Chaarat Gold – developing a new gold province on the Tien Shan

Nestling in the north west corner of Kyrgyzstan, on the highly prospective Tien Shan gold belt, is the 604 sq km Sandalash emerging gold province being explored and developed by Chaarat Gold (AIM:CGH) who have held the licence since 2002.

The current focus at Sandalash is three distinct clusters of gold occurrences in a Prospect Area 6km wide over 28 km of strike along the Sandalash river. Originally explored for gold and antimony by the North Kyrgyz Geological Expedition (NKGE), it had been the subject of both surface and underground work, including soil and rock sampling, geophysics, trenching, drilling and the excavation of several adits. NKGE identified a series of north-east trending gold anomalies which were later further explored in the late 90s by Apex Silver and Newmont, so that in 2002 when Chaarat acquired the licence, an impressive database came with it. New eyes on old data revealed that the Prospect Area had, in fact, greater potential than had at first been realised, and the “new eyes” decided to focus on the centre of the strike at the Chaarat project, leaving the outer projects - Kashkasu and Minteke - for exploration at a later date.

At Chaarat, the Sandalash River cuts through a package of north-easterly trending sedimentary rocks dipping at around 40º northwest, in which the lower Chaarat Formation of meta-siltstone and argillite is overlain by the mainly quartzite Tulkubash Formation. Both have been cut by several faults and younger intrusions, and a very extensive deep hydrothermal system has deposited minerals – including gold - in these structural breaks in the two rock formations and in a major NE-SW aligned shear zone along the contact between the two, some 600m above river level.
This has given rise to three roughly parallel NE-SW trending mineralised zones contained in the northern slopes above the river, comprising a number of discrete project areas, numbered according to their distance along strike from the project baseline.

In the Main Zone, consisting of Chaarat Formation siltstones and closest to river level, mineralisation is found in a series of roughly parallel slip faults running NE-SW along the slopes, dipping steeply at 70-80 degrees to the NW (i.e. into the mountain). Seven discrete project areas - M2400, M3000, M3400, M3900, M4400, M5000 and M6000 – are being developed.

Upslope from the Main Zone is the Contact Zone, a 10 km long shear system developed where the Chaarat and Tulkubash formations meet - mineralisation in this zone has been traced over a length of ten kilometres, and is associated with sulphides, sericitic alteration and minor quartz veinlets. Three separate project areas occurring along strike have been drilled: C4000, C4600 and C5300, with extensive underground development at C5300.

Further upslope, the 4 km Tulkubash Zone, running parallel with the Contact and Main zones, is hosted in silicified quartzites, and mineralised zones exhibit pervasive silicification, brecciation and some argillic alteration, usually with stibnite (the source of antimony) present. Only one area has been drilled - T0700 at the south western end..

After more than six years of systematic seasonal exploration and drilling, Chaarat confirmed in March 2009 an overall resource in the eleven project areas of 3.34 million ounces of gold, with an average grade of 4.3 g/t at a conservative cut-off of 3 g/t. Of the total, 1,598,000 ounces is hosted in the potentially open-pittable Main Zone, and a further 1,432,000 ounces in the Contact Zone, where the C5300 underground project alone now contains more than a million ounces. All projects remain open to depth and down dip, whilst the overall project is open along strike, and there should be a substantial improvement when a new resource statement is produced early next year following the 2009 drilling and underground development programme. There is also great scope for further discoveries – only one small 6km-long portion of this huge 604 sq km licence area has yet been investigated.

Of particular interest this year has been the potential for connecting the million-ounce C5300 project to the next one along strike at C4600. In 2007 Chaarat drove an adit into the mountainside at C5300, starting 275m downslope from the outcropping mineralisation, in order to test the mineralisation at depth. The adit intersected the Contact Zone over a width of 22.45 metres at 5.7 g/t, which encouraged further development along strike and the construction of three drilling chambers from which the orebody has been drilled from underground. Thus far, a depth extent of 520m from surface has been drilled. Development and drilling have been continued steadily down strike towards C4600 through Sections 5280, 5200, 5120, 5040 and 4960 with excellent results, and this year, Section 4880 was drilled for the first time, showing consistent mineralisation and returning grades of up to 11.4 g/t . Further development drifting and drilling of Sections 4800, 4720 and 4640 from a new drill chamber should complete the link, yielding over a kilometre of continuous mineralisation.

T0700 in the Tulkabash Zone has also formed part of this year’s 5,000 metre drilling campaign, and an old Russian adit was re-opened and sampled with excellent results. Mineralisation widths range from 18-24 metres, with grades of up to 9 g/t, at depths not exceeding 180 metres from surface. One of the objectives at T0700 is to evaluate its open-pit potential, which will greatly improve project economics.

Chaarat’s pre-feasibility study is  expected mid 2010, following incorporation of this season’s results. Meanwhile, last December’s update of a scoping study conducted by Behre Dolbear estimated production of at least 210,000 ounces of gold per annum at cash costs (before by-product credits) of $458 per ounce over the life of mine. A 10% project NPV at $750 gold was calculated as $152 million, rising to $351 million at $950 gold. The study also identified potential for expansion via a second phase of at least equal size, following further exploration. Capex is estimated at around $230 million, which includes $17 million working capital. 

Unusually, for a junior, Chaarat had already conducted several seasons of work, funded by supportive shareholders and directors, before listing on AIM two years ago and had already defined nearly 2 million ounces of gold.  Directors and management continue to support the company and between them now own almost 25% of the shares in issue. They were joined this summer by China Nonferrous Metals Int'l Mining Co Ltd (CNMIM) who subscribed for 22,469,289 new shares at 25p per share, raising £5,617,322 of new funding – sufficient to see Chaarat through to 2011. There is more significance to this investment than just the money, however, as explained by CEO Dekel Golan at the time: "CNMIM, being very familiar with the Chinese mining environment will be able to assist in introducing the Company to financial institutions interested in financing projects such as Chaarat and to various contractors and service providers required for such development."

This opens up several opportunities for Chaarat to realise value from the project.  With help from a supportive major investor like CNMIM, they can press on through feasibility and financing to production; they can seek JV arrangements; or they can sell the project outright to a Chinese or Western miner looking to acquire further resources.  And – as the company say themselves in a recent presentation – if they choose to sell, what might the Sandalash licence be worth? Their own estimates, range from $315 million to $700 million – with the lowest based on $90 an ounce, Canaccord’s calculation of the price paid for the average gold acquisition during 2009.

However, the share price does not remotely reflect this level of potential value. The market appears to be factoring in significant risk, particularly “country risk”, as although the legislative regime for Western miners in Kyrgyzstan has improved and the entry of Gold Fields into the nearby Talas region signals increased international confidence, at today’s share price of 27.25p, market cap is just £31 million.

In the light of this lowly valuation – a mere $15 an ounce - and given the certainty of increased resources and probability of future gross operating profits approaching $100 million per annum, one has to ask – yet again – has the market got this one wrong?