Patagonia Gold

Source: Energy Digital

Date :27/09/2007 11:48:49

Experience and adaptability reap rewards for Patagonia Gold

Director Marc Sale explains how the company is utilizing the management team’s previous gold mining successes to explore exciting new properties

Written by James Hurley and Produced by Alex Smith

Patagonia Gold has its origins in HPD Exploration Plc, initially formed as a wholly owned subsidiary of international mining company Brancote Holdings Plc that was set up to hold exploration projects predominantly in Argentina but also included areas in Canada and New Zealand. Brancote Holdings was acquired by Meridian Gold Inc. in July 2002, and the following year HPD changed its name to Patagonia Gold and the company’s management team focused their attention on developing HPD's assets in Argentina. A crucial step in this process came with an AIM flotation in 2003, raising an initial £2 million to fund concentrated exploration in the Patagonia region of South America.

The company is based in Buenos Aires and London, with principle exploration office in Esquel, in the southern Patagonia region and regional exploration bases in San Juan, Santa Cruz and a new base in Perito Moreno which is used for field operations.

The exploration principle

The previous successes of Patagonia Gold’s management team provide an excellent example of the principle that an exploration company can be very successful without ever actually producing anything.

“Most exploration companies are listed on an exchange that gives them the opportunity to raise funds for exploration. In our case, we can go to the AIM market with a prospect to raise money,” says Patagonia Gold’s Operations and Non Executive Director Marc Sale. “We can use that money to enhance a prospect, which of course would increase our share price. We’re in a speculative role, without necessarily producing an end product; you can be a very successful exploration company and never reach a mining situation, despite the intention being real.”

The management of Patagonia Gold is essentially the same management team of the Brancote Holdings’ subsidiary, which was one of the best performing companies on AIM in 2001. “Its share price went from 10p to £2.50. The reason for this was that Brancote Holdings explored and discovered a very large gold deposit in South America which was sold for approximately $360 million. The success was so great that the management decided to form another company and try it again,” Sale explains.

Patagonia is now trying to repeat that success in South America with a prospect that can add value to the company, with one crucial difference; this time Patagonia Gold is determined not only to find another resource but to take it through to production. “It may well be that Patagonia Gold becomes Patagonia Gold Mining in a few years,” says Sale.

Track record

Gold has been very buoyant for the last three or four years, at well over $600 an ounce, making the exploration market extremely competitive. “The investment dollars are harder to get in some ways because there are more people clambering for them,” explains Sale. “Where Patagonia Gold succeeds in that regard is the strength of our proven track record. Our investors have a choice between a company that sounds promising and is working in the right area against a company with a management team that has already found a significant gold resource. We have the team in place to repeat that.”

In the first half of 2006, the company’s exploration efforts were concentrated in the Chubut province of Patagonia, where it had accumulated a substantial portfolio of highly prospective exploration properties over the previous three years. Most significantly having acquired the historic Huemules Gold Mine in late 2005, Patagonia Gold concentrated on bringing the mine back into production as soon as possible, so as to take full advantage of the strong metal prices which had risen over 250 percent in the previous three years. The Huemules mine, located some 35 kilometres to the west of the city of Esquel, contains large deposits of gold and silver together with high base metals grades.

“The acquisition was very good, but due to Argentine politics, that area was put under a three year exploration moratorium which we’re currently halfway through,” says Sale. This was a significant setback to the company; the exclusion area not only included the Huemules mine but also 85 percent of the company’s exploration properties. As such, Patagonia Gold’s board decided to adopt a conservative approach in the presentation of its accounts last year and included an impairment charge of approximately £14 million in its 2006 results. However, it is contesting the moratorium in the Argentine courts and hopes to be able to develop the Huemules mine in accordance with the highest possible environmental standards, with a development that is wholly underground and doesn’t use cyanide at any stage in the process.

While there is no doubt that this had a serious impact on the company, not all of its effects have been negative. Indeed, Sale believes it may even come to be seen as a blessing in disguise. “Three years sounded like a long time when we first started the ban. Yet in some ways, with the escalation of metal prices, it has worked to our advantage. Huemules was a historic gold mine, and we believe there is a lot of potential to expand its size. We have been involved in two drill programmes on the site, but because we could no longer work what was our flagship project, realistically, we were forced to look elsewhere.”

Portfolio acquisition

In light of the difficulties Patagonia Gold encountered in Chubut, it substantially reordered its priorities in Patagonia and concentrated its resources on provinces which are more sympathetic towards the mining industry. As part of this strategy, the company completed the acquisition from Barrick Gold - the world’s largest gold mining company - of its entire Santa Cruz exploration portfolio. Barrick retains the right on defined terms to buy back into any major development in the portfolio.

“Barrick Gold had about 200,000 hectares of prospective ground in Santa Cruz. There was a lot of industry interest in that ground and Patagonia Gold was successful in getting it for two prominent reasons,” says Sale.

“The claw back option means it’s a two way benefit for them – if we find something small, they have been exonerated in picking a company that could find it, if we find something big, they have the option to buy back into it. Barrick realised the potential of the management of the exploration team to find something.

“The second reason is that Patagonia Gold, while listed on the AIM market in London, is in fact a predominantly Argentine company. We are backed almost 50 percent by the Argentine Miguens-Bemberg family, which is very helpful. Historically, the family were owners of a brewery with virtually a monopoly on the production of beer in the country,” explains Sale.

“The family has a long industrial history with Argentina and they are very well respected politically. Given that Barrick Gold still has a lot of activity in Argentina, they chose a company they could have confidence in with regards to exploration, and also one with a very sound Argentine background.”

As part of the deal, Barrick Gold took a ten percent share holding Patagonia Gold as well as a cash payment of $800,000. “This says to the industry that Barrick has faith in the future success of Patagonia Gold, which is a great compliment.”

Links

patagonia gold