Gold on the silk road

Source: Energy Digital

Date :26/09/2007 15:09:40

How Aurum Mining is finding the once hidden treasures of Central Asia.

Written by Ruari McCallion & Produced by Alex Smith

David S Bohigian, USA Assistant Secretary for Market Access and Compliance, recently observed that Russia was paying ‘a lot of attention…to the exploration and production side of energy…There is cause to think twice’.

In other words, if you think you might like to invest in Russia’s energy sector or any of the other economic ‘crown jewels’, go and have a lie down until the feeling passes. So why is a UK-based mining company staking its future on mines in Central Asia?

“Our main area of operations is in Kyrgyzstan, which is a lot more exciting than Russia,” said Aurum’s CEO, Mark Jones. Russia isn’t the Soviet Union and Kyrgyzstan is one of a number of countries that emerged from the old structure since 1991.

In the past, any claim to fame that the country had was related to its location on the old Silk Road, which went from Europe to China. For the last 100 years, it’s been lost in obscurity.

“Much of Central Asia was closed off during the Soviet era and Kyrgyzstan, which was the centre of uranium mining for military and nuclear activities, was probably the most closed off of all,” said Jones. “Until the break-up of the Soviet Union, no-one really knew much about it at all – which always presents an opportunity.”

GOLDEN SHOT

The opportunity that Aurum has seized upon is about gold mining. The company joined the AIM in May 2004 as a vehicle specifically formed to target the acquisition of gold assets in the former Soviet Union. Eight months later, in January 2005, it gained an exploration licence to the Andash gold and copper project in the Kyrgyz Republic.

The emphasis was very much on exploration at that time but the management of the company recognized the need for modification to the strategy and brought Jones on board two years ago. A graduate of Camborne School of Mines, his 25-year career has taken him around the world with Anglo-American, AEL Group, and Ingersoll-Rand.

“One of the things we wanted to do was to move from exploration through development to exploitation, and quickly,” he said. The three phases of mining are, first, exploration – looking for and identifying reserves, with some work on confirmation; second, development – confirming the opportunity, raising finance and building the mine; and third, production, which is the cash-flow stage. Its exploitation that brings in the rewards, long-term – if the conditions are right.

With the price of gold at historically high levels, the conditions are right for the Andash project, Zone One of which has JORC (Joint Ore Resource Committee) proven and probable reserves of 16 million tonnes of ore at 1.05 grams per tonne, with 0.4 per cent copper. The gold equivalent is 1.1 million ounces, which is projected to be worth over £900 million through the anticipated nine-year life of the Zone One development.

COST CONTROL

Mining is a risky business and costs have to be tightly controlled in order to extract maximum value. Aurum has taken a big step in the right direction by managing to shave $7 million off the estimated capital development costs of $55 million.

“We managed to raise all the finance for the mine through equity, which is pretty much unique. We raised £30 million on AIM in February 2007,” said Jones. “We have no debt, we’re not beholden to banks and can run the business in the best way to extract optimum value for our shareholders.

We don’t have to use outside contractors during the building phase, for example. We have experienced personnel on site, like our project manager, Norman Livingstone. We know how to build a mine and that alone has saved $3 million.” The development phase is famously a black hole for news, with little to tell investors or excitable reporters, and is a period when cash is spent, rather than coming in. So Aurum is using tried and trusted techniques, rather than cutting-edge technology, to get to the next stage fast.

“We use copper mining techniques, which brings the two metals out together,” he explained. “That costs much less than cyanidisation. The ‘cakes’ we’ll produce from processing the ore, which are neither gold or copper bar, contain 23 per cent copper and 80 grams per tonne of gold. We negotiate with smelters on the ‘gold credit’ – how much gold can be extracted – and we can afford to ship the cake to the West, where we get a better gold return.” Production is scheduled to begin in H2 2008.

RISK MANAGEMENT

Aurum steers clear of potentially choppy local political and economic waters by ensuring the company has a high local labour content. There are only three Westerners in the Kyrgyz company: Geoff Geissman; finance officer Andrew Howson; and project manager Norman Livingstone. The local managing director is a Kyrgyz national and Aurum has invested in training and education facilities to raise local skill levels.

“We’ve always made clear that we don’t want to employ large numbers of expatriates,” said Jones. “Seventy per cent of the labour force is Kyrgyz and 95 per cent are from Central Asia. This doesn’t make us immune from acquisitive or nationalistic thoughts but our structure does enable us to defend ourselves from rapacious acts.”

The company is also advised by an expert on Central Asian politics. It’s essentially about risk management – as is building the pipeline.

“When we first arrived, we felt we were just one of a number of companies undertaking similar activities and we felt we had to differentiate ourselves. We concentrated on getting from exploration to production quickly and put a lot of effort on getting Zone One rerated, raising finance and moving forward,” said Jones.

“By default, we ended up spending less time on exploration. Our strategy is to fill that gap by undertaking more from now on and build our reserves to take us beyond the nine-year life of Zone One.”

Related Links

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