ASMARA, ERITREA -- Despite brimming with geologic promise because of its location within the prolific Arabian-Nubian Shield, Eritrea has remained underexplored for years.
Continued violence and turmoil in the young nation left the international exploration community highly wary until recently. And the country's location did not help: Eritrea is part of the Horn of Africa, sharing borders with Sudan, Ethiopia and Djibouti, and not too far from Somalia.
But its location could soon become a benefit. Eritrea boasts a long Red Sea coastline and recently revived its major port, known as Massawa, both of which make it a point of interest for the Middle East and Asia.
Across the Red Sea, Saudi Arabia is busy building a $2-billion smelter complex that is in need of ore, Asian markets are but a short ship voyage away, and Indian smelters would also enjoy access to concentrates from a nearby nation.
Mineral exploration companies from the Middle East, Asia and India are all in Eritrea, searching for the next high-grade volcanogenic massive sulphide (VMS) deposit. But it is a Canadian company, Nevsun Resources (NSU-V), that is leading the charge: Nevsun found the country's first major VMS deposit and is now halfway through building a mine at Bisha.
At every step in its eight years in Eritrea, Nevsun has shouldered the challenge of being a first mover. In working from a mining code that had never before been tested by the building of an actual mine, Nevsun and the Eritrean government formulated a mine development agreement that defined the realities of mining in Eritrea and will be used as a template for all mine agreements in the country to come.
The United Nations' late-2009 decision to impose limited sanctions on Eritrea, because of the country's unwillingness to abide by regulations on its dealings with Djibouti and alleged arms dealings with Somalian rebels, looked set to derail Nevsun's efforts earlier this year. Bank insurers balked at the sanctions and the company's recently-negotiated debt facility fell through.
Nevsun's determined management team went to the equity markets instead, and raised the funds it needs to complete Bisha mine construction. And, of course, with equity funding the mine's cash flow will no longer be impeded by financing costs and debt repayment.
So Bisha is on track, on budget, and set to become Eritrea's first operating mine before the end of the year.
The Bisha mine is in Eritrea's arid west, 250 km by road from its capital city Asmara. Flying from Asmara to Bisha reveals a varied landscape, from dry rolling plains to high, steep hills.
The clean modern buildings of the Bisha mine camp seem out of place in the seemingly empty desert. But close by lies the Bisha deposit, a significant VMS discovery and the basis of Eritrea's first mine.
Discovered in 2003, Bisha is a layered VMS deposit. Lenses of mineralization are stacked one atop another in a steeply plunging orebody that is more than a kilo-metre long on surface but narrows as it descends. Nevsun has tracked the deposit to 450 metres depth; below that it remains open.
The top layer comprises gossan that is stripped of base metals but enriched in precious ones, especially gold. The 35-metre-thick oxide layer starts at surface and carries an average grade of 7.99 grams gold per tonne and 32.85 grams silver per tonne throughout its 4 million tonnes of proven and probable reserves.
Those 4 million tonnes will carry the Bisha mine through its first 2.5 years of operation. Working with what nature provided, the Nevsun team devised a mine plan that moves through three stages as the open pit reaches the three key mineralized layers. After churning through oxidized, gold-bearing gossan for just over two years to produce 900,000 oz. gold and 1.5 million oz. silver, the Bisha open pit will hit the supergene layer and the mill will shift gears to focus on copper.
Supergene layers occur at the base of oxide layers, which end at the water table. When the VMS deposit at Bisha originally formed, it would have been made entirely of sulphide minerals. As the deposit moved towards the surface, however, the upper layer encountered the water table. Percolating groundwater oxidized the primary sulphide minerals and then carried the minerals downwards. At the base of the water table, the oxidized minerals reacted again, converting back to sulphide minerals but this time forming secondary sulphides, which have higher metal contents than primary sulphide minerals.
The result is a layer of secondary sulphide mineralization enriched in base metals. At Bisha, the top of the VMS deposit originally held gold, silver and copper. Precious metals do not readily mineralize as sulphides or oxides, so the leaching process does not affect them much. But copper is almost always leached from oxide zones and at Bisha it has been perfectly re-deposited in a copper-rich supergene layer. The layer reaches from 35 to 65 metres depth, totalling 6.35 million proven and probable tonnes, and carries an average grade of 4.4% copper as well as 0.83 gram gold and 35.98 grams silver.
The supergene layer will feed the Bisha mine for three years, producing 538 million lbs. copper plus 80,000 oz. gold and 3 million oz. silver. Finally, the mine will start to tap into the primary sulphide portion of the deposit, which means the mill will shift focus again, this time to zinc.
