Geology favours Herencia at Paguanta

Herencia Resources (LON:HER) has come a long way since 2007, when we first looked at their flagship Paguanta silver-lead-zinc project in Chile. Paguanta comprises three individual targets sitting at the centre of 39 square miles of granted mining lease: the Patricia zinc-lead-silver-gold resource – currently in advanced development - the Doris high grade copper-silver prospect and the La Rosa porphyry-copper prospect. Located at the northern end of the Chilean coppery porphyry belt - one of Chile's best geological addresses, where access to infrastructure and skilled labour is excellent - Paguanta has neighbours of the calibre of BHP’s Cerro Colorado Mine, Codelco’s Mocha Project,   Anglo American’s Queen Elizabeth and the Rio Tinto Candelabro prospect.

Herencia acquired 70% of Paguanta by spending US$2m on exploration, with the remaining 30% being retained on a fully contributory basis by local Chilean partner Minera Costa Rica Dos. The project area, some 3,700m up in the Chilean Andes, is in gently sloping terrain. The key target identified by Herencia since they began work at Paguanta is the Patricia Zone, where a silver-lead-zinc mine was active in the late 1800s, focused on several high grade near-vertical lodes or veins. However, the old underground workings had exploited just a small part of what Herencia discovered was a much larger altered mineralised zone some 700 metres in length, containing zinc-lead-silver-gold in high sulphidation epithermal veins and stockwork breccias hosted by andesite volcanic lavas and porphyry intrusions.

It was late 2006 when Herencia put the first ever drill hole into Patricia, and it took them just a year and 7,000m of drilling to delineate an initial resource, centred on the outcropping subvertical Cathedral, Central and Camp Veins. In successive years, further exploration and several drill programmes have advanced the project to a JORC-compliant resource of 3.51Mt at 4.6% Zn, 1.5% Pb, 93g/t Ag and 0.2g/t Au (at a 2% zinc cut-off). The 26,000 ounces of gold now known to be contained within the resource is a recent addition to the resource estimate.

Based upon results from the 2008 Scoping Study the company anticipated a mining and processing operation with an initial Stage One mine life of around five years, based on open pit mining allied to an underground operation. The initial minelife was planned to be 5½ years at an extraction rate of 500,000 tonnes per annum, based on a total mining inventory of 2.67 Mt. Capital costs were estimated at US$55.6 million, with operating costs of around $55 per tonne. There is significant sensitivity to increases in both tonnage and grade – and one such increase has already been achieved by further drilling.

A recent update to the scoping study, following the 2010 drilling campaign, shows a revised underground mining inventory of 1.66M tonnes grading 6.1% zinc, 2.0% lead, 154 g/t silver and 0.26 g/t gold, which gives a greatly increased project NPV of US$90.4 million, 70% of which is attributable to Herencia. With Patricia remaining open in all directions, there is plenty of further scope for extensions to both inventory tonnage and minelife, and infill and exploratory drilling will continue as part of the feasibility study during 2011. The impact of such extensions is clear in the project NPV calculations: if underground mineable tonnage is increased to 2.4 Mt, the project NPV rises to $139.5 million, and if Herencia’s hoped-for project upside can be achieved, and a 3.3 Mt underground mining inventory delineated, the NPV becomes $184.9 million.

During the resource extension drilling in 2010, new veins and extensions were discovered and high grade western, eastern and depth extensions to the Cathedral vein – which houses the bulk of the resource – were also intersected. The gold mineralisation which is now included in the resource figures was confirmed, and whilst low grade, could add upside by providing by-product credits. MD Michael Bohm is confident that Patricia will continue to grow: “Every time we drill we find high grade mineralisation where we expected to find it – but also where we didn't expect to find it!”

Unusually, the existence of old workings on the site has allowed underground bulk samples to be taken for the purpose of metallurgical testing. The results were excellent, demonstrating zinc recoveries of up to 91.6%. Lead recoveries were good at 71%, whilst silver recoveries came in strongly too, at 83.4% recovery. Bohm commented “We are very pleased with the initial metallurgical results as they have positive implications for ensuring a simple design of any processing circuit at Paguanta. This would keep the capital and operating costs of the project down.” 

