Glencar Mining’s partnership with Gold Fields bodes well for future

Given market conditions, we can understand why Glencar has done a second deal with Gold Fields for a carried interest in future production

Mali, in West Africa, has long been regarded as an excellent location for gold explorers and miners. A modernized mining code enacted in 1991, combined with attractive fiscal terms for gold producers, have propelled the country into the top three gold producers in Africa - behind South Africa and Ghana.  The attractive fiscal terms and excellent prospectivity of this small African nation haven’t been lost on Glencar Mining (AIM: GEX) who entered into an option to acquire the Sankarani Project in 2003.

Sankarani is a classic example of how a project discarded by a mining major can present a lucrative opportunity for a junior company. Randgold Resources (LSE: RRS, Nasdaq: GOLD), which was recently promoted to the FTSE 100, had previously explored Sankarani but it didn’t fit with its priorities, as reserves at its  Morila mine project in Mali exceeded 2 million ounces and were growing apace. This allowed Glencar to jump into the fray, acquiring a significant project with an extensive exploration database and a small resource of 280,000 ounces of gold at Komana. Glencar set to work immediately, and within 12 months, reported promising rock chip and soil sampling assays, including 32.4 grams per tonne (‘gpt’) at Farasaba.

In August 2005,  confirmed it was in advanced talks with Gold Fields Limited  (NYSE: GFI) for a 65% earn-in interest on the Farasaba, Sanioumale and Bokoro concessions – about 750 square kilometres of the Sankarani Project. Glencar excluded the entire 250 square kilometres Komana concession (which had been part of the original Sankarani Project) from this deal. At this time, Glencar also acquired the 250 square kilometres Solona concession.

It soon became clear why Glencar had completed the acquisition of Sankarani and why Gold Fields’ interest was aroused.  A few weeks later Glencar reported bonanza gold grades, including 20 metres at 55.2 gpt gold from drilling on the Komana concession.  The Komana concession became a high priority project for Glencar, and by October 2008 the company reported an updated resource of 1.25 million ounces of gold at the Komana East and Komana West targets. This resource was based on an average grade of 1.6 gpt gold, and represented an increase of 139% in just twelve months.

SRK Consultants concluded that by using selective mining techniques, the mined grade of the ore could be held at 2 grams/tonne or higher with the loss of only 10% of the metal content - and all within 150 metres of the surface making it amenable to open pit mining.

Komana East still remains open in all directions, so it is plausible that the resource could be increased with further drilling, which is expected to recommence shortly. Grades at Komana West are quite high, so a later  underground operation is conceivable, starting from the floor of an open pit mine. Further drilling at Komana West will be aimed at proving the down-dip and down-plunge extensions of high-grade shoots. Drilling is also planned at nine more prospective targets along the 23 kilometres of the “Sankarani Shear Zone” (which, despite its name, is part of the Komana licence).

Gold Fields now owns 51% of the Sankarani Joint Venture Project, having met the requirement of spending US$5 million on exploration by the end of 2008. Gold Fields has now spent approximately US$6 million on exploration at Sankarani. Gold Fields’ expenditure identified six target areas for drilling, and it now has the option to earn 65% by spending up to a total of US$12 million (including the US$6 million already spent) on exploration and, if warranted, a feasibility study before the end of June 2011. On completion of a positive feasibility study, Glencar may require Gold Fields to provide Glencar’s share of the finance needed to build a mine with payback from production, at LIBOR plus 2%, from production cash flow, andGlencar will give a further 5% interest to Gold Fields.

The relationship that Glencar and Gold Fields have built over the Sankarani Joint Venture Project is clearly working well for both parties. Just a few weeks ago, the nimble gold exploration junior announced another joint venture with Gold Fields, this time for the Komana concession.  Gold Fields has agreed to take a 15% equity stake in Glencar for US$3.2 million at a 30% premium to current market price - subject to approval by Glencar’s shareholders. Gold Fields also agreed to pay four annual payments of US$1.25m (totalling US$5 million) to fund Glencar’s ongoing exploration programmes on the adjacent Solona licence and elsewhere. As part of this arrangement, Glencar has granted Gold Fields a right of first refusal on Solona should Glencar wish to bring in a partner at any stage.  Glencar has also committed to spend US$1.5 on the Solona concession within two years, providing results obtained there warrant further expenditures. Results from the drilling at Solona, in May 2008, showed significant gold mineralization intersected at three targets, including 4 metres at 155 gpt gold at Badogo Malikila.

In total, Gold Fields committed to spending up to US$32 million to earn up to 65% interest in the Komana concession within five years; Gold Fields can, through a four year staged earn-in arrangement, acquire a 60% interest in the project. On completion of this, Gold Fields will have the right, but not the obligation, to earn another 5% by funding further exploration and/or feasibility study programmes, by spending a further US$12 million.

If a feasibility study is not complete at this point, Gold Fields and Glencar may fund further expenditures on a 65/35 basis.  On completion of a feasibility study, Glencar has the right to participate in the development of a mine, the size of its participation being determined by its remaining interest. Gold Fields may also elect to fund this participation with payback coming from production cash flow at LIBOR, plus 5%.

Hugh McCullough, Chief Executive of Glencar, told Proactive that Gold Fields has abandoned “the rule of five” in favour of “the rule of two”…

Gold Fields previously considered a resource of five million ounces of gold to be their minimum target size, whereas now they regard a resource of two million ounces as the minimum. This implies that it is plausible to Gold Fields that a resource of 3 million ounces could be developed for the Sankarani and/or Komana joint ventures, given that Gold Fields has a two-thirds stake in each of these joint ventures, and Glencar has a one third stake.

Glencar also has prospects in Ghana and Uganda, which are currently being offered for joint venturing as Glencar has decided to become a Birimian Trend specialist. The Birimian is a geological zone that is currently the fastest growing gold exploration and production area in the world. It extends through Ghana, the Cote D’Ivoire, Guinea, Mali, Senegal, and Burkina Faso. Comparisons have been made between the Birimian and the Carlin Trend in Nevada; at Carlin, about one third of its known two hundred million ounces of gold resources have been mined. There are over forty producing gold mines along the Carlin trend, but only twenty-five mines are in production on the Birimian.

Having developed a technical model of the Komana deposit, Glencar is on the hunt along the Birimian for more “Komana look-alikes”.

Given market conditions, we can understand why Glencar has done a second deal with Gold Fields for a carried interest in future production, rather than engage in the uncertain enterprise of attempting to raise US$20 million to heroically take Komana into production alone. By sticking with the knitting and building on its relationship with Gold Fields, Glencar has secured financial stability for a number of years, and can settle down and focus on the possibility of doing some very serious exploration.

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