YEREVAN, ARMENIA -- The first-mover exploration model only succeeds when the chosen country provides that perfect balance of geological potential, economic openness and government stability. In Armenia, it seems Lydian International (LYD-T) has found it all.
Lydian was established in late 2005 with the first-mover model in mind, and Armenia was on the company's radar right from the start. Tim Coughlin, Lydian's president and CEO, had spent time earlier that year in the Eurasian country as a consulting geologist, researching prospectivity and risk.
"It was fairly obvious, right away, that the country was amenable to business," he says from the lobby of the Marriott Hotel in Yerevan, Armenia's capital city. "There's a certain Armenian character that's free market-oriented and the prospectivity and underexploration, at least for this kind of system, were obvious."
Four years later, Lydian has defined a 1-million-oz. gold resource in southern Armenia, the second-largest gold deposit found to date in the country, and the zone remains wide open. Now drills are pulling long, mineralized intercepts from the ground in new zones and metallurgical work has shown the gold can be extracted though simple heap leaching. The project is on Amulsar Mountain, which translates as Barren Mountain, but from here it appears that Amulsar is anything but barren.
Armenia's geology is dominated by the Tethyan fold belt, which was born in Triassic times when Africa, Arabia, and India collided with the Eurasian plate. The belt now stretches from central Europe to Indonesia, crossing northern Africa, the Middle East, and the Himalayas.
It is the perfect first-mover frontier: a major geological system, one that has experienced significant upheaval and activity, stretching through parts of the world that have often matched their geological turmoil with political tumult.
While Armenia was on Coughlin's list of targets from the beginning, Amulsar was not. In fact, Coughlin essentially tripped over the project on his way to review another.
On the second day of a scouting trip, Coughlin and his team planned to drive directly to southern Armenia to see some potentially prospective ground. But as they were driving, he started seeing some interesting rocks tracking through the hills east of the road. When they stopped for coffee at a roadside caravan on a high pass, Coughlin looked across the road and saw what he described as "an obvious, extensive alteration system stretching up the hill for 400 metres."
The team postponed its trip south and instead scrambled up the hill to investigate. Soon, they were back in Yerevan to apply for a mineral licence, which they assumed would have already been taken. To their surprise it was not, and the Amulsar project was born.
In early 2006, the team was approached by Newmont Mining (NMC-T, NEM-N). The major was interested in a fee-for-service contract to generate targets and report on risk in the Caucasus areas. When Newmont was advised that the consulting team had joined forces and formed Lydian, the contract became a joint venture. Lydian owns all of the Amulsar licences and is operator of the joint venture; Newmont is funding 50% of the exploration budget for an option to earn 70% of the project by taking it from an inferred resource through to a completed feasibility study. The major could then earn another 10% by taking the project to commercial production. In March, Lydian was granted a 25-year mining licence for Amulsar, which requires the company to upgrade the resource from inferred to measured and indicated status before the end of 2010. As such, Newmont needs to decide whether to exercise its option before the start of the next drilling campaign early next year.
By mid-2006, a soil-sampling program had outlined an area 3.5 km long by 500 metres wide with anomalous gold grades, as high as 2.1 grams gold per tonne. Trenching and channel sampling followed and also returned promising results, such as 128 metres of 1.3 grams gold in trench and 20 metres of 9.9 grams gold in channel.
In 2007, Lydian mobilized a drill to Amulsar for the first time and punched five holes into the ground. This first drilling effort produced three particularly promising intercepts: 53 metres of 2.98 grams gold from surface, 33 metres of 0.98 gram gold from surface, and 18 metres of 1.08 grams gold from 100 metres depth.
In 2008, spurred on by their sucsoutheast cess, the Lydian team returned to Amulsar with three rigs and drilled 13,000 metres. Some of the best intercepts were 125 metres averaging 1.57 grams gold, 106 metres of 2.35 grams gold, and 135 metres of 2.26 grams gold.
By the end of 2008, Lydian had identified five distinct zones at Amulsar aligned along the north-south ridge that climbs to the peak of Amulsar Mountain. At the north end is Erato North, which has seen only limited drilling. Roughly 1 km south is Erato, which saw limited drilling in 2008 but was a focus of the 2009 drill program. Tigranes sits 1 km southeast of Erato and Artavasdes is 500 metres south of Tigranes. The fifth zone, Arshak, is another 2 km southeast.
The 2008 drill program focused on just two zones, Tigranes and Artavasdes, and by the end of the season, Lydian had proven up an inferred resource of 31 million tonnes grading 1 gram gold, for 1 million contained ounces gold. The deposit defined to date measures 1 km along strike and 400 metres width, starts at surface, and is entirely oxide.
The two geology rules of thumb at Amulsar are pretty simple. First, silica says you're in the right area. Second, red rocks are good. The two rules work together because there are four types of silica present at Amulsar -- light, vuggy, broken and hematitic -- and it is the last that bears the best grades. Hematite, or iron oxide, is red.
