2006 has yet again been another year where investors have been reminded of how crucial the location of a project can be. From Uzbekistan to Argentina to Ecuador to Bangladesh, a number of explorers and producers have been damaged by a variety of region specific challenges.
Mercator Gold, on the other hand, has the distinct advantage of having a very low country risk profile. Mercator is in the process of redeveloping the St. Barbara gold mine and Yaloginda Carbon in Pulp Gold Processing Plant in the Meekatharra Greenstone Belt in Western Australia - a district that has historically produced some 3.5 million ounces from 20 shallow pits and underground mines. St. Barbara Ltd once ran a successful gold operation, but ran into trouble when gold prices where hovering around $200/ounce, so the mine was put into care and administration and St. Barbara literally 'sat' on the project for years doing very little.
Along came Mercator in 2004 to earn in a stake in the licences covering a large part of the Meekatharra tenements to fund further drilling and conceptualisation, as St. Barbara was in risk of losing the licences if they didn't do something with them. Where others saw a washed up mining operation, Mercator saw an opportunity to get involved in an historical project with plenty of reserves in the ground - a decision that should be vindicated in 2007 as the project nears production once again. Since first earning in, Mercator has consolidated its position by acquiring the entire operation including the Yaloginda Plant from St. Barbara for A$18 million in January 2006.
Mercator has quite a few arrows in its quiver. The mine-site has existing infrastructure, road access, existing planning permission and a huge database of historical data to work with. Oh, and also 2+ million ounces of indicated & inferred resources and a plant undergoing refurbishment with a replacement cost of US $20 million. One of the immediate advantages that Mercator found itself in was not requiring bank finance to build a mine - it was already there! Instead £10 million was raised recently to fund the drilling program to increase confidence in various pits, re-furbishing and commissioning the plant and a healthy whack left over for general working capital, contingency funds and the need to possibly take a put on some of the production.
Mercator have also been using cutting edge software, called SpaDisTM, which uses complex mathematical formulas to interpret drill results to conceptualise where a company should drill next. The original mine was based on several pits feeding into a central plant which meant the area was subject to lots of drilling - 33,000 drill holes containing 1.7 million meters of drill core is being inputted into SpaDisTM giving Mercator an enviable database of information to increase confidence in the mine plan. SpaDisTM certainly appears to be paying off? At the Bluebird pit, the indicated resource has increased from 106,000 ounces to 408,000 ounces bringing the total indicated and inferred resource for the entire project to 2.16 million ounces at 1.6 grams per tonne (gpt)
The official target from Mercator is first gold production before the end of the first half of 2007 - however, this includes a fairly large provision for unforeseen delays or hiccups. Patrick Harford, Managing Director told us that continued mine commissioning, drilling and resource modelling of the ore body have increased the management's confidence in the project in the last six months.
The mine should produce 90,000 ounces of gold in 2007 rising to 120,000 ounces in 2008; the ore will be sourced from the Bluebird and Surprise pits - both contain soft oxides which are relatively simple to mine. Cash costs are currently forecast at A$350/ounce (US$260) which puts the mine smack dab in the middle of the cost curve.
Further down the road, Mercator has several additional pits where the ore body is being further defined and also 2000km2 of tenements - more potential than you can shake a stick at in a low country risk setting.