Placing bets on Colombia

The Gold Report: What makes Colombia an appealing mining jurisdiction to investors?

Paul Harris: Colombia has gold and it’s high grade. There hasn’t been a great deal of modern exploration and so there are probably a lot of deposits yet to be found. In the past 10 or 15 years around 90 million ounces have been discovered here.

TGR: How are investors affected by the recent news that the mining code in Colombia might not change, as it was previously thought?

PH: Effectively, Law 1382 of 2010 is dead and buried, so Colombia is left with Law 685 from 2001. This is generally considered a good thing in the mining and exploration sector because it is a technically based law, and people on both the government and the exploration mining sides are familiar with it. We can now expect the ministry to issue some administrative instruments to correct specific clauses. For example, Law 685 said you can’t mine in the famous páramos, but it never defined what the páramos were. That needs a regulation that can be implemented via an administrative instrument. It doesn’t need the drafting of a new law.

TGR: Are páramos similar to the national parks in the United States?

PH: No. A páramo is a specific ecosystem that typically occurs above 3,000 meters elevation. It is a rare ecosystem that has characteristic flora and fauna. Páramos should be well defined to ensure that they’re protected and also so that land that is not páramo can be available for exploration and mining or, indeed, other economic activity.

TGR: Does the government of Colombia have a firm grasp on how this industry works?

PH: It’s getting there. Colombia didn’t have the financial resources dedicated to the sector to cope with the flood of the interest it received in the past 5 or 10 years. That has changed. This government has created the National Mining Agency and fully funded it, so it’s able to do its job. Initial signs indicate that it’s progressing well. One of its first tasks was to clear the backlog of concession applications. It’s now down to about 7,000 from a backlog of 19,000. When we come out of this process, the sector should be in better shape. The market retrenchment of the last 18–24 months is also showing the government that having gold in the ground is not enough. It is starting to understand why inefficient administration can be slow death to juniors that may not know where their next fund raise is coming from. It is also awaking to the fact that capital is highly mobile and that despite its gold endowment, it still has to compete with other mining jurisdictions by offering attractive business terms. The explorers that came in 2009 or earlier, unfortunately, as the first to hit the beach, were naturally the first to run into all the snags.

TGR: What has the industry in Colombia achieved since the exploration rush there in 2009?

PH: If you think of the mine lifecycle curve, right now we’re in the discovery stage. About 10 gold ore bodies have had resources defined and quantified in resource statements. The question is whether some can now go on and become mines in the next three to five years. It takes several years to go from a discovery to a resource to a feasible mining project to its implementation. Environmental and community issues will make it increasingly challenging to develop mines, and projects will have to be better than they were in the past. In this, Colombia is no different than anywhere else.

TGR: About 40% of the 65 tons of gold produced in Colombia last year was extracted from unlicensed mines. How is that affecting legitimate industry players? Are illegal miners influencing public opinion?

PH: It is important to distinguish between the traditional, artisanal miners that work without a license and are technically illegal, and the criminal miners that are part of organized crime. Typically exploration companies will not work on concessions near criminal mining.

In the past, criminal groups in Colombia had various economic activities, such as kidnapping and growing and selling cocaine. Former President Alvaro Uribe put a lot of heat on the criminal groups about the kidnapping, and it became a difficult business model for them. If you kidnap people, you’ve got to feed and transport them. They’re bulky. They’re visible. The logistics are complicated. The same is true with cocaine. It’s a bulky commodity that needs to be transported and protected. It’s a high-cost business model, whereas illegal gold production isn’t. Gold is relatively small, easy to transport and something you can sell anywhere. It’s easy, quick money.

TGR: How is the government addressing this?

PH: It has started directing resources to it. In April the armed forces actually destroyed some of the excavators that criminal miners used to take gold out of the alluvial areas. Criminal mining has negative repercussions for everybody. The Colombian government isn’t getting taxes or royalties, and local communities are exploited as people are forced to work without health benefits or proper pay and sometimes at gunpoint. The exploration sector suffers because companies cannot go and work in those areas. The only way to address it is to take the fight to the criminals and destroy their equipment.

TGR: Looking at projects, which are going to become gold mines?

PH: The two leading candidates are Continental Gold Ltd. (CNL:TSX; CGOOF:OTCQX) with Buriticá and Red Eagle Mining Corp. (RD:TSX.V) with Santa Rosa. Continental Gold’s Buriticá could be producing 200,000 ounces (200 Koz) a year for 20 years. It will be a cash cow for Continental Gold or whichever major eventually takes it over. Red Eagle Mining is more modest, with a 10-year production horizon at a smaller volume of perhaps 50 Koz a year. It’s relatively high grade and near surface, so it should become a gold mine.

TGR: Several members of Continental’s management team were part of Colossus Minerals Inc. (CSI:TSX; COLUF:OTCQX), which is entering production in Brazil. Does that give you more confidence in Continental?

PH: Ari Sussman had great success at Colossus Minerals and is repeating that at Continental. At both companies he brought in the best technical expertise he could find, which increases the chance for success and successful execution.

TGR: Red Eagle Mining raised $20 million last year. How far will that take the company?