In addition, mineralization always accompanies structural alterations to the host volcanic rock. Wherever the original texture of the host rock is apparent, it is barren. As for a genetic model, Coughlin thinks Amulsar is a high-sulphidation caldera ring fracture system, wherein gold is hosted in the fracture network created by northeast-cutting faults. The result is higher-grade gold hosted in steeply dipping, oxidized silica breccia bodies surrounded by shallowly dipping oxidized structures carrying lower grades.
The 2008 drilling program was designed to define a deposit, in part because Lydian needed a deposit in order to convert part of its short-term exploration licence to a 25-year mining licence. This year, however, the focus shifted to stepping out and testing the deposit's size potential.
Drill holes collared southwest and of the resource at Artavasdes showed the deposit there is set to grow. Hole 82 cut 82 metres grading 2.5 grams gold from 102 metres down-hole. Nearby, hole 84 returned 32 metres of 6.2 grams gold, starting at 92 metres and including 18 metres of 10.2 grams gold. Hole 93, collared almost 500 metres to the east, cut 94 metres of 1.5 grams gold from 50 metres depth.
Farther south, hole 134 returned 12 metres of 1 gram gold from 8 metres depth, followed by 76 metres of 1 gram gold from 50 metres. Hole 89 cut 64 metres of 1.1 grams gold from 46 metres depth. And hole 119 returned 52 metres of 1.1 grams gold, while hole 135 cut 38 metres of 1 gram gold.
The stepout effort at Artavasdes has extended the zone 200 metres to the south-southwest and 500 metres to the east-southeast, with both directions still open.
At Erato, drills have also hit gold. Hole 103 cut 50 metres of 0.98 gram gold from 50 metres depth, while hole 104 returned 56 metres of 1.2 grams gold from 128 metres. Hole 30 then returned 229 metres averaging 1 gram gold, while hole 162 cut 22 metres of 2.7 grams gold and hole 161 hit 24 metres of 1 gram gold followed by 10 metres of 1 gram gold.
Mineralization at Erato appears to be controlled principally by steep to moderately dipping fractures and faults extending to at least 250 metres depth, with higher grades hosted in more densely fractured, stratabound zones. The fractures and faults are part of a 200-to 300- metre-wide contact zone along the west side of a dome body.
Lydian only drilled a few holes into North Erato. The best result from the northernmost zone was 10 metres of 1.1 grams gold, starting at just 6 metres depth in hole 114.
And at Arshak, the southernmost zone, mineralization seems to be confined to discrete fault-controlled zones. The zones can carry decent grades, as shown by a 12- metre intercept grading 1 gram gold, but their size potential has yet to be determined.
Lydian's drills have penetrated to 250 metres vertical depth and have only returned oxide mineralization. It is because the deposit sits on top of a mountain that the oxide-sulphide boundary is so deep (the boundary occurs at the water table, which is in the valley). The downside of a mountaintop deposit, though, is that the soft oxidized rock has been slowly weathering away for millennia, which means some of the mineralization has been lost.
In terms of recovering gold from rock, though, oxide is always easiest. Along those lines, Lydian's second major accomplishment in 2009, aside from defining a sizable resource, was to complete metallurgical test work that showed the Amulsar deposit is amenable to heap leaching. Specifically, heap leaching extracts 95-97% of the gold out of mineralized rock from Amulsar that is still in half-inch or quarter- inch chunks.
The metallurgical work employed three master composites of drill core from Tigranes and Artavasdes, with grades ranging from 1.09 grams to 1.29 grams gold. The work examined the use of coarser fractions and lower cyanide concentrations and still produced high recoveries. Though bulk-scale testing is still needed, the work indicates Amulsar gold is recoverable with minimal or possibly no crushing.
In terms of permitting a cyanide operation, it is worth noting that there is already a cyanide-leach facility in operation in Armenia.
Armenia is an elongated country that strikes, so to speak, northwest-southeast. It is widest at its northwest end and narrows as you head southeast, towards the country's short border with Iran. Amulsar is in the middle of the narrow segment, 170 road-km from Yerevan.
Armenia's western and eastern borders, with Turkey and Azerbaijan, are closed, which means that goods and energy flowing in and out of the country must come through the Iranian border or the Georgian one. As such, the narrow part of the country stretching towards Iran is home to major electrical transmission lines and natural gas and oil pipelines, all of which pass through the Amulsar licence along with a paved highway.
Lydian is the highest-tax-paying company in the Syunik region, the poorest region in Armenia. The company employs roughly 100 people during the field season, which lasts from June to October. In November, the snow starts falling, especially on the mountaintop. The project camp is at 2,600 metres; the top of the mountain reaches 2,988 metres elevation.