According to Nevsun's current plan, the Bisha open pit will reach 200 metres depth. To that depth, the pit's primary sulphide layer contains 9.7 million proven and probable tonnes grading 7.21% zinc, 1.14% copper, 0.76 gram gold and 54 grams silver.
However, Nevsun knows the deposit continues to more than twice that depth at the south end. At the north, mineralization ends at just over 100 metres depth but halfway along the deposit's 1.2-km strike, the zone suddenly opens up at depth. The deepest intercept to date returned 128 metres grading 0.66 gram gold, 49.1 grams silver, 0.96% copper, and 7.36% zinc, starting 289 metres downhole and including 84 metres of 0.71 gram gold, 63 grams silver, 0.92% copper, and 11.1% zinc.
The pit was planned using conservative metal prices, specifically US$400 per oz. gold, US$1.05 per lb. copper, and US50¢ per lb. zinc. With current prices significantly higher -- 2.5 times higher for gold, more than three times higher for copper, and double for zinc -- Nevsun is remodelling the pit to extend the mine life by going deeper.
Deepening the pit to chase the steeply-plunging deposit farther would increase the strip ratio, but Nevsun does not expect the increase to be dramatic. While details of the remodelled pit have not yet been released, the company has said deepening the pit to 400 metres from 200 metres would increase the strip to 5 to 1 from 4 to 1.
In addition, Nevsun has partially defined a zone adjacent to the Main Bisha deposit that could reduce the strip ratio back down. Known as the Hangingwall Copper zone, the additional mineralization is being considered waste rock in a pit remodel because it does not carry a defined resource.
Previous drilling returned several promising intercepts from the Hangingwall zone, such as 56.5 metres grading 0.81% copper, 19.3 metres of 2.11% copper, and 12 metres of 2.64% copper. The area has not been drilled since 2006. If Nevsun decides to deepen the pit, the company would better define the Hangingwall zone and the new resource would reduce the waste-rock increase.
Plans for the pit may still be changing but plans for the mill, which is more than 50% complete, are solid. The operation will churn through 5,500 tonnes of ore each day or 2 million tonnes a year. Nevsun actually oversized the plant, making it capable of processing 3 million tonnes annually, to give the company room to ramp up production if it wants.
During phase one, when the feed is oxide, ore will be crushed and leached in cyanide tanks, with gold then recovered via conventional carbon-in-leach technology and poured into doré bars. Before phase one is complete, Nevsun will install the flotation system needed for phases two and three. Copper and zinc will be recovered via flotation.
After producing 900,000 oz. gold and 1.54 million oz. silver in phase one, Bisha will shift to producing 180 million lbs. copper and 1 million oz. silver a year for three years. In the 4.5 years of phase three, the mine will kick out roughly 240 million lbs. zinc, 44 million lbs. copper, and 1 million oz. silver annually. Metal concentrates will be trucked from Bisha to the port at Massawa, roughly 400 km away by road.
The operation's cash costs are fairly low. Including by-product credits, in phase one it will cost US$210 to produce an ounce of gold, in phase two it will cost US67¢ to produce a pound of copper, and in phase three it will cost US54¢ to produce a pound of copper and US50¢ for a pound of zinc.
Nevsun's original feasibility study for Bisha, completed in 2006, pegged capital costs at $250 million. With the mine almost complete, Nevsun recently revised that number, but only slightly, to $260 million.
The company has already spent more than $130 million at Bisha. And with the recent close of a $117-million private placement, plus funding from the Eritrean government's 30% participating stake in the mine, Nevsun has all the cash it needs to finish building the mine.
Yes, the Eritrean government has a stake in Bisha. The country's mining code gives the government an automatic, carried 10% stake in every mineral project. The code also gives the government a right to buy another 30% participating stake in any project and, in late 2007, the Eritrean government decided to step up its ownership of Bisha.
It took several months for Nevsun and the government to finalize the terms of the deal. But by the end of 2007, the partners had become just that, with the signing of a mining agreement for Bisha. The agreement required the Eritrean government to start contributing its 30% share of costs right away but the government did not immediately have to hand over a chunk of cash to pay for its ownership position.
Instead, that payment is due when Bisha ships its first gold. When that shipment happens, an independent agency will essentially complete a new feasibility study on Bisha using actual capital costs. That study will determine the project's value and the Eritrean government will have to pay for its 30% interest based on that valuation.
The Eritrean national mining company, ENAMCO, has already contributed $80 million towards Bisha. ENAMCO has handed over $25 million towards its ownership position, contributed $35 million towards construction costs, and loaned $20 million to Nevsun. The construction contribution is not applicable against the purchase price, so when the first gold is poured and the valuation completed, ENAMCO's payment will be calculated as 30% of the project's net present value (NPV), minus $45 million.
