VANCOUVER — When Avnel Gold Mining (TSX: AVK) bought the Kalana gold project in southwest Mali in 2002, its priority was getting the historic mine back into production, as required by the terms of the property deal. As a result Avnel has been producing 9,000 to 25,000 oz. gold annually from high-grade quartz veins at the underground operation since 2004.
But the company always had bigger plans.
Now those plans are another step closer to reality, thanks in large part to three years and $32-million worth of work by Avnel’s joint-venture partner Iamgold (TSX: IMG; NYSE: IAG). But when a military coup destabilized Mali in early 2012, Iamgold walked away from Kalana before vesting its stake, leaving Avnel with full ownership of a much more advanced project.
Avnel has since turned Iamgold’s work into a resource estimate for the Kalana deposit, an open-pittable mineralized body next to the small underground mine. The new resource comprises 8.5 million indicated tonnes grading 4.53 grams gold per tonne, for 1.25 million oz. An inferred 2.1 million tonnes grading 3.76 grams gold adds another 250,000 oz.
Avnel also finished a preliminary economic assessment (PEA) of the new deposit. The PEA outlines an open-pit mine and combined gravity and carbon-in-leach processing plant producing 138,000 oz. gold annually in its first four years, at an all-in cost of just US$679 per oz.
Indicated resources support a 14-year mine life, with annual production sliding to 98,000 oz. after year four. Using a US$1,110 per oz. gold price and a 10% discount rate, the project carries an after-tax net present value of US$194 million and would generate a 53% internal rate of return.
It would only cost US$188 million to put the new Kalana mine into production.
Lower production costs and an extended mine life are precisely what the Kalana project needs. The small underground mine has been in production for a decade, but in the first nine months of 2013 it cost US$1,286 to produce each ounce of gold, and Avnel expected to lose money producing gold in the year’s fourth quarter.
The current Kalana mine is also running out of ore. In September reserves totalled just 26,000 tonnes grading 6.75 grams gold. Avnel expected these tonnes would sustain operations until the end of March, and was optimistic exploration would delineate mineralization to maintain the mine for longer.
Nevertheless, Avnel knows the underground Kalana mine is nearing the end of its days. Given its history, it is no great surprise.
Under Soviet guidance, two Malian national companies — Sonarem and Sogemork — explored Kalana between 1962 and 1982. Eventually a production decision was made and Kalana began operating in 1985. Over the next six years the small crushing, milling and gravity concentration circuit processed 270,000 tonnes of ore bearing an average grade of 12.9 grams gold.
When the Soviet Union broke apart, its technical personnel and financial assistance disappeared, and the Kalana mine was put on care and maintenance.
Ownership reverted to the Malian government, which in 1994 embarked on a privatization process that included an international call for tenders. Over the next eight years several bidders won, and then later relinquished rights to the property.
In late 2002 Avnel got its chance. Within six months the company had brought the government of Mali on-board with a free carried 20% interest.
Within a year the company installed pumps and an underground power system, upgraded the crusher and gravity systems, refurbished the ball mill and increased the tailings dam capacity. By early 2004 the mine was back in operation.
Alongside producing gold, the underground workings of the Kalana mine have been vital in advancing Avnel’s understanding of the area’s geology. Sonaram and Sogemork put years of work into Kalana, but all of that work focused on high-grade gold in stacked, near-horizontal quartz veins amenable to gravity processing.
For Avnel, the potential at Kalana was much broader. The wallrocks offer disseminated sulphides and stockworks that include lower-grade gold, and the oxide cap also contains gold.
There is considerable potential along strike and at depth. Underground workings extend to 180 metres depth, but drills have pulled golden vein intercepts from as deep as 600 metres.
In 2009, this potential attracted a big name joint-venture partner: Iamgold came on-board, signing on to earn a 51% stake in Kalana by spending $11 million on the project over three years and paying Avnel $2 million.
The producer surpassed its expenditure requirements, pouring $32 million into the ground between mid-2009 and early 2013. With this money Iamgold completed 165,000 metres of drilling at Kalana — mostly in the vicinity of the Kalana mine. About 35,000 metres of the dilling was aimed at the nearby Kalanako, Dadjan and Djirila targets. Iamgold identified 15 gold targets worthy of more exploration. However, the earn-in deal also called for a Kalana resource estimate, which Iamgold did not do. As such in March 2013 the deal lapsed, leaving Avnel with full project ownership.
Since Iamgold abandoned Kalana, the political situation in Mali has improved. Troops from France and the Economic Community of West African States regained control of the key northern city of Timbuktu in early 2013 after Malian separatists took control of the northern half of the country, and Islamist groups took control from them.
Presidential elections were held in July and August, with international observers lauding the process. The new president was inaugurated in September.
On news of the Kalana resource and PEA Avnel shares gained 4¢ in two days to close at 22¢. The company has a 52-week trading range of 10.5¢ to 31¢, 192 million shares outstanding and $10 million in its treasury.
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