Given that a host of first-time investors will likely be flocking this way shortly, I thought that I might go over this company’s powerful investment thesis by framing it within a historical perspective (thus enabling everyone to participate in the excitement).
So here goes:
In 1997, the Uzboy mineral properties were originally acquired by Cameco Mining Corp., one of the world's largest uranium producers, which enjoys a significant uranium deposit located in Kazakhstan called ‘Inkai’, consisting of two production areas (blocks 1 and 2) and an exploration area (block 3). Given its powerful and entranced position as the country’s major uranium player, Cameco had a beguiling ‘in’ when securing this valuable lease. Only a very well placed and highly influential ‘insider’ would be able to obtain such a large and valuable geological footprint (2.4 million acres in north central Kazakhstan).
Unfortunately for Cameco, gold prices were low and under constant downward pressure, so, after several years of sporadic exploration, they decided to shift focus back onto their core business. Cameco’s 2001 Annual Report sums it up this way: “The persistent weakness in gold prices, which averaged $271 per ounce, was a major disappointment. In fact, the average 2001 gold price was the lowest recorded in the past 23 years.” Consequently, “we want to do more of what we do well (uranium).” Having done no gold exploration on the “Uzboy Property" since 1998, Cameco ‘pulled out’ and their junior partner in Kazakhstan assumed the rights, - from whom Alhambra acquired 100% of the property in 2002.
Acquiring immensely attractive mineral Licenses on extremely favorable terms (courtesy of historically low commodity prices precipitating big time corporate frustration) assuredly constituted a serendipitous and colossal prize for Alhambra to capture, - but, would they be able to capitalize on this good fortune?
From day one, all the right ingredients appeared to be in place: gold had previously been produced in three areas; there were more than 100 significant gold occurrences, and, best of all, highly prospective geology suggested the presence of meaningful gold resources. Couple this fortuitous ‘big picture’ with an ideal physical landscape (flat, without major mountains or rivers to contend with), and gold production was looking to be potentially very cost-effective. If this were not enough, there was also available power, a good source of water, ready labor, a favorable government fiscal regime, a reasonable corporate income tax rate, and a low royalty fee. Developing into the leading market in Central Asia and positioning itself as a transit route between China and Europe, Kazakhstan (interested in developing its mining sector) has been progressively developing a transparent and effective business culture to create a less regulated and more market-driven business environment.
So, - how did things turn out?
A great deal of time, effort, expense, and ‘thought’ has been expended by Alhambra in developing its franchise. Since 2002, a decade has been spent overcoming every imaginable variety of diverse and discordant adversity (ambush by nefarious heathen invaders), but an improved understanding of the complexities of the region’s geology has resulted in the Uzboy mineral properties harboring potential to become a significant (world-class) gold bearing area.
Most metallogenic belts and provinces are dominated by deposits formed in one or more favored epochs, - and nearly twenty large (many world-class) gold deposits have been disclosed in Kazakhstan, in addition to hundreds of small and medium-sized occurrences; and while the basic gold-ore mineralization took place in the orogenic and postorogenic stages of the regional development, (as to formation time) gold was settled in the Pre-Cambrian period (with the main part of the deposits generated in the Caledonian and Hercynian metallogenic epochs). Within this ‘setting’, Alhambra is finding success.
Through it all, Alhambra’s management has demonstrated patience, backbone, and an outstanding ability to navigate the back roads and alleyways of Kazakhstan.
- What the perceptive and wise Knight once wrote says it all: “Management has put in herculean physical and intellectual efforts (sweat equity, strategizing) to get to this point...(understand the history). Just to get this far with a Junior is one in what...a thousand!?. What odds...and maybe worse when considering where the venture is located. To have secured property, begin an exploration campaign, commence production and navigate lethal legal land mines all in a country half way around the world, in a culture that is equally as distant from our own...that is magnanimous. Believe me, these guys.. they want their returns too after what they have put into this.”
- And, to quote the Kid, “Anyone who examines what is going on here closely will come to realize that what these ‘guys’ are attempting to ‘pull off’ is amazingly difficult, being continually confronted as they are by distractions, disputations, tests (of every kind), threats, trials, and the endless caprice of local and national authorities; but (thankfully) they persevere on, knowing all too well that each and every new day is going to present them with yet more unexpected challenges to overcome; so, yes, sometimes things do go wrong, but, at the end of the day (when all is said and done) they are likely to pass the finish line in flying colors.”
Alhambra’s two exploration and exploitation Licenses are strategically located in the Charsk Gold Belt directly between two world-class gold deposits, Vasilkovskoe (on the northwest) and Asku (on the southeast); consisting of two ‘separate’ plays, - Uzboy and the ‘Dombraly-Shirotnaia gold trend’. To date, all production has been from Uzboy.
