Thursday, July 21, 2011

Executive decision

As your author was up last night tending a sick kid (nothing serious I hasten to add, just a stomach thing that's now finished) and didn't get much sleep, now that a whole bunch of e-mail fielding and catchuppering has been done an executive decision has just been made Chez Otto: The markets can get along just fine without the presence of your humble scribe so this post says "hasta mañana" to you all.

However, I'll leave you with this paste-out of a letter to the editor over at Northern Miner (we have no qualms about pasting out NM stuff ever since one of their reporters ripped off a bunch of stuff from this blog and pretended it was his own work), as it was sent in by A. Person and is a very good read that concerns a rising and rather disturbing trend amongst juniors. The tail wagging the dog? 

So chau for now and make a point of digesting what's below. Good education.

Letter to the editor: How big can Côté Lake get? Depends how you stretch it!
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In the cover story of The Northern Miner's June 27 - July 3, 2011 issue, staff writer Anthony Vaccaro describes Trelawney Mining and Exploration's activity on its newly discovered Côté Lake gold deposit in the southwestern Abitibi region of Ontario.
Trelawney has made remarkable progress in just one year, delineating a National Instrument 43-101 compliant inferred gold resource of 4.2 million oz. to a depth of 550 metres at a grade of 1.0 gram per tonne using a cut-off grade of 0.3 gram gold. Citing analysts' euphoric projections that this resource has now grown to 8 to 10 million oz., Mr. Vaccaro asks "How big can it get?"
Côté Lake is described as being unlike typical shear-hosted Abitibi gold deposits, instead being hosted by brecciated granitic rocks and sharing many features with porphyry deposits.
However, the deposit nicely fits current gold-exploration requirements where the preferred target is a wide, large-tonnage deposit amenable to open-pit mining. The tendency today is to stretch the width and depth of these deposits as much as possible to maximize the ounces that can be extracted while maintaining an acceptable profit margin.
The parameters and assumptions used to establish the 4.2-million-oz. gold resource at Côté Lake are well documented in a technical report prepared by independent consultants Roscoe Postle Associates (RPA) as an audit of an initial study by Trelawney's consultant. RPA's report is clearly written and thorough, and its assumptions are fairly standard for an open-pit mining operation in a readily accessible location in the level terrain of the Canadian Shield.
However, there are two features of the Côté Lake deposit which suggest that a more conservative approach may be needed to allow for possible unpleasant surprises. The first is that a significant portion of the deposit is not as close to surface as other gold deposits of a similar 1.0-gram-gold grade that are currently being mined or developed in a shield setting. The second is that the gold grade within the resource limits is highly variable, with many samples being barren and much of the 1-gram-per-tonne average gold content contributed by a small number of high-grade samples. With the mineralization being hosted mainly in the breccia matrix, these high-grade intercepts are unlikely to have significant continuity.
The 4.2-million-oz. inferred resource is based on the first 47 core holes drilled at Côté Lake. These holes tested a strike length of roughly 800 metres between grid lines 88+00E and 96+00E, with most holes in the eastern 400 metres.
Cross and longitudinal sections from RPA's report and a Trelawney presentation to investors dated May 2011, indicate that the western half of the deposit crops out whereas, in the eastern half, very little mineralization occurs within 100 metres of surface. It appears that only 10% to 20% of the gold resource lies above the 100-metre level, limiting the potential for early payback of capital costs if a mine is developed at Côté Lake.
A fundamental requirement for mineralization to qualify as a resource, even in the preliminary "inferred" category of Côté Lake and similar early-stage deposits, is that the mineralization must have "reasonable prospects for economic extraction."
In the Abitibi, does all or even a significant portion of a 4.2-million-oz. gold deposit with a grade of just 1.0 gram gold at a 0.3 g/t cut-off and with more than 80% of the deposit lying between depths of 100 and 550 metres actually have reasonable prospects for economic extraction?
One table in RPA's technical report (11-2) features 15 drill holes having mineralized intervals grading between 0.82 and 1.75 grams gold per tonne across widths of 16 to 196 metres, in some cases with two or three such intervals in the hole. The other 32 holes included in the resource study but not in the table generally had significantly shorter and/or lower-grade mineralized sections; all were included in Trelawney's news releases.  The typical sample interval was 1 metre.
