A Modern Colombian Gold Rush
Exploration Insights
by Brent Cook
www.explorationinsights.com
December 20, 2009
explorationinsights.com
A Modern Colombian Gold Rush
“Jose Arcadio Buendia, whose unbridled imagination always went beyond the genius of nature and even beyond miracles and magic, thought that it would be possible to make use of that useless invention to extract gold from the bowels of the earth.”
Gabriel Garcia Marquez from One Hundred Years of Solitude
(High Sulfidation Gold Shrine)
Colombia is a geologist’s paradise and a promoter’s dream that offers the speculator a chance for riches under every rock and an ambush around every corner. I believe it is one of the best new gold frontiers in the world, and plan to keep a close watch on companies and developments in the country for many years. What follows is my take on what I saw during my recent trip.
Security
This is the first question anyone who has not been to Colombia always asks: “What about security?” It’s a fair question.
The country has a very deadly and unsettling past, some would argue present, that has until now thwarted serious minerals exploration in the country. The reign of terror (la Violencia) began in 1948, when populist presidential candidate Jorge Eliécer Gaitán was assassinated. The ensuing 50-year political fight for control of the country left hundreds of thousands dead. In an effort to contain the violence, leftist guerilla groups (e.g. FARC) ostensibly fighting for the common people, and rightist paramilitary groups (AUC) organized and funded by the wealthy, sprang up across the countryside. These two broad military organizations have terrorized the population as they fought for control of the country and its illicit booty.
The FARC and similar gangs are primarily funded through kidnappings and the drug trade. Venezuela provides implicit cover and weapons to FARC; there are recent allegations that they have also supplied cash. Additionally, claims have been made that Ecuador is supporting FARC et al., but aside from the asylum provided by the Ecuadorian jungles, the evidence supporting that claim is rather thin.
The Colombian government has initiated a number of counter insurgency programs over the past few decades, sometimes with the help of the CIA, which have ultimately failed to end the violence. A tentative peace process that essentially relinquished control of large parts of the country to the various terrorist groups fell apart in 2002. That and the ensuing violence were probably the final straws for the Colombian citizenry.
The current President, Alvaro Uribe, was elected in 2002 based on his strong stand against the violence (his father was killed by FARC in 1983). Colombia’s military budget has doubled to ~US$9 billion since his election (the US provides ~US$600 million) and the results have been significant. The homicide rate has declined 45%, kidnappings are down ~80% (Fig. 1 below) and attacks on infrastructure etc. have decreased. For the most part, FARC has been pushed out of the main population centers into the lowlands along the Pacific and Caribbean coasts, and to the borders with Venezuela and Ecuador. Because these rural and frontier areas are much tougher for the military to operate in, progress in crushing FARC has slowed.
(Fig. 1- Kidnappings through 2007)
The paramilitary groups laid down their arms a few years ago. Unfortunately, it soon became apparent that an honest day’s work was far less financially rewarding than a dishonest day’s. It is estimated that 3,000 to 5,000 ex-paramilitary are back at “work”. More recently, small disorganized gangs—Bandas Criminales—have taken to drug running and other criminal activity in the country.
Clearly, there are still some major safety and security issues in the country. A recent report entitled "Decline of Democratic Security" (brought to my attention by Otto Rock, who publishes an excellent daily blog and weekly letter on Latin American politics and mining) indicates that violence is on the rise in certain provinces. One of the more alarming statistics from this report is that the Medellin murder rate has recently increased to 32 per 100,000 inhabitants, actually surpassing Washington DC’s 31 per 100,000.
Another point of contention amongst the international community is that the Colombian military tactics have been brutal at times. One policy in particular, a kill-count based pay rate, created a perverse incentive for military personnel to kill innocent people that they claimed to be FARC militia. The government has begun steps to prosecute military personnel (some high ranking) involved in human rights violations, but, as you can imagine, we will never see full resolution of these crimes.
My take on security in Colombia is that it has noticeably improved since my first visit five years ago. A military presence is obvious on street corners in Bogota and to a lesser degree in other cities, but it was not oppressive, at least not to some middle aged white guy minding his own business. I toured mineral properties in the vicinity of Medellin and Bucaramanga, driving hours on dirt and paved roads, sometimes at night, with no problems or concerns. Occasionally we had military accompaniment, but that seemed to be a holdover from years past. I walked around Medellin at night and stopped to watch soccer in a local pub. There I ran into three geologists I know who are independently looking for opportunities in the region. All of the ex-pats and Colombians I spoke with said that the security situation has improved dramatically, provided you keep your head about you and stay out of areas controlled by militias. Colombia, they claim, is as safe as anywhere, considerably safer than Houston, Mexico City, Rio de Janeiro, or Kapuskasing.
