Keeping an Eye on the Guerrero Gold Belt

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Below is an excerpt from the The Gold Report article titled “Geologist Merrill McHenry Keeps His Eye on the Guerrero Gold Belt.”

The Gold Report, October 29th, 2012.

The Gold Report: Merrill, speaking as a geologist, what makes the Guerrero Gold Belt in Mexico so highly prospective for gold and silver mineralization?

Merrill McHenry: Two words: plate tectonics. Two tectonic events in that area of sufficient scale to create an entire region filled with gold mineralization.

In more detailed terms, the Chortis plate, which was about the size of Colorado, impacted the western side of southern Mexico. The first event, about 140 million years ago, created “laramide” north-south extensional faults. That was followed, about 70 million years later, by a strike-slip to the southeast. As the strike-slip slipped and subducted under the southern portion—what is today Guerrero State—it rotated many of those north-south transitional faults and shear zones into roughly 40-degree and other angles, creating a chimney effect, which brought the mineralization, in liquid form, much closer to the surface. In geological terms, this is called a metasomatic transfer. The strike-slip also created various low-angle extensional faulting allowing laterally displaced mineralization and improving strike-length potential.

TGR: How does the creation and mineralization of the Guerrero Gold Belt compare to the Carlin Trend in Nevada?

MMcH: Both had tectonic events that liquefied the subterranean minerals and resulted in events that could transport the minerals to the surface. The Carlin Trend, which is older, was formed underwater. On Carlin, hydrothermal channels were created and bubbled up for long periods. In the Guerrero Gold Belt, the minerals were liquefied and brought up as structurally controlled magmatic events along various intrusive zones.

“Two tectonic events in that area of sufficient scale to create an entire region filled with gold mineralization.”

Typically, economic mineralization is highest along these intrusion zones. (The structural control is a key to creating and allowing for higher-grade mineralization.) These systems are most fully developed either at (e.g., El Limon-Guajes) or below (e.g., Los Filos-Bermejal) the contact of the local Mezcala formation (shales and sandstones) with the underlying Morelos formation (carbonates).

In addition, the strike-slip and subduction that created the Guerrero Gold Belt arguably covered a larger area. To date the Carlin Trend is roughly 40–60 kilometers (km) long; mineralization in the Guerrero Gold Belt has been found along a 60km-plus range.

Another difference is that the Carlin Trend has been mined and prospected for well over 100 years, with the first large mine—Carlin—opening nearly 50 years ago. The first major mine in the Guerrero Gold Belt went into production in 2008 and most of the exploration remains to be done. So far, two companies—Goldcorp Inc. (G:TSX; GG:NYSE) and Torex Gold Resources Inc. (TXG:TSX)—have reported 16 million ounces (Moz) of NI 43-101 gold resources in the Guerrero Gold Belt. I expect Newstrike Capital Inc.’s (NES:TSX.V) Ana Paula project will report near 3 Moz of NI-43-101-compliant in-pit gold mineralization, and roughly 4.5 Moz in global resources, mostly to be included in subsequent pits, by the end of 2012. Ana Paula has some breccia pipe areas of spectacular grade and width.

TGR: What can you tell us about the kind of precious metals deposits discovered in the Guerrero Gold Belt so far?

MMcH: Because it is a long, intrusion-hosted system, much of the gold mineralization is at or near the surface. You can find the intrusions—an orange-red oxidized ore (retrograded calc-silicate skarn)—at the surface. Gold mineralization in the district tends to be in the most oxidized alkaline significantly reduced iron and magnesium host rock that conversely hosts increasingly higher gold values.

Essentially, you want heavily magnetite/hematite (iron) initial fluid flows, but later during the retrograde (cooling) phase, you want the magnetite to precipitate out and become more oxidized Calc-alkaline potasically altered and biotite rich. That is where the highest gold mineralization occurs.

“So far, two companies have reported 16 Moz of NI 43-101 gold resources in the Guerrero Gold Belt.”

Gold occurs either in chlorine complexes or in a variety of high-sulfidation complexes that are stable at lower temperatures, which tend to drop out at lower near-surface temperatures, usually because of some event that changes the oxidation state. Therefore, you can get multiple economic mineralization in the same hydrothermal system—higher temperatures and less fluid mixing at depth giving you gold, copper, and silver; and lower temps and magmatic/meteoric mixing as you move higher in the system, giving you gold with much less silver and copper.

TGR: Is there a company working on one of those polymetallic deposits?