Lydian's team does not think the snow would hamper a mining operation, especially because the leach pads, the most sensitive item, would be down in the valley where there is considerably less snow.
That covers the usual topics -- infrastructure and access -- that matter when it comes to an exploration project, but there is another one at play here: the country.
Until recently, Armenia has had a tough go of it. The country's strategic location between Europe and Asia meant that it was invaded by one ruler after another, from the Greeks and Romans to the Ottoman Turks. Following a brief stint of independence after the atrocities of the First World War, the Soviet Union ruled the country for 70 years.
When the Soviet Union started to fall apart in 1991, Armenia was the first Soviet-controlled country to declare independence. The first three years of its independence, however, were incredibly difficult: still reeling from a 7.2-magnitude earthquake in 1988 that killed 250,000, Armenia was further crippled by an armed conflict with Azerbaijan over a parcel of land separated by Stalin from Armenia in 1923 and added onto Azerbaijan. The dispute over the territory led Azerbaijan in 1991 to close its border with Armenia, through which the majority of Armenia's imports had previously come. In 1993, Turkey joined the blockade against Armenia and sealed its border as well.
Armenia was left basically without electricity and gas, and some 30,000 Azerbaijanis and Armenians were killed and 1 million displaced, until 1994, when a Russian-brokered ceasefire was negotiated. The two countries are now working to find a final resolution, in a process overseen by the Organization for Security and Cooperation in Europe.
The ceasefire helped Armenia's economy dramatically. Economic growth since 1995 has been strong and after a few years of hyperinflation, the country's national currency, the dram, settled, leaving inflation negligible.
This steady economic progress has earned Armenia support from international institutions. The International Monetary Fund, World Bank, and European Bank for Reconstruction and Development, among others, have extended grants and loans to Armenia exceeding $1 billion in the last 15 years, all linked to reducing the budget deficit, stabilizing the currency, and developing needed sectors such as health care and transportation. Construction is now one of the country's economic mainstays, along with outsourced IT support and mining.
Those international groups have not only invested directly in Armenia but also indirectly. The International Finance Corp. (IFC), the equity investment arm of the World Bank, is Lydian's largest shareholder, with roughly 17% of its shares. The European Bank for Reconstruction and Development is the company's third-largest shareholder, at about 8%. Newmont takes the second spot with 10%.
Until very recently, the country's borders with Turkey and Azerbaijan remained closed but of late, Armenia and Turkey have taken steps towards reconciliation. In October, the two countries signed an agreement, which still needs to be ratified by both parliaments, vowing to establish diplomatic ties and reopen the border. In another positive sign, the two countries faced off in a football (soccer) match in the fall, which for many was an equally historic event.
The long blockade means Armenia has already developed solid relationships with its two other neighbours, Georgia and Iran. The country has also maintained close security ties with Russia, which has a military base in the country's northwest.
The other key development to fall out from Armenia's troubled past is its diaspora. There are only 3 million Armenians in Armenia, but roughly 8 million living abroad. Remittances from the Armenian diaspora -- in Russia, France, the U. S., Iran, Syria and elsewhere -- constitute a large portion of the country's international investment.
Spreading the risk
Risk is inherent in the first-mover model, which means spreading risk is a key component of a successful first-mover explorer. Lydian spread the risk of its exploration gamble in Armenia to another country: Kosovo. As the only foreign mineral exploration company active in the country, Lydian was able to acquire three projects in Kosovo, the most advanced of which is the Drazhnje lead-zinc-silver project.
In September, Lydian calculated its first Drazhnje resource, based on only 20 core holes and 120 metres of underground channel sampling, combined with historical data. The inferred resource stands at 3.21 million tonnes grading 5.11% zinc and 2.51% lead and remains open in all directions.
Drill core from Drazhnje also re- turned promising gold and silver grades, but the gold and silver data from historic samples did not meet the requirements of National Instrument 43-101, so the precious metals were excluded from the initial resource.
Lydian has been rehabilitating underground exploration workings at Drazhnje, which were left behind by a previous operator that left in the late 1980s with the onset of ethnic unrest. Soon, the company will be ready to start underground drilling. The first exploration targets are mineralized extensions immediately beneath and along strike from the resource.
After that, Lydian plans to probe the untested lead-zinc surface geochemical anomalies that lie to the west and south of the main deposit. Lydian wants to define a 10-million-tonne resource at Drazhnje. If it can do so, the company will consider mining the deposit and transporting the ore to a nearby concentrator, rather than building a facility.
At the end of September, Lydian had roughly $3.6 million in the bank. A few days later, the company raised another $2 million in a private placement with Macquarie Bank, selling 3.3 million shares at 60¢ apiece. The company has no debt.
Over the fall, Lydian shares have moved between 60¢ and 75¢, well up from its December low of 22¢. The company has 51 million shares outstanding.
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