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Duo’s Pierina discovery epitomizes new generation of low-cost mines
At first glance, it seems an unlikely partnership. Yet the weathered, laconic geologist with several major discoveries under his belt and the down-to-earth, female stockbroker with a keen eye for opportunity collaborated to form a junior company, Arequipa Resources, that made one of the most important gold discoveries in South America this past decade.
Their Pierina discovery is now a highly profitable producer, epitomizing the new generation of low-cost gold mines able to make the grade in one of the bleakest gold markets of recent times. Officially opened on April 26, 1999, by owner Barrick Gold (ABX-T), it is now producing gold at a cash cost below US$50 per oz.
David Lowell and Catherine McLeod-Seltzer met in Santiago, Chile, in the early 1990s. She was a struggling stockbroker with Yorkton Securities, but one who knew the mining industry better than most of her peers. Her father, Don McLeod, was already a legend in Vancouver mining circles, known for his gregarious personality and gung-ho attitude toward finding, developing and operating mines. Following in footsteps that big wouldn’t be easy.
Lowell, meanwhile, was a geological legend, best known for his academic and industry expertise in porphyry copper deposits and a growing roster of major discoveries. The holder of a master’s degree in geology from Stanford University and a mining engineering degree from the University of Arizona, he has participated in more than 13 major feasibility studies and managed exploration programs all over the world. His biggest success was in Chile, where he co-discovered the huge Escondida copper deposit, now one of the nation’s largest and richest mines.
In the early 1990s, Lowell knew South American geology better than almost anyone kicking rocks there at the time. But he wasn’t as well-versed on the market side of the business, which hadn’t interested him as much as what Mother Earth was hiding below her surface. In the past, his discoveries earned him much praise, the respect of his peers, and royalties. In other words, more fame than fortune.
McLeod-Seltzer, on the other hand, understood the financing side of the business, having watched her father become a major player on the Vancouver scene with his stable of junior companies. The holder of a degree in business administration, she also specialized in mining during her career as a stockbroker. She talked Lowell into forming his own company to hold mineral properties and, in the process, talked herself into a new career as a mining executive.
Arequipa Resources, which began life as Thumper Resources, obtained a listing on the Vancouver Stock Exchange in the spring of 1993, armed with a stable of properties in Peru. The ground was acquired on the premise that the underexplored terrains of Peru were no less prospective than those hosting mines in neighbouring Chile.
The properties were compiled by Lowell, based on 20 years of research and reconnaissance. Major copper producers such as Asarco and Phelps Dodge were first to belly up to the bar, with both securing option deals to explore the better copper prospects in Arequipa’s portfolio.
These projects were soon overshadowed by reports of a gold-silver discovery on the Pierina property, perched at an altitude of 4,100 metres in the Cordillera Negra mountain range in the department of Ancash, near the city of Huaraz.
Initial sampling from 11 pits returned an average grade of 6.84 grams gold and 31.7 grams silver per tonne, followed by eight samples from another three pits, which yielded an average of 15.4 grams gold and 47 grams silver. The mineralization was described as disseminated, with little or no sulphides.
Before long, a zone of disseminated mineralization was defined over a sizable area by 14 pits averaging 9.47 grams gold and 33.8 grams silver. A tunnel driven to provide information on geology and to test mineralization at depth returned a consistent grade of 4.85 grams gold and 180 grams silver over a length of 107 metres. A second tunnel returned 7.81 grams gold and 201 grams silver over a 38-metre length.
The first drill hole confirmed these results, returning an 88-metre intersection, starting at surface, grading an average of 6.58 grams gold per tonne. The results propelled Arequipa’s share price to $20, from $2.50 at the start of the year. The shares reached more than $34 by spring, after subsequent results convinced the market that Arequipa had the goods.
The spectacular results quickly attracted the attention of majors. In the summer of 1996, Barrick made a cash-only, $969-million bid for the shares of Arequipa on the basis that the project had 5 million oz. in the ground. Analysts speculated it had more: up to 8 million oz.
Arequipa played it cool, holding out for an improved deal, until Barrick announced a revised bid valued at more than $1 billion. It allowed shareholders either to receive $30 per share or exchange an Arequipa share for 0.79 of a share in Barrick, plus 50?. Lowell and McLeod-Seltzer signed a lockup agreement covering 23% of the junior’s shares, and shareholders followed their lead by accepting the offer.
The hefty bid was a gamble of sorts (only nine holes had been drilled at the time), but Mother Nature delivered, with subsequent drilling proving up a significant near-surface deposit.
By the end of 1998, reserves stood at 114.3 million tons grading 0.063 oz. gold per ton (or roughly 7.2 million contained ounces), plus an additional resource of 61 million tons grading 0.013 oz. An attractive feature of the deposit was a starter pit dubbed “Payback Hill,” which boasted gold grades exceeding 8 grams per tonne, with no overburden.
Barrick developed Pierina from an advanced-stage exploration property to a producing mine in just over two years at a cost of US$260 million.
Production began in November 1998 and, by year-end, 56,860 oz. had been produced at a cash operating cost of US$48 per oz. Production this year is expected to total 835,000 oz. gold at a cash cost of US$45 per oz. Cash costs are expected to average US$100 over the life of the mine.
Development and construction of Pierina was not without its challenges. The land tenure system in Peru can be complicated and, in this case, more than 2,000 deals had to made to secure title to the lands in and around the mine, as well as for access roads and other infrastructure. Construction coincided with El Ni?o, which triggered record rainfalls that cut supply routes and disrupted operations — not just at Pierina, but all over the country.
Despite these challenges, Barrick began production ahead of schedule, cutting the ribbon this spring on what is now the world’s lowest-cost major gold mine. Peruvian President Alberto Fujimoro was on hand for the official opening, along with his mines minister, Daniel Hokama Tokashiki.
Pierina is a conventional open-pit, truck-and-shovel operation in which ore and waste are being mined in 30-ft. benches. The stripping ratio is 1.3:1 waste-to-ore, and the mining rate is expected to reach a maximum rate of 83,000 tons per day in 2001 with the final expansion of the mining fleet.
The process facilities consist of a valley-fill heap-leach pad and a Merrill-Crowe gold and silver recovery plant.
In addition to gold and silver — and plenty of profits for Barrick and its shareholders — Pierina is generating economic benefits for Peru, particularly for the communities near the mine. It provides more than 400 well-paying jobs for Peruvians, as well as roads and community infrastructure. Other lasting benefits include spinoff trade for local businesses, improved health care and education, as well as environmental and archeological protection.