MMcH: Torex is working on the Media Luna project, to the south of the Balsas River, where the mineralization tends to be deeper. To date, Media Luna is 300 to 600 meters deep and looks to be polymetallic, not predominantly a gold project.

TGR: It is rare for a polymetallic deposit to get developed at depth, given the expense of bringing the minerals up.

MMcH: Yes. Before Torex released its feasibility study, I had moved it from a Buy to a Hold and changed the price target to $2/share. The stock has hung in there around $1.90–1.95/share because it is a show-me situation. Pending further Morelos gold project development, the market needs to see that Media Luna has enough mineralization and thick intercepts that can be accessed, ideally through an adit, to make the project economically viable.

TGR: It was exploration of the Carlin that led to the discovery of the Cortez Trend, where Barrick Gold Corp. (ABX:TSX; ABX:NYSE) now operates its massive Cortez gold mine. Have similar high-grade trends been found in the Guerrero?

MMcH: Yes, that is one of the Guerrero’s calling cards. When it opens several years from now, Torex’s Morelos project, at 3.14 grams per ton (g/t) Measured and Indicated, will be one of the highest-grade open-pit mines in the world.

Newstrike’s Ana Paula project has some phenomenal drill results. To give you an idea, just one hole at Ana Paula had 174m of 5.4 g/t gold that included a 76m interval of more than 10.57 g/t gold and 15 g/t silver.

TGR: Are there advantages to mining the Guerrero over the Carlin?

MMcH: Many projects in the Carlin Trend are destroyed limestone—black rock formed by the hot springs upwelling mineralization while deforming the host rock—so you cannot distinguish what is gold mineralized. That makes finding the ore bodies difficult visually; in most respects, you are drilling blind without geophysical signatures other than the generalized trend to guide you. The intrusion-hosted mineralization in the Guerrero tends to be quite visible so you can see where you are likely to have potential gold intercepts.

Also, a fair amount of the ore in the Carlin Trend is refractory ore and a lot of that has to go through an autoclave. That process is expensive, and a lot of the cost of an autoclave is capital expense, not processing.

TGR: Mexico is now on the list of the top 10 gold-producing countries. What are some mines that helped it crack that list?

MMcH: Mexico also had the fastest growth of any gold-producing country last year, and the Guerrero had a lot to do with both accomplishments. Last year, Goldcorp’s Los Filos project produced 336,500 oz, with cash costs roughly $463/oz. The company estimates production of 345,000 oz gold in 2012.

Mexico is a very fertile country for gold production. In central Mexico, you have the volcanic trends for mineralization, which tend to be vein swarms and silver-oriented projects. Then, you have the unique mineralization of the Guerrero.

TGR: All of the mineralization created in the past is good news, but present-day Mexico has its troubles. What issues—security, nationalization, rising costs—might make Mexico a riskier jurisdiction?

MMcH: Mexico had its nationalization experiment with PEMEX, its national oil company. PEMEX was a jobs machine, but its production growth has been flat to declining because it is not operated efficiently or effectively.

“As long as QE in is play and economies remain stagnant, gold will continue to do well.”

There can be security concerns when a project is just starting up. For example, five trucks were stolen from Torex at gunpoint last year. So, the company built its own security force. Other companies have taken a different route. Number one, they employ a lot of local Mexicans. Number two, they work on community relations, support the community and fund social projects. Number three, they just lay low and try not to attract attention.

TGR: What recent discoveries might add to Mexico’s gold and silver production?

MMcH: As I mentioned, I expect Newstrike to have 3 Moz in pit resource by year-end. The most logical efficient outcome is to tie Ana Paula in with Torex’s planned mill and use a conveyer belt to deliver it to Torex for processing.

Bear in mind that Newstrike has the largest land holding in the region. I believe it will have other successes. Newstrike has already extended and increased the width of the high-grade breccia zone; it is currently pending an “in-pit” NI 43-101 resource. It also has land to the northwest and southwest of the Ana Paula region, where I expect additional resources to be found.

TGR: Has Newstrike done any metallurgical studies to determine the amount of recoverable gold?

MMcH: Yes, it is expected to be in the mid-80s percentage range, similar to Torex.

TGR: Is either Torex or Newstrike likely to be bought out?

MMcH: Richard Whittall, CEO of Newstrike, is a very credible and capable operator who does things on a very conservative basis. My take from him, and he has clarified this for the Street, is that Newstrike does not plan to develop Ana Paula.

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