Ollachea Geology, Exploration and Post-DFS Improvements

Deposit Geology

The Ollachea Deposit is an orogenic style gold system. These types of gold systems are known for their large size and continuation to depth, and therefore, are a major source of the world’s gold production.

Important examples include Muruntau in Uzbekistan (currently world’s largest open pit gold mine), Skukhoi Log in Russia (widely considered the world’s largest undeveloped gold deposit), Ballarat and Bendigo in Australia (the first economically significant gold discoveries on the continent), just to name a few.

The deposit is hosted in Devonian-aged carbonaceous metamorphosed sediments on the eastern escarpment of the Cordillera Oriental of the Andes Mountains. The sediments are structurally deformed and in close proximity to intrusive bodies.

Gold mineralization occurs within a well-defined shear zone and is contained within seven discrete west-striking, north-dipping structures. Gold mineralization is associated with a quartz and sulphide assemblage that consists of pyrrhotite with minor pyrite, arsenopyrite, and chalcopyrite. Free gold is frequently observed in drill core and appears to increase with depth in the deposit.

The cumulative, drill-indicated strike of the mineralized trend at Ollachea is several kilometres long and remains open ended in both directions. Further, exploration drilling has only tested the first three hundred metres of the down dip extent of the mineralized structures.

Exploration

In the first quarter of 2013, we completed a 1.2-kilometre long, 5-metre high by 5-metre wide exploration tunnel on time and below budget. The exploration tunnel was subsequently used as a platform for the recent Minapampa Far East drilling program that was completed in the fourth quarter of 2016 and which demonstrated that gold mineralization at Minapampa continues over 500m to the east of the existing Mineral Reserve and remains open to the east and at depth.

The drill hole results have been used to outline an exploration target in the Minapampa Far East mineralized zone of 370,000 to 550,000 ounces of gold contained within 3.1 to 4.6 million tonnes, grading 2.9 to 4.3 g/t gold, (this tonnes/grade range is reported within the framework of the N.I. 43-101 Restricted Disclosure Section 2.3(2)). The potential tonnages and grades are conceptual in nature and are based on drill results that define the approximate length, thickness, depth and grade of mineralization in the Minapampa Far East mineralized zone. The exploration results from this program will be used as the basis for estimating a maiden Mineral Resource estimate on the zone.

We believe the Ollachea Project is still significantly underexplored, with considerable potential to add to the Mineral Reserves in the future.

Post-DFS improvements


During the construction of the exploration drive, we determined that the ground conditions and rate of water inflow to the mine are likely to be significantly more favourable than what was used in the Ollachea Definitive Feasibility Study (“Ollachea DFS”). Both of these factors are likely to have positive implications for both capital and operating costs, leading to an improvement in the overall project economics.


On 4 June 2014, the Company announced the results of apost-Definitive Feasibility Study (“DFS”) mine optimization studies that have been completed by external consultants Mining Plus Pty Ltd (“Mining Plus”) in anticipation of the development of the Company’s flagship Ollachea Gold Project in Peru. The Life-of-Mine (“LOM”) results of the updated Ollachea mine plan prepared do not differ materially from the results presented in the 2012 Ollachea DFS prepared by AMEC dated 29 November 2012. However, there were several areas that have benefited from this optimization process.


The updated LOM production schedule has resulted in an optimized ramp-up of initial production with average annual gold production increasing to 100,000 ounces over the first two years of production (from 70,500 ounces in the Ollachea DFS). The average annual production is approximately 100,000 ounces per year over the nine years of mine life, almost identical to the Ollachea DFS

Cost Estimates

The updated mine plan provided opportunities to reduce or defer certain pre-production development capital items. As a result, initial capital expenditure has been reduced by $12.8 million to $164.7 million (from $177.5 million in the 2012 Ollachea DFS).


Deferral of some underground development work has pushed out $9.5 million of pre-production capital expenditure into LOM sustaining capital. The net effect is that total LOM capital has reduced slightly to $220.0 million from the $223.3 million estimated in the DFS.


Project costs are still based upon Q3 2012 capital cost estimates. However, the Company believes that potential cost reductions for equipment and services driven by the depressed mining development industry is likely to offset potential cost increases. Additionally, discussions with equipment suppliers have confirmed certain opportunities to lease finance a substantial portion of the mining equipment.


There has been little effect upon the LOM cash operating cost projections.

Financial Analysis

Following the mine plan update process, the financial model for Ollachea has been updated to reflect these changes and to account for other changes to the mine’s economics. The following table illustrates the effects of the optimization process upon key economic indicators compared to the DFS. A base case gold price of $1,300 per ounce was used in both cases.

Financial Analysis Comparison

Notes:

 

  • NPVs as at commencement of construction
  • NPVs are based on mid-period discounting
  • Before tax is before Special Mining Tax, Workers’ Participation Profit of 8% and Income Taxes of 30%
  • Payback starts from the commencement of production
  • The financial results are on 100% Project basis and exclude the agreement with the community for a 5% participation in Minera Kuri Kullu SA (“MKK”) on commencement of production and the $14.2 million remainder of the Second Additional Payment payable by MKK due to Rio Tinto in June 2016.
  • Excludes the 1% gross smelter royalty granted to Macquarie Bank.
  • Tax losses and capitalized expenditures available to offset taxes payable include balances as of 31 December 2013 in the 2014 Update (31 December 2012 estimates in the 2012 DFS).
  • The update was undertaken in constant US dollars, 100% Project ownership and 100% equity finance basis.

Updated Mineral Resource and Reserve Estimate

The updated LOM mine plan is based upon a refined geological interpretation and an updated mineral resource estimate for the Minapampa Zone of the Ollachea deposit. There has been no additional resource drilling at Minapampa since the 2012 DFS. The refined geological model and accompanying enhanced structural model allows for a more robust definition to the limits of the economically mineralized horizons.  The updated mineral resource estimate, carried out by consultants GHD Group Pty Ltd (“GHD”) is based upon a significantly smaller panel size, more constrained search ellipsoids and a 2.0 grams of gold per tonne (“g/t Au”) cut-off (consistent with the DFS).

 

The 2014 mineral reserve estimate also benefited from the refined geological model and optimization for the Minapampa Zone. The lower cut-off grade was increased marginally to 2.1g/t Au (from 2.0g/t Au in the DFS). The overall result is an increase in contained gold to 1,001,000 ounces (from 983,000 ounces). There remains considerable upside at Ollachea which, with more work, could lead to an expanded mineral reserve and increased mine life. As previously reported, the nearby Concurayoc Zone, to the west of Minapampa, contains an inferred resource of 0.9 million ounces (10.4 million tonnes grading 2.8g/t Au).

Minapampa Resource Estimates Comparison

Ollachea Mineral Reserve Estimates Comparisons


The preparation of the Indicated Mineral Resources contained herein was estimated by Doug Corley, Member of the Australasian Institute of Geoscientists (MAIG), and Registered Professional Geoscientist (RP Geo), of GHD Group Pty Ltd, who is recognized as a Qualified Person for the purposes of National Instrument 43-101, and who has reviewed and approved the resource information in this press release.


The preparation of the Probable Mineral Reserve contained herein was supervised by Neil Schunke, Member of the Australasian Institute of Mining and Metallurgy (AusIMM), of Mining Plus Canada Pty Ltd, who is recognized as a Qualified Person for the purposes of National Instrument 43-101, and who has reviewed and approved the technical information in this press release.

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