The 47 holes considered in the resource study yielded 54 samples having unusually high-grade gold assays exceeding 25 grams gold per tonne and ranging up to 785 grams gold; these were capped at 25 grams per tonne to limit their influence on the average grade of the resource.
This strict capping is commendable but the gold grades of the 1-metre samples appear to be so variable throughout the deposit that an even more conservative approach may be needed.
RPA notes that the resource blocks include 8,807 samples. However, not all of these samples exceeded the 0.3-gram-gold resource cut-off grade. Rather, as is usual when estimating resources, the grade was obtained statistically by "compositing" (essentially averaging) the assays, in this case in 2-metre intervals across 10-metre sections, or ten consecutive 1-metre samples.
Thus a single assay of just 3 grams gold per tonne might qualify a 10-sample section for inclusion in the 4.2-million-oz. gold resource even if the other nine samples contained no gold whatsoever.
RPA further notes that the median grade of the 8,807 samples is just 0.34 gram gold per tonne, indicating that nearly half of the samples within the resource blocks were below the 0.3-gram cut-off grade.
Trelawney's cross sections show many 30- to 50-metre intervals within the resource field having grades only marginally above cut-off. Would a large mining operation at Côté Lake be able to withstand significant periods with very little gold coming out of the mill?
At the deposit scale, the major dependence of Côté Lake's average resource grade on the highest-grade samples is evidenced by the fact that the 4.2-million-oz. resource diminishes by only 300,000 oz., or 7%, if the cut-off grade is raised from 0.3 to 0.5 gram gold per tonne. This suggests that capping only those assays greater than 25 grams gold may not be sufficient; it may be necessary to cap somewhat lower values as well.
At the drill-hole scale, the degree of grade dependence on the highest assays is illustrated by hole 33 on Section 94+00E. This hole was featured in a Nov. 16, 2010, Trelawney news release. Using a 50-grams-gold cap rather than the more-conservative 25 grams subsequently adopted for the resource calculations, Trelawney reported a remarkably long, 520.3-metre intercept grading 0.92 gram gold per tonne. Within this interval, a 193.5-metre, sub-interval graded 1.42 grams gold. However, 62% of the gold was contributed by three short, 0.95- to 1.7-metre sections spaced 40 to 60 metres apart, with the other 190 metres grading just 0.54 gram gold, well below the 1.0 gram per tonne average resource grade.
In contrast, a recent news release by Atac Resources announcing a 114.9-metre drill intercept grading 3.15 grams gold per tonne from its Conrad discovery in the Yukon included a footnote clearly explaining that 32 of the 45 samples within this wide intercept yielded greater than 1 gram gold per tonne and only 4 samples yielded less than 0.25 gram gold, thereby assuring potential investors that the gold grade is relatively uniform and that the mineralized interval was not stretched to boost the size of the zone.
Côté Lake is not the only new gold deposit in the Canadian Shield for which the length of the mineralized drill intercepts and the depth of the proposed mine pit have been stretched to maximize the resource ounces. However, the Côté Lake resource is based on just 47 drill holes whereas the others were determined from hundreds of holes, providing a better understanding of the gold-grade distribution, and also have a higher percentage of their resources at shallower depths.
In today's euphoric markets, there is a lot of pressure from analysts, shareholders and the media for gold exploration companies to quickly deliver more ounces. In The Northern Miner interview Trelawney's president, Greg Gibson, is quoted as saying: "We've done this so quickly that we weren't able to prepare for everything, but the world has said we're on to the real deal so we have to keep on pushing."
Unfortunately, history has shown repeatedly that hurrying results to meet the expectations of those who may have little interest in oversight and due diligence is a perilous path.
Have we so quickly forgotten the many mines that were opened in 1987 with easy money obtained from poorly regulated flow-through financings only to fail within a year, the Bre-X Minerals debacle of 1997, the dot-com bubble of 2000 and the juiced-up derivatives and asset-backed commercial paper offerings that triggered the 2008 recession?
The market meltdown from each of these events devastated our mineral exploration industry, drying up our principal source of capital and disrupting the careers of many mining professionals, thereby creating a lingering shortfall of qualified personnel with no end in sight.
Recently we had another market warning from Sino-Forest.
Will we in the exploration industry, from geologists and analysts to the media and stock exchanges, heed these warnings and muddy the crystal-clear waters underpinning euphoric resource projections by asking penetrating questions about the quality of these resources? Or will we once again raise investor expectations to unattainable levels and kill the golden goose?
Stu Averill, P. Geo., president
Overburden Drilling Management Ltd.
Ottawa, Ont.