The Rocks
The geologic evolution and tectonic history of Colombia have been ideal for the formation of gold deposits: this is El Dorado. Colombia lies at a triple-point juncture between the Caribbean Plate, the Nazca (Pacific) Plate, and the South American plate. This dynamic setting has accreted exotic micro-plates to western Colombia and is responsible for several periods, and directions, of plate subduction and related volcanism, all of which are associated with some very deep and long-lived major transform faults. Since at least the Jurassic period (~190 million years) to the present, the geologic environment has been conducive to the formation of gold deposits.
Gold bearing hydrothermal systems ranging from high-level, low temperature epithermal types to deep, high temperature mesothermal types are all exposed due to the very rapid tectonic uplifts. Significant gold deposits in Colombia include Colosa (12.3 million ounces grading 0.86g/t Au), Gramalote (2.39 million ounces grading 1.00 g/t Au), Angostura (11.5 million ounces grading 1.09 g/t Au), and Ventana Gold’s discoveries in the California District (no resource yet). The map below (Fig. 2) shows the known gold trends and ounces of both hard rock and placer gold in these belts, as of 2007. The map significantly understates the true gold endowment and extent of mineralization in the country but is the best I could come up with.
(Fig. 2- Gold belts from; Sillitoe 2008, SEG v. 103)
Additionally, and this is very important for you gamblers in the crowd, there are literally hundreds, maybe thousands, of gold workings, showings, and prospects scattered throughout the country. Most of these are more or less controlled by about a half dozen people or groups that have been quietly biding their time waiting for you to show up. They are wheeling and dealing these to an ever increasing number of promoters, geologists, and scumbags that are jumping into this area play called Colombia.
Here’s the situation
Most of the known gold “mines” consist of small pits or tunnels hand dug into the hillsides on narrow, erratic, yet high grade quartz veins. Almost all of these are mesothermal (higher temperature and deep) veins that offer no chance of a significant deposit but can produce some very high grades if sampled properly. I expect that in 2010 we will see many Colombia plays come out of the box with very splashy high grades and much fanfare. Be careful: although it is geologically possible to cob enough of these Small High-grade Irregular Type (SHIT) veins into a sizeable deposit, most of the time the cobbling process only produces a random collection of SHIT veins between large areas of barren rock. A ratty sub-type of these veins, favored by many Vancouver juniors, makes for particularly disappointing gold deposits.
The other main deposit type that occurs in Colombia is the gold porphyry. These can be quite large but low grade. Anglo Gold’s Colosa deposit (468 million tonnes grading 0.86g/t Au) discovered just a few years ago is the model for gold porphyries in Colombia. The issue with these, and the reason I am not jumping into some porphyries I know of, is that they are ultimately marginal deposits, highly sensitive to the gold price. In Colombia, the extreme topography and rapid erosion means the oxidation (good for inexpensive gold recovery) is for the most part not going to be deep or complete, hence these low grade deposits will probably require milling operations to recover the gold (assuming the ore is not refractory). Therefore, capital costs are going to run from $500 million to well over $1 billion when and if the first of the required permits is finally issued.
The second issue a junior company has to face when defining and delineating a substantial low grade resource is the cost. These are expensive programs that will require the junior company to continually raise money on the back of long, sub-one gram per tonne gold intersections. This is not a class of deposit I want to be seriously involved with until I see the major mining companies move to take out the juniors that already have defined, large low grade bulk mineable milling deposits (Detour Gold, Rainy River, International Tower Hill, Andina, Greystar etc.)
The tremendous potential I see in Colombia lies with the innovative junior explorer that has secured in-country contacts and experience, and has the ability to differentiate the good from the bad—rapidly. There are high sulfidation and low sulfidation gold deposits lurking out there that have yet to be recognized. There are also going to be shear controlled stockwork and sheeted vein systems that can be bulked up into a major deposit, and carbonate gold-base metal veins that work for small, low cost operations. The transform tectonic setting and wrench tectonics have produced ideal sites for the development of gold deposits in extensional basins and along normal faults. There are undoubtedly other settings I haven’t even considered. We have to keep an open mind yet be very discriminating in selecting companies to buy. For the time being I intend to let the dust settle and see what survives. It’s worth remembering that there are no called strikes in this game and that patience is probably the most underappreciated investment tool we have.
Company Comments
Medellin Region
Continental Gold is probably the most advanced junior explorer in the country and is planning an IPO early next year. Technically competent and well-connected people run it in Colombia, and Ari Sussman (of Colossus Gold success and my worst trade last year) is point man in Toronto. The company has been privately funded by respected resource funds, has a pre-money market capitalization valuation of C$78 million, and hopes to raise $25 million at C$1.50 in 2010. Continental will attract the attention of larger funds and investors that don’t want to worry about their money being wasted on some rat-hole in Colombia. Continental is not cheap but it is legitimate: I would not discourage anyone from investing.
