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Patagonia Gold

Patagonia Gold Scores Twice with Maiden Resource for Cape-Oeste and Positive Scoping Study for Lomada de Leiva

Earlier this month, Patagonia Gold shares received a boost from news of a 43-101 compliant maiden resource estimate for the Cap-Oeste gold-silver project in Santa Cruz Province, Argentina. Making it a one-two punch, Patagonia has just released an encouraging scoping study for the Lomada de Leiva project, also in Santa Cruz, and expected to be the company’s first producing mine.

Let’s begin with Cap-Oeste, which, assuming a cut-off of 0.3 grams per tonne (g/t) gold (Au), now has indicated resources of 149,842 ounces (oz) Au and approximately 3.65 million oz silver (Ag) with average grades of 1.44g/t Au and 35.15g/t Ag, plus inferred resources of 154,257oz Au and 3.28 million oz Ag with average grades of 1.42g/t Au and 30.16g/t Au. Enticingly, the Main Shoot has resources of 135,408oz Au at 13.17g/t and 2.3 million oz Ag at 227.56g/t, assuming a 5g/t cut-off. The deposit is still open at depth and along strike, and Patagonia has reported that the Cap-Oeste mineralized trend has been defined by mapping and trenching for over 6km, while geophysical work has identified similar signatures to Cap-Oeste at nearby Breccia Valentina and Vetas Norte.  

The Cap-Oeste project is located on Patagonia’s El Tranquilo property, while the Lomada de Leiva project is situated on the La Paloma property. Cap-Oeste and Lomada de Leiva are arguably the company’s most significant assets. Both have come out of the group of properties that were acquired from Barrick Gold in 2007, following the news in 2006 that Chubut Province, where Patagonia had previously focused its activities, was imposing a three year ban on all hard rock mining and exploration within a large area containing most of the company’s properties. Thanks to the Barrick deal, the company was able to transition its activities to attractive projects unaffected by the ban.

The Chubut ban is up for reconsideration next year, but Patagonia’s Managing Director Bill Humphries expects that it will be renewed, though possibly with exceptions for some areas. He is hopeful that the local mood is changing somewhat, and that the company will be granted permission to carry out exploration on the promising Huemules project. However Humphries is emphatic that Patagonia is only interested in proceeding with the support of the local community.

Getting back to Santa Cruz, a 43-101 compliant scoping study on the Lomada de Leiva project has just been released, with pleasing results. Simple run-of-mine heap leaching has been chosen as the processing option, which means low capital costs of US$8.5m. Mine life is estimated at 7 years, with production of around 21,000oz Au per annum at a cash cost of US$299/oz. Assuming 80% recovery, 100% equity financing and a gold price of US$650 an ounce, before tax cash flow is US$35.3m and after tax NPV is US$18.9m. Change the gold price to US$850, and before tax cash flow rises to US$63.6m, with after tax NPV up to US$36.9m.

Patagonia judges that there is potential to outline additional resources at Lomada de Leiva and close by at Breccia Sofia, which could significantly extend the life of the proposed mining operation. But by keeping 43-101 compliant indicated resources on the La Paloma property below 200,000oz for now, the company has cannily avoided triggering a cash payment of US$1.5m to Barrick Gold. The scoping study is based on a resource estimated for Lomada de Leiva last year, which came in at 161,346oz Au measured and indicated with an average grade of 1.003g/t Au and another 73,725oz Au inferred with an average grade of 0.672g/t Au, assuming a cut-off 0.3g/t Au.

Like its sister company Landore Resources, Patagonia has had no difficulty in raising the money necessary to sustain its pace of work, despite all the market upset. The company raised £1.845m at 4.5p per share in October, and another £2 million at 6.75p in July. The explanation is that the memory of Brancote Holdings, out of which Patagonia’s initial properties were spun when Brancote was taken out by Meridian Gold in 2002, lives on. As a consequence, Patagonia enjoys a generous valuation many other explorers would give their eye teeth for. Shareholders seem to be pretty confident that Patagonia will become another Brancote. Certainly, it is becoming increasingly clear that Patagonia Gold is more than just another explorer. There is now a clear route to cash flow from Lomada de Leiva, and this in turn will aid the development of the larger Cap-Oeste project. Trial heap leaching could commence at Lomada de Leiva in the second half of 2009, and Patagonia expects to be cash positive by mid 2011.

On a final note, Patagonia announced in May this year that its local subsidiary had signed a Letter of Intent with regard to a strategic partnership with Fomento Minero de Santa Cruz Sociedad del Estado (Fomicruz), a mining company owned by the government of Santa Cruz Province. This amounts to a joint venture between Patagonia and Fomicruz for the purposes of progressing Patagonia’s projects in Santa Cruz, including Lomada de Leiva and Cap Oeste. Direct government involvement should be very helpful from a permitting standpoint, and Fomicruz will also contribute some new ground to the joint venture. Patagonia will be responsible for managing exploration and development, must spend US$5m over 5 years on the ground contributed by Fomicruz and will have a 90% interest in the joint venture. The bottom line is that Patagonia has aligned its interests with that of the Santa Cruz authorities, and that is unlikely to be a bad thing.