The valuation will use consensus life-of-mine metal prices, determined as the average of 10 predicting houses. Using current metal prices, the project generates a NPV of roughly US$1 billion.
"Of course the negotiations were difficult -- there is a lot at stake," says Cliffs Davis, Nevsun's president and CEO. "But afterwards, one of the government's key negotiators came over and said to me, 'We hope that payment is a big one,' because of course that would mean the project is set to provide the government with considerable cash through taxes, royalties, and its own portion of revenue. So the better the project, the better for both us and them."
The reality of operating in Eritrea also impacted Nevsun's financing efforts. In mid-2009 the company lined up a $235-million credit facility to develop Bisha. The loans were to come from a consortium of South African and European lenders. Everything was ready to go when the UN imposed sanctions on Eritrea in December.
According to the UN Security Council resolution, the sanctions stem from concerns that Eritrean nationals are providing "support to armed groups undermining peace and reconciliation in Somalia" and worries that the Eritrean government has "not withdrawn its forces following clashes with Djibouti in June 2008." The sanctions are very specific; the U.N. imposed an arms embargo on the country, and placed travel restrictions and asset freezes on its political and military leaders.
The news immediately pushed Nevsun's share price down to the $2.55 area, from closer to $3.20. But Nevsun is actually not too concerned.
"Except for the impact of the market's misconceptions, we don't think the UN sanctions will have any significant implications on the abilities of mining companies to conduct business here," says Davis. "The sanctions are very specific and the United Nations does not want these to become more general."
The sanction did create one significant problem for Nevsun: the European lenders involved in the credit facility required support from the German government, which can give a partial guarantee to lenders. Nevsun waited several months for the Europeans to try to insure the loan but, by early February, the company realized time was running out. Nevsun was funding Bisha development with cash until the loans became available and the company's cash position was dwindling.
So Davis found a way around the problem. A few days into February Nevsun announced a $117-million private placement; within two weeks the company had closed the deal, selling 52 million shares at $2.25 apiece. The funds will be sufficient to carry Nevsun and Bisha through commissioning into cash flow-positive operations.
The current Bisha mine plan only calls for mining the Main deposit but, in addition to the potential Hangingwall zone resource expansion, chances are good that Nevsun will define more resources in the area to extend the mine life. The company has already identified two new VMS discoveries within its Bisha mine licence.
Nevsun discovered the Northwest zone, which is 1.5 km north and slightly west of the Main Bisha deposit, in 2003 when a few initial drill holes returned low-grade massive sulphides. In 2005 the company returned to the area and pulled two significant, well-mineralized massive sulphide intercepts from the ground, including 22.1 metres grading 1.42% copper and 4.67% zinc in hole NW8.
In 2006 Nevsun punched four more holes into the Northwest zone that returned sphalerite-rich intercepts from the zone's southwest. The results, such as 22 metres of 7.08% zinc and 12 grams silver, led Nevsun to believe the Northwest zone actually comprises a main, lower-grade massive sulphide body with a second, zinc-rich lens sitting just to the southwest. With all its energy focused on permitting and building the mine, Nevsun has not been able to return to the Northwest zone since 2006 but plans to ramp up expansion exploration once the mine is operational.
The second area that offers expansion potential is the Harena zone, which lies 9.5 km southwest of the Bisha Main deposit. Harena is developing into a third near-surface massive sulphide zone with the potential to provide additional feed to the Bisha mill.
Discovered through geophysics and initially drilled in 2005, Nevsun returned to Harena in late 2009 to conduct infill drilling and recently released the results. The northeast-striking, 400-metre-long zone seems to carry gold, silver, copper and zinc.
Collared at the northeast end of the zone, hole 29 returned 7 metres grading 2.71 grams gold, 51.86 grams silver, 1.01% copper and 0.14% zinc from 62 metres depth. From 100 metres to the southwest hole 32 cut 37.4 metres grading 0.13 gram gold, 9.72 grams silver, 0.37% copper, and 3.51% zinc, starting 63 metres downhole and including 5.2 metres averaging 2.62 grams gold, 134.42 grams silver, 1.95% copper and 1.35% zinc.
Then a line of holes across the centre of the zone, another 100 metres to the southwest, produced three promising intercepts: Hole 35 hit 31 metres of 2.41 grams gold and 12.71 grams silver; hole 36 returned 37.7 metres averaging 0.32 gram gold, 27.18 grams silver, 0.74% copper and 3% zinc; and hole 37 cut 23.5 metres of 0.61 gram gold, 30.52 grams silver, 1.09% copper and 4.5% zinc.