Their main project, Buritica, contains a number of narrow high grade quartz-carbonate gold-base metal veins (Fig. 3 below). Continental runs a small-scale operation that actually kept the company out of the red during last year’s financial crisis. Buritica will probably never be a big operation, but given the apparent high grades and relatively low costs it should be quite profitable for Continental. They continue to find new veins and ultimately a plus million-ounce system is possible.
(Fig. 3- Underground view of carbonate gold-base metal vein at Buritica. Lead, zinc and pyrite with ~30 g/t gold across this ¾ meter wide vein)
Continental has eight other projects in Colombia, plus access through the Bullet Group to many more. The most promising of the lot is the Berlin property. This appears to be a several kilometer long mesothermal vein that has seen some production from high grade shoots. It is in very steep country and will be difficult to drill and eventually mine. However, Berlin does offer the potential for a significant high grade mostly underground gold deposit.
Well-respected Nevada explorer Miranda Gold (MAD.TSX-V) has set up a second base of operations in Colombia through an exclusive partnership with a local geological team (ExpoGold). ExpoGold brings 45 mineral applications in 14 target areas to the venture. I spent time with ExpoGold and came away impressed with their knowledge of deposits and conditions throughout the country. Miranda’s business plan (define targets and attract industry partners) requires them to rapidly sort through projects, focusing only on legitimate big-potential gold projects. Because their clients are major mining companies and not the market, we can rest assured that projects they advance have real potential. This selection process is time-consuming work; we will keep a close watch.
Colombia Gold Mines (CMJ.TSX-V) is another well connected company, with approximately ten projects scattered across the country, a market capitalization of ~C$13 million (18.5 million shares out) and ~C$1.3 million in cash. Yarmulito, their most advanced project, is a bulk tonnage gold porphyry (with some indications of high grade veins) easily accessed from a paved road. Trenches and grab samples across potassic altered volcanic and intrusive rock in road exposures returned broad intervals of 0.5 to 1.2 grams per tonne gold. Five initial drill holes over an ~250-meter area indicate that 0.5 to 0.8 grams per tonne gold can be expected over 50 to 100-meter intervals. Initial bottle roll leach tests on oxidized and sulfide material from drill core showed good recovery for oxide material.
With the acquisition of Colombia Goldfields and a letter of intent to acquire Mineros Nacionales, Medoro Resources (MRS.TSX-V) is progressing towards controlling the (in)famous Marmato Gold District . The company raised ~C$103 million at C$0.80 and has the backing of some of the heavy hitters in the mining industry, including Frank Guistra; Frank Holmes; Ned Goodman; plus, Serafino Iacono et al. in Colombia. At the current price of C$0.47 the company’s market capitalization is ~C$175 million.
I was not able to secure an official tour, but did drive through the property, and spent considerable time discussing the project with Colombian businessmen and geologists. Without going into detail, and with the full recognition that I may later be eating my words: Medoro may make money mining the market, but no one will make money mining Marmato except the miners who are becoming quite proficient at mining the Gringos.
The deposit is burdened with legal, title, mining, environmental, and social issues that I don't see being resolved. There are rumors about that Medoro is working a deal with the government to solve some of these hurdles by taking on the ~$120 million in pension liabilities from the Frontino mines in exchange for government concessions at Marmato.
MRS is probably a good trade for the traders among you but not a bet on which I am willing to put my name. Buena Suerte.
(Fig. 4- Marmato’s Alta Zone artisanal mines. Persian blue color is cyanide running down hill from one of many gold processing plants. Most tunnels on hillside are individually owned and operated.)
California District
Major players in the California District include Greystar Resource (GSL.TSX-V), Ventana Gold (VEN.TSX-V) and Galway Resources (GWY.TSX-V). This is the district that put Colombia in the spotlight, in particular due to Ventana’s spectacular drill results. The combined fully diluted market capitalization of the group has rocketed to ~$1.6 billion despite the recent decline in gold prices and litigation problems for Ventana. Greystar has the only defined resources and reserves (proven and probable 8.59 million ounces grading 0.9 grams per tonne gold); Ventana is working towards that goal with about 10 drill rigs on site, whilst Galway is just starting its first hole.
The California District and surrounding area is one of the most mineralized and altered areas I have seen in quite some time. Mineralization starts at the upper end of the valley on Greystar’s Angustora porphyry/stockwork gold deposit and progresses downstream through Ventana’s high-sulfidation veins and porphyry stockworks, directly into Galway’s concessions (Fig. 5 below). There are undoubtedly several intrusive events and associated mineralization phases—differentiating between important mineralizing events and the insignificant will be a major task.