With the current prices of Patricia’s three key metals steadily on the rise – silver is at a 30-year high and zinc and lead prices, while volatile, are now over $1.1 per lb – the feasibility study should define and deliver a robust economically viable mining project. This study, commenced in late 2010, is scheduled for completion by the end of 2011, and will be followed by permitting and financing leading to potential production by late 2012. It’s a tight and demanding timetable - but according to Bohm: “We believe it's doable”.

With Patricia now well into development, Herencia’s pure exploration focus has shifted a kilometre or two to the north, where Doris and La Rosa offer substantial promise - Doris has never been drilled. 

Doris lies just 1500m NNE of Patricia and hosts multiple outcrops of high grade copper and silver, with sampled surface grades of up to 5% Cu and 600 g/t Ag (approx 20 ounces per tonne). Herencia see potential here for an  open pit mine which can be evaluated and developed at relatively low cost. Drill targets have been defined, aided by a geophysical survey which took place in January, and drilling is about to get under way, with first results expected in late April.  Until the first round of drilling is complete, the structural controls on these multiple outcrops are uncertain – but one thing is certain: Doris is “exotic”. That’s geo-speak for not native to the surrounding country rock – i.e. the copper and silver have been emplaced by a mineralising event (or events) which forced up high-temperature fluids from deep beneath the earth. On their way to the surface, these fluids dissolved metals from the rocks they passed through and carried them upwards, penetrating cracks, fissures and faults and – on cooling – solidifying into the vein systems seen today. Such deposits are common in Chile – usually in close proximity to a porphyry source.

Which brings us to La Rosa, which lies cheek by jowl to the west of Doris and only 3km north of Patricia, and is a potential copper porphyry intrusion which could be responsible for the entire mineralised system at Paguanta.  A 3km x 1km area of intense argillic alteration, heavily weathered and bounded by two N-S oriented faults, La Rosa has at its heart a smaller area of phyllic alteration, featuring outcropping quartz veining. Within this area, an IP survey has identified a chargeability high – a “bullseye” - which underlies the most intense surface alteration, and is a significant anomaly which could represent copper bearing sulphides.

The extent of the surface weathering means that surface sampling is not particularly useful, as it is not representative, but nonetheless, samples which have been taken are anomalous in lead, zinc, copper, gold, silver and molybdenum, and a 300m long quartz outcrop has been mapped.  Drill targets are being identified, and La Rosa will be drilled during 2011.

Herencia have recently broadened their horizons by signing an MOU for a 51% earn-in on a new IOGC-style project (iron oxide gold copper) located approximately 750 kilometres north of Santiago in Region III in Chile. The project – as yet unidentified – lies at low elevations between 700 metres and 900 metres above sea level.  The current owners have drilled the property, producing results of up to 2.88% copper and 2.58g/t gold over 3 metres, just 34 metres from surface. Herencia can earn their 51% interest by drilling a minimum of 6,000 metres over a 30 month period and making staged payments totalling US$600,100 over the same 30 month period.

Managing cirector Michael Bohm stated: "This new Copper-Gold Project opportunity provides Herencia with an advanced, potentially open pittable copper-gold target, located in a geologically and logistically excellent environment. The fact that significant copper and gold grades have already been intersected so close to surface bodes well for us.”

2011 thus looks like a busy year for Herencia – and with investor sentiment returning and a market cap now approaching £50 million, the share price is beginning to reflect some of the potential upside at Paguanta and demonstrates increased confidence in future markets for the metals it hosts. Major investor Nyrstar – one of the biggest smelting outfits in the zinc space – is also showing that confidence by becoming more directly involved in zinc mining as well as smelting. Their current rights issue to raise $674 million is intended to lift Nyrstar’s direct ownership of the zinc it smelts to at least 50%.  They already own more than 10% of Herencia, and have a seat on the board, in the person of their COO Greg McMillan. With Nyrstar’s support and involvement, there can be little doubt that Herencia have a significant project in development at Paguanta.