The Country Question
Eritrea is a difficult country to understand. Its history tells part of the story but the country's trajectory since its very recent independence and its generally closed-door policy makes its recent past appear dark and veiled to outsiders.
Eritrea was under Italian control, first as a colony and then as a province, from the late 1800s until 1941 when British armed forces expelled the Italians. The British controlled the country only until 1951 when, pursuant to a UN mandate, Eritrea was federated with Ethiopia. Eritreans initially welcomed the federation but, before long, Ethiopia started to exert more control over its northern neighbours than they wanted. Then, in 1962, Ethiopia annexed Eritrea as its 14th province.
The Ethiopians' lack of regard for the Eritrean population soon prompted an independence movement that led to war. The bloody, 30-year war did not end until 1991. In 1993, following a UN-supervised referendum, Eritrea declared its independence and gained international recognition.
At first, the international community welcomed Eritrea as a prime candidate for a much-needed African success story. The long liberation war had hard-moulded Eritreans into a determined population led by a political party, the Eritrean People's Liberation Front (EPLF), that enjoyed popular support and endorsed liberal democracy, human rights and free markets.
Sadly, the dreams of 1993 and the reality of modern Eritrea are much different. Eritrea's conflict with Ethiopia reignited in 1998 and led to another horrible war, this one lasting three years. In the aftermath of that war, a group within the government started to question the president's authority and decisions. A dissident movement started to gain momentum, with independent newspapers and social groups challenging the EPLF's monopoly on power.
But the dissident movement met a rapid end in September 2001 when the President ordered a nation- wide clamp down. Government forces arrested hundreds of critics, closed down all private media outlets, and placed limits on the general public's activities.
The constitution, ratified by the government in 1997, has still not come into effect. The government has used the threat of war with Ethiopia as an excuse to repeatedly postpone elections, which were originally scheduled for 1998 but still have not occurred. The country today runs as a single-party state.
Organized political opposition is forbidden, and military service is compulsory -- at age 16 teenagers leave for two years of training and many Eritreans, especially men, stay in the service for the rest of their lives.
Eritrea's troubles as an independent country are reflected in various international rankings of democracy and human rights. The country places 164th out of 179 countries on the United Nations' Human Development Index. On the Worldwide Press Freedom Index 2008, Eritrea took the last rank in the world for the second year. Transparency International ranked Eritrea 126th out of 180 countries on its Corruption Perceptions Index. And in the Freedom of the World survey for 2008, in which Freedom House evaluates the state of global freedom as experienced by individuals, Eritrea is classified as being "Not Free," and grouped with the world's most repressive societies.
Within the country, however, the feeling is not one of repression. Perhaps the realities are well shielded, but, to a Western reporter, the country and its people appear functional and reasonably happy.
For the country with the biggest per capita defence budget in Africa, the military presence is surprisingly minimal. There are checkpoints at the entrances and exits to major cities, but their lack of guns and use of a thin rope as the main barrier make them feel more like a formality than a threat.
Foreigners require visas to enter the country and travel documents to move around within it. Eritreans are free to move around within the country but require permission to leave. The country is just about crime-free -- a foreigner can walk the streets of the capital city in the middle of the night and usually be perfectly safe.
The main occupation in Eritrea is agriculture, most of which is sustenance farming. Half the population is Christian and half is Muslim; the two groups live in peace. There is as much Western garb as traditional clothing and there is more female representation in the Eritrean National Assembly than there is in Canada's parliament.
One of the most interesting aspects of this African nation is its determination to be self-sufficient. From the time of independence, Eritrea has shunned foreign aid, choosing instead to try to develop the abilities to care for its own people. In terms of food it generally succeeds, even exporting some livestock and grain, though a drought last year necessitated some food aid.
And there are essentially no nongovernmental organizations (NGOs) in the country. The lack of NGOs is in part because of Eritrea's focus on independence, though the primary reason is that the EPLF has thrown most of them out.
Perception and reality clash constantly, in the eyes of an outsider visiting Eritrea. Is the government not actually as repressive as the rest of the world thinks it is? Or is the repression very real but hidden from view?
In a short stay those questions remained unanswered. In terms of its developing mining sector, however, those Eritreans involved in it appear thoughtful and reliable. The government knew very little about mining just eight years ago and now is poised to hold a 40% stake in a brand new, promising mine. Nevsun's experiences dealing with the government have been positive, if sometimes slow, and the company truly believes it has found a solid partner in ENAMCO.
By the end of the year, Bisha's mills should see their first ore and Nevsun will have done its all to define mining in Eritrea.
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