(Fig. 5- View from Greystar’s La Bodega dumps to Ventana ground. Roads on hillside in distance are for Ventana’s drill pads. The vein dips steeply into the hillside: to the right.)
Greystar’s pre-feasibility stage Angostura deposit is a massive, billion dollar mining project that envisions moving up to 250,000 tonnes per day (~2.25: waste to ore strip ratio) up hill by trucks and/or conveyors with waste being dumped into the next valley over. There are three metallurgical process streams treating the different ore types. The high grade mineralization occurs erratically at structural intersections and represents only 7% of the mined tonnes, but 45% of the ounces produced (see EI April 18, 2009 for a more detailed discussion). Economically extracting this high grade mineralization for the floatation circuit will require selective mining methods and tight grade control. Given Angostura’s overall deposit average grade of only 1.09 grams per tonne, less recovery, everything has to go right.
Our visit with Ventana was cancelled due to some legal issues the company is having, but I do have some comments based on discussions with Colombians, a review of the data, and studying outcrops along the roadside. As the drill results to date indicate, the La Mascota gold discovery is the real thing. It appears to be a high sulfidation gold system with at least one later epithermal phase that has upgraded the mineralization. High grade continuity within the vein system appears to be better than at the nearby La Bodega vein, and they have had some very impressive drill intersections (e.g. 84 meters grading 13.66 grams per tonne gold). Likewise, preliminary metallurgy is showing decent and promising recoveries.
Ventana is working towards producing an initial resource estimate; this will not be an easy task. The vein system dips into the extremely steep hillside, making it exceptionally difficult to drill at an appropriate angle. Essentially, the drill sites are positioned just about on top of the vein set and drilling almost directly into it. For those of you keeping track of VEN drill results, this means that drilled vein intersections can be substantially longer than true vein widths. What makes the task even more challenging is the erratic nature of the high grade mineralization and structural complications within the mineralized zone. Ventana’s ~C$850 million fully diluted market capitalization suggest the market is assuming somewhere in the order of five to eight million ounces of gold. I suspect reaching that goal will be difficult, at least in the short term.
The steep topography, the river, and the people living along the river pose additional hurdles to the eventual development of a mine (Fig. 6 below). There is no place flat enough for a decent sized milling operation, and the logistics of moving into development will be formidable. I don’t see how engineers can turn this into an open pit and imagine most, if not all, of the production will come from underground. Grade, however, can solve most problems, and La Mascota does offer that bonus.
(Fig. 6- Artisanal mining operations adjacent to Ventana and Galway properties)
Ventana has two heavy hitting shareholders on its register: Ross Beaty (16.9% as of June) and Brazillionaire Eike Batista (17.5% as of October). Strong rumors had been circulating that one of these two, or a third party, were in the process of gaining control of Ventana as a first step in consolidating the entire district. This was confirmed in a press release in which Ventana stated that they were in advanced negotiations that could result in the acquisition of the company by a third party. That same release also disclosed that the mineral rights owner of the La Bodega property was disputing the option agreement and seeking arbitration with regard to the payments. Long story short: the La Bodega property owners are a well-known bad crowd in Colombian circles. The dispute is an attempt at extortion and most likely has no merit. The Colombian legal system and government recognizes the importance of the outcome of the arbitration and will ensure that the matter receives full and fair due process. The legal proceedings could take up to one year to complete. The whole issue is not unique to Colombia or Latin America and should not be viewed as a negative to doing business in Colombia. An out of court settlement is certainly possible. The current situation represents a good trading opportunity if the legal issue is resolved and/or the company is acquired. Gamblers are lining up on either side of that outcome.
Galway’s mineral concessions lie directly on trend from Ventana. The high sulfidation gold-copper system continues on to the Galway ground as evidenced by the historical pits, mines, strong alteration and mineralization exposed near the road (Fig. 7 below). Galway faces the same drilling difficulties as Ventana due to the steep topography etc. Their first drill platform is located in an old mining pit; it will test the edge of that pit and the hanging wall mineralization below the old workings. It will take time before we have sufficient drill assays to make some sort of determination of what Galway actually has and whether it can support the current fully diluted market capitalization of ~C$140 million. If Ventana is acquired, Galway should pop as well, as it is clearly part of the same mineral system.
(Fig. 7- Historical mine on Galway property)
Although we are not buying any new Colombian companies this trip my jaunt to Colombia was not, by any means, a failure. These on-the-ground site visits (all over the world) provide the critical Exploration Insights that allow us to evaluate new data as it arrives and to put those results into geologic context. The accurate interpretation of new data based on what we know is crucial to an investment decision.
That’s the way I see it.
Brent Cook |