PH: All the way to the feasibility stage. It hopes to have its preliminary economic assessment sometime in the second quarter, and then it’s going straight to feasibility, which it says it will complete in the first quarter of 2014.

TGR: Has it talked about tons per year or ounces per annum?

PH: It’s got a resource of about 800 Koz.

TGR: How is it expanding that resource?

PH: Red Eagle was the first company in Colombia to readjust its strategy to focus on near-term production. It refocused on its San Ramon deposit at Santa Rosa to bring that into production, which will enable the company to survive and get some cash to do other work on its Santa Rosa concessions.

TGR: So this company looked at the financial climate and decided to develop the 800 Koz it has right now so it can get some cash flow and be less dependent on the equity markets for funding?

PH: That’s right. In this day and age any company with the possibility of near-term production is going to actively look for it because it’s not going to get any money for exploration from the markets. If it has cash coming in, it can keep going. Seafield Resources Ltd. (SFF:TSX.V) is taking that approach, as is Batero Gold Corp. (BAT:TSX.V). In Chile, QRS Capital Corp. (QRS:TSX.V) is looking at that with its copper project.

TGR: Does a merger between Batero and Seafield ultimately make sense?

PH: In many ways it does because the two projects are next-door neighbors. Having shared infrastructure and shared roads makes sense. However, both Batero and Seafield are run by very competitive CEOs, so coming to an agreement about who wears the trousers may be difficult. There may be too many egos involved for a merger to occur. That said, they have some important shareholders in common that could eventually try and push them together.

TGR: Can you tell us about some other companies operating in Colombia?

PH: Another possible gold mine is Gramalote, a joint venture 51% owned by AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) and 49% by B2Gold Corp. (BTO:TSX; BGLPF:OTCQX). It’s at the prefeasibility stage. I think the two partners have different strategies for that project. For AngloGold Ashanti, I think it’s a pilot project to show Colombia that it’s able to develop modern mines safely and in a way that benefits everyone and cares for the environment so that it can develop its massive La Colosa deposit. B2Gold is an emerging midtier producer and I think it really wants to optimize Gramalote for making money. Their different perspectives may mean the partners have different opinions about optimal pit size and production rate. For that reason I think AngloGold Ashanti will eventually buy out B2Gold so it can develop Gramalote as it wants to. I imagine that is why it wrestled operating control from B2 a couple of years ago, so it can proceed with its plan.

TGR: What about Eco Oro? Will Angostura eventually become a mine?

PH: Eco Oro Minerals Corp. (EOM:TSX.V) owns Angostura. It’s at the prefeasibility study stage. I think Eco Oro is waiting for three things—the results of its prefeasibility study, the location of the Santurbán Park boundary and the definition of the páramo ecosystem.

The Santurbán Park boundary has been defined and—surprise, surprise—it didn’t impact any of the ore bodies defined by the companies exploring in that region. It still remains for the government to define a páramo. How and where it draws that line could have an impact. Perhaps the most important of those three things for Eco Oro is the prefeasibility study.

TGR: Any other companies you would like to mention?

PH: Atico Mining Corp. (ATY:TSX.; ATCMF:OTCBB) has an option to acquire 90% of El Roble. Atico was due to exercise its option in the second quarter, and when it does it will obtain copper production. It has until the end of 2013 to exercise its option and given the recent fall in the markets and stock prices and given that the option will cost it $14 million, it may decide to postpone that until the end of the year to try and build up its stock price again so that any potential equity financings are less dilutive.

The company has a very clear understanding of the mine and the deposit and will be looking to increase production when it takes control. The mill was built by the Japanese and has more production capacity than the mine currently uses. The company will only have to increase its mining rate and open up new areas for exploitation to rapidly increase production and start generating even greater cash flow.

TGR: Is it producing copper concentrate and gold concentrate, or is it producing dore and copper concentrate?

PH: It’s a copper concentrate, and the copper concentrate contains gold.

TGR: Do you agree with recent drill results that suggest there is potential for further discoveries at El Roble?

PH: Absolutely. Atico was attracted to El Roble because it’s a volcanic massive sulphide (VMS) deposit, and those typically have clusters of lenses. Yet El Roble only exploits one lens. Under the VMS model there should be other lenses in its vicinity. It has a 10 kilometer strike or trend to explore. It has other targets to drill and expects to find other high-grade copper-bearing lenses.

TGR: Do you have one last piece of advice for Colombian investors?

PH: Patience. Exploration and mining is a long game. If you expect to get rich quick you better go to a casino, spin the wheel or put it on the horses.

Paul Harris is a mining information expert with over 12 years of experience as an analyst, journalist and researcher on the mining industry. He has spent nine years in Latin America, four years in Colombia and five years in Chile. Harris has written for leading industry publications and business newspapers around the world and produced reports for leading consultancy firms prior to starting the Colombia Gold Letter.

Source: Brian Sylvester of The Gold Report

Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

DISCLOSURE:

1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Gold Report: Continental Gold Ltd., Red Eagle Mining Corp., Colossus Minerals Inc., B2Gold Corp. and Atico Mining Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Paul Harris: I or my family own shares of the following companies mentioned in this interview: Continental Gold Ltd. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.

5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.

6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise – The Gold Report is Copyright © 2013 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.