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Gold Mining: Investing From 300,000$ to Hundreds of Millions

Many gold deposits, placer and hard-rock, have been discovered in Kyrgyzstan.

By far the largest gold deposit is the Kumtor mine developed now by Centerra Gold Inc., a TSX-listed company. Its total reserves and resources are well over a hundred tons of gold, annual production is around 500,000 oz.

Besides Kumtor, the country has several large gold projects which are either being developed now (Ishtamberdy: Chinese-owned), or are at the mine construction stage (Chinese-owned Taldy-Bulak Left Bank; Chaarat, owned by an AIM-listed BVI corporation, Chaarat Gold Holdings Limited), or are at an earlier pre-production stage (Jerooy — owned by Alliance-Altyn, a Russian-Kyrgyz venture).

Distribution of licenses for large strategic gold deposits is done exclusively through tenders organized by the Government of the Kyrgyz Republic. Having burnt their fingers on dealing with unqualified speculators in the past years, the Government now accepts applications only from well-capitalized experienced mining companies. We think that this is absolutely fair.

In Kyrgyzstan there is a certain number of medium size gold deposits (2-10 tons in reserves, for hard rock). Their profitability without further exploration and increase of reserves is a disputable matter, because the cost of building the benefication plant and all the infrastructure may kill all the potential profit (there are a few exceptions). Investors put their money into such projects usually in hope that further exploration will yield a good increase in reserves. This makes sense: during the Soviet times many of such deposits were not sufficiently explored.

A separate category of gold projects in Kyrgyzstan are gold placers. This is a peculiar category: if profitable production of gold from hard-rock deposits starts from the content of 3-4 grams per ton, placers may be profitable even when the content is 0,2 – 0,3 grams per cubic meter of sands. Chemical reagents are not required for benefication (mechanical processes are used), and the investment needed to launch a gold placer project into production are times lower than with a proper hard-rock mine: 300-500,000$. Reserves starting from 20-30 kilos of gold per prospect can make economic sense, when the same figure for orebody gold would probably be in single tons.

The main challenge in recovering gold from placers in Kyrgyzstan is very low content and tiny size of the gold particles. Nuggets are practically unknown in Kyrgyzstan; those which are found are smaller than a one cent coin. The other challenge is a relatively small size of placer deposits: licenses with reserves exceeding 200 kilograms are rare which means that the mining company focusing on placers must constantly look for new targets to maintain production.

As far as the potential to discover new gold deposits (hard rock or alluvial), please consider the following.

Throughout the territory of what is now the independent Kyrgyz Republic, the Soviet Union for many years was intensively prospecting for Uranium, and with much success. As a consequence, all the territory of Kyrgyzstan has more or less been surveyed with at least regional-scale exploration during the Soviet days. When they prospected for Uranium, they assessed all other mineral occurrences too.

This means that the chances of discovering a yet unknown large gold deposit in Kyrgysztan are not so big. Maybe it is ‘hiding behind’ an underexplored deposit, and maybe not. Of course, the geological potential to find larger deposits in the country exists, and any geologist will gladly tell you that (geologists generally love to talk with investors about ‘potential’ and ‘perspectives’). From the commercial standpoint, though, investment of significant capital into prospecting for a new large goldfield in Kyrgyzstan most probably carries an unjustified risk.

A full-scale exploration of a gold deposit with reserves of gold (emphasis on ‘reserves’, meaning the real gold and not the vague expectation that it might be there somewhere) of over 30 tons would cost 20-30 million dollars at least. The prospecting phase will require a very small fraction of that amount, but the proper exploration (wells, shafts etc.) will be most costly. Only when the company certifies reserves of the deposit it may talk about the commercial potential of profitable production.

Going public as a way to raise money for mining in Kyrgyzstan

Prior to the financial crisis of 2008 many ‘junior’ companies came into Kyrgyzstan, acquired gold prospects, brought them to varying degrees of exploration (usually, to a very basic degree) and then went to stock exchanges to raise capital for further exploration. This model of business is firmly closed now: the market of publicly quoted junior gold mining companies has been depressed for many years.

Among the past stories of success one can name Chaarat Gold, a junior explorer: their public placement on AIM in 2007 was a huge success. Now the company has completed exploration and looks for a strategic investor to build a mine with all the infrastructure (their market capitalization on AIM is around 90 million USD with about 7 million oz of gold reserves).

Other companies (except Centerra Gold, which can hardly be called a ‘junior’) have developed with much less success. A number of them left the country having sold their assets, some remained. The list of public companies with mainly Kyrgyz exposure can be viewed here — some of those on the list are from the gold mining sector.

Gold licenses market: placers

In Kyrgyzstan investment opportunities in placer gold mining start from 100 — 200,000$.

The cheapest license to explore alluvial gold on a prospect which does not yet have the status of a deposit can be purchased at the official auction for 20-30,000$. For approximately the same price you will have a chance to buy a similar license from local ‘squatters’ at the end of the second year of their futile attempts to sell it for 100-200,000$ (it is the same story every year, but they never seem to learn…)

The quality of such a license (procured from the auction or a squatter company) will be, diplomatically speaking, speculative. Everything will depend on whether the Soviet geologists who sampled almost all the areas with gold placer potential, really missed a good spot, or (most likely) you will be exploring and bringing to production a small goldfield with 30-50 kilograms of reserves (such objects were of little interest to the Soviet geologists and many are left unexplored).

There are notable exceptions from this rule (for example, in 2011 we invested into a totally unknown area and brought it to become a gold deposit with reserves exceeding 100 kg of alluvial gold), but those exceptions do not undermine the general validity of the rule.

Please note that the purchase of an exploration license at the State auction for even 200,000$ does not guarantee the quality of the prospect. From time to time such auctions are visited by Chinese investors who push the prices unreasonably high. We do not know of their motivation (perhaps, just to buy anything and then steal1 spend even more, having secured a line of financing from China). Never compete with Chinese companies at auctions.

To more or less secure the launch of successful placer gold production we recommend to buy licenses which already have at least a few dozen kilos of gold in ‘reserves’. They can be found on the licenses market and their price varies drastically (if the license goes cheap, check out the relations of the license holder with the local villagers).

The launch of production at the placer prospect (purchasing and renting equipment, construction of the camp, resolving all the permitting matters, hiring the workers etc.) should cost within 250-350,000$ — provided that you do not buy new equipment but rent it (except for the dredge and other core equipment). If operated correctly, such prospect should pay back your investment by the end of the first year of operation.

Gold licenses market: hard rock

A good selection of licenses for hard rock gold prospects is available for a very reasonable cost from the State auctions — starting from tens of thousands USD. A few of those can also be purchased on the market.

However, in most cases such licenses do not allow to start profitable production immediately: given the relatively modest reserves (2-5 tons of gold in ore), they require additional exploration to bring the reserves to figures when the cost of building the mine will be justified.

Such licenses require investment in millions USD, with totally unpredictable results.

Licenses where profitable production without exposure to exploration uncertainties are available in the market. They are typically valued in tens of millions USD (having tens of tons of gold in reserves).

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