unit of weight used almost exclusively in the U.S. It’s 2000 pounds. A tonne, or metric tonne, is the unit of weight used elsewhere in the world, and it’s equivalent to 1000 kilograms (kg). 1 kg is about 2.204 pounds so one tonne equals 2,204 pounds.

But that’s where we went, because that’s where the gold is — or rather, it’s miles and miles out of town, but we traveled the rest of the way by vehicle and foot, to Exeter’s Cerro Moro Project.

Cerro Moro is a high-grade gold and silver project. Like Caspiche, Cerro Moro is on a rich vein, the Escondida vein, which has a resource estimate grade of 34 grams per tonne. This could be initially developed as an open pit operation at a grade of up to 1 OUNCE of gold per ton.

Other miners are already working in the area. In fact, Exeter has made a deal with a neighboring miner, Formicruz, that should add handsomely to Exeter’s available resource and Cerro Moro’s potential. The Formicruz property appears to host an extension of the Escondida vein.

Under the agreement, Exeter will spend $10 million to acquire an 80% interest in 293 square miles of Formicruz mining licenses which surround Exeter’s Cerro Moro project. Formicruz can acquire a 5% participating interest in the Cerro Moro project following the granting of mining permits. The deal gives Exeter a total of 870 square miles in landholdings around Cerro Moro.

Along with giving Exeter more territory along a rich vein, it also makes it a partner with the government of Santa Cruz province, which owns Formicruz. This could be important because of what happened at Exeter’s third asset, the Don Sixto Gold Project in Mendoza province.

The Don Sixto gold project has a measured and indicated resource of 925,000 ounces of gold and an inferred resource of 334,000 ounces of gold. However, Exeter probably won’t be developing that project anytime soon. In June 2007, the Mendoza government passed legislation that severely restricts mining in Mendoza. Exeter has filed an action in the Supreme Court to have the legislation declared unconstitutional. This shows the perils of South American exploration, at least in districts that aren’t mining friendly. Both Caspiche and Cerro Moro are in mining friendly districts (Chile in particular ranks #3 in the world for mining investment), and I think the potential payoff shows Exeter is worth the risk.

Back to Cerro Moro — the grades along the Escondida vein are really, really rich. With discovery costs running at just $20 per ounce of gold, here are some recent results …

  • Hole MD617 intercepted 6.2 meters with an average grade of 94.9 grams gold per tonne (that’s 2.75 ounces per ton) and 14,365 grams silver per tonne (417 ounces per ton).
  • Hole MD633 intercepted 2.4 meters with an average grade of 70.7 grams gold per tonne.
  • A new discovery in Hole MD666 on the Formicruz property had intercepts of 13.3 grams per tonne of gold and 699 grams per tonne silver. More drilling is needed, but this could be a new ore zone.

Folks, despite rising prices, mine supply around the world is under pressure and struggling to keep up with demand. At the same time, ore grades have fallen from around 12 grams per tonne in 1950 to nearer 3 grams in the U.S., Canada, and Australia. Result: With gold at current prices, there are mines going into production that grade less than 1 gram of gold per tonne.

Exeter's Cerro Moro Project in Argentina is on a rich vein of gold and silver.
Sean Brodrick on site at the Caspiche project in Chile.

Now, you don’t want to compare apples and oranges, and I’ve told you only a few of the higher grade samples from Exeter’s most recent news release, but there are now hundreds of high-grade drill holes at Cerro Moro. There is obviously the potential of starting with open pits and to quickly go to underground mining, chasing those rich veins as deep as they go.

Along with drilling, Exeter is also making plans for developing Cerro Moro, though a final decision to go ahead won’t be made until the first quarter of next year. It will take $9 million to connect Cerro Moro to the local electric grid, and electricity is cheap in that part of Argentina. The rock is easy to process and the company should see recoveries of 97% of gold and 90% of silver, which is high.

Caspiche is not as advanced on the road to development. A lot can happen to the price of gold between now and when these projects reach production stage. And the price of gold can go down as well as up. However, Cerro Moro’s high grades should help insulate it from the fluctuations in the price of gold.

Still, it would be very unlikely for a company of Exeter’s size to develop both projects — Caspiche and Cerro Moro — on its own. So that brings us to Exeter’s options …

Option #1) Prove up the ounces at the Caspiche project and then sell it. Exeter would have to sell the entire company or potentially play a tax bill of hundreds of millions of dollars (in capital gains). But the big miners will probably be very interested in Caspiche, because it is the biggest gold discovery made by the entire industry in several years. And there are big miners nearby that would probably be able to make Caspiche an even better bargain through economies of scale.

But what if that buyout doesn’t come? Well …

Option #2) Spin off Caspiche into its own company. Shareholders of the parent company get stock in the new company, essentially giving shareholders a dividend. Some of the money raised would go to Cerro Moro as well. Then the new company can raise money on its own.

Option #3) Do a mixed development plan at Caspiche. Exeter may do this anyway because there are actually two kinds of deposits at Caspiche — a low-grade oxide resource on top and a higher-grade sulphide resource lower down. And Eric Roth, of Exeter’s Advanced Development Group, says the project would start as an open pit on the low-grade rock at Caspiche, to get cash flow, then go to underground mine for the higher-grade gold-copper rock.

At that point, Exeter could then develop the high-grade resource as an underground mine (which the company favors) or take on one of the big miners as a joint-venture partner (which the company is not so keen on).

The point is, there are many ways this could play out. And there are other obstacles as well. Just one example: In Calama, a town in the Atacama Desert of Chile, it has never rained — NEVER rained. That’s because the Atacama is the driest desert on Earth. Guess what desert Caspiche is located in? I’ll spot you the “A.”

Mining requires a lot of water. The good news is, the company has time to put water rights together, and something can be worked out. There are unused water resources in the area.

But all obstacles and enormous potential aside, here’s the kicker …

Exeter Is Valued Only on Caspiche

Explorers that have “inferred” ounces (like Exeter) were recently priced at an average $20 per ounce on the Toronto Stock Exchange. Looking at the valuation of the company, it seems obvious that Exeter is valued only on the potential at Caspiche. That would mean Cerro Moro is thrown in for free — as well as the company’s silver, AND the company’s copper. And in that case, Exeter can definitely be bought on the dips.

I think this will be an $8, $9 or even $10 stock down the road. The parade of good news should continue, and we could see one of those company making events that boost the price overnight.

However, you’ll need patience to own this stock … it could also sit there for a while, bubbling away, like the molten gold and silver deposits that originally formed Caspiche. It could take a tumble if the price of gold swoons or some bad news breaks (always a possibility when you’re investing in gold explorers).

Do your own due diligence and remember that you’re in charge of your own investment destiny.

Yours for trading profits,


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