At Uzboy, the eroded surface of the folded and heavily metamorphized crystalline basement was covered in the Late Proterozoic with deposition of both sedimentary and volcanic formations representing the protoplatform cover, - with separation zones (new areas of oceantype crust and associated islandarc zones) forming along the faults. Repeated stages of tectonic movement occurred during Caledonian and Hercynian orogenies; with the Caledonian orogeny encompassing events that occurred from the Ordovician to Early Devonian, roughly 490-390 million years ago; (by the way, the Caledonian orogeny was one of several orogenies that would eventually form the supercontinent Pangaea in the Late Paleozoic era). Meanwhile, the ‘Hercynian stage’ was roughly 400-250 million years ago. With respect to Late Cambrian-Early Ordovician Orogenic events in Central Asia, several Late Cambrian - Early Ordovician collisional episodes (zones) have been recognized in Central Asia (east to west), including when the Kokchetav microcontinent collided with the Stepnyak island arc (Northern Kazakhstan). The Kokchetav massif lies within the Central Asian fold belt, and the Precambrian outcrops are part of a series of ancient blocks that form a single Kazakhstan-North Tienshan Precambrian massif modified by early Paleozoic deformation. More specifically, the Kokchetav Metamorphic Belt (KMB) was formed by the Early Ordovician collision between the Kokchetav microcontinent (including the Kokchetav metamorphic belt) and the Stepnyak island-arc. Accordingly, large areas in the west and north of Kazakhstan are overlaid by Hercynian platform cover deposits; with geosynclinal systems (subjected to Hercynian folding) arising mainly in the Ordovician, Silurian, and beginning of the Devonian period on an older (Baikalian) base, comprising thick series of marine sedimentary and volcanic rock. Interestingly, no record of “Post-Caledonian” sedimentation or igneous activity indicates that the Kokchetav massif has been stable (and near the Earth’s surface) since early Paleozoic times
Within this geological context, the Uzboy prospect is situated on the northwest portion of the Silurian-Lower Devonian-aged Uzboy Volcanic-Tectonic Structure; (with this structure) extending along a northwest sub lateral trend, with a length of approximately 35 kilometers and a width of 10-15 kilometers. As such, the Uzboy structure is in fault contact with Ordovician-age rock units; while the Silurian-Lower Devonian-aged rocks exhibit a sharp non-conformity with the different rocks of Ordovician age. The Uzboy Volcanic-Tectonic Structure was formed during the Hercynian orogenic activation of the Caledonian basement (as described previously); and, during this period, vertical displacement along northwest and northeast-trending faults created a graben-synclinal structure overlaid by a sequence of volcanic-sedimentary formations of Ordovician-age.
In essence: the gold mineralization in the Uzboy project developed mainly during the Hercynian tectonic-magmatic cycle (middle to late Paleozoic), - and each deposit represents a steeply dipping structurally controlled (shear hosted) hydrothermal (mesothermal) gold deposit. As to pay-zones, the Uzboy mineralized trend is characterized by gold-silver geochemical anomalies occurring along the Uzboy fault system and hosted by Ordovician – Silurian rocks.
Against this general backdrop, - Alhambra’s licenses are located within the northeast portion of the regional-scale Kokchetav - North Tienshan basin (and dome fold system of Caledonian age), where four elongated mega-structural zones occur in the north part of this extensive fold system; forming the region’s basic structural framework. The Uzboy prospect itself falls within the Shatskaya structural zone (which hosts many of the major gold deposits of Kazakhstan); and the majority of gold occurrences is within steeply dipping quartz veins, or associated with sulphide-rich zones (with intense silicification and sericitization alteration patterns). In essence: the gold mineralization in the Uzboy project developed mainly during the Hercynian tectonic-magmatic cycle (middle to late Paleozoic), - and each deposit represents a steeply dipping structurally controlled (shear hosted) hydrothermal (mesothermal) gold deposit. Wide structural-metallogenic zones contributed to the tectonic framework of the license areas, and the structural zone of prime interest in the Uzboy area is the Shatskaya Zone, which is located in the northern portion of the licenses and extends along an east-west trend, (separating Proterozoic rock assemblages in the north from mainly Palaeozoic units in the south); and the Shatskaya Zone also appears to control and geographically define a line of Devonian volcanism. This structure hosts the well-recognized Vasilkovskoe gold deposit in the west as well as the Uzboy occurrence itself (located towards the central portion of the zone).
The Uzboy gold deposit is situated in the central part of the Uzboy mineralized trend, - located within a Silurian to late Devonian graben (which complicates the central part of the synclinal fold occupied by Ordovician rocks). Actually, this graben and syncline extend in a northeast direction; and the fault zone occurs in the central part of the structure (controlling the Uzboy gold deposit). Here, zones of intense silicification, quartz-carbonate veins and stockwork veining and chloritesericite alteration are associated with the fault/shear system, - with the main gold mineralization at Uzboy (apparently) associated with sheared and stockwork zones. Not surprisingly, the Uzboy tectonic zone is the main host structure for the Uzboy West and Uzboy East zones of gold mineralization; and the faults of the Uzboy zone control the hydrothermal metasomatic alteration, gold mineralization, upper Paleozoic diorite stockwork, (and in some cases are the borders of the elevated tectonic blocks formed by Ordovician sediments). Meanwhile, this Uzboy tectonic zone is complicated by the occurrence of numerous related faults (such as antithetic and synthetic faults), down throw and thrust faults and intense folding (due to faulting); with the combination of these structures determining the general morphology of both oxide and primary gold mineralization.
The gold deposit resource at Uzboy is comprised of the West Zone Uzboy Deposit and the East Zone Uzboy Deposit; and at both zones, in the upper (oxide) part of the profile, discreet well defined lenses (seen in the sulphide zone) have undergone gold remobilization resulting in the formation of broader >0.2g/t Au gold zones near the surface. (Where zones of either fracture cleavage or quartz veinlets occur in drill core, these intervals are described as fault zones). There are three zones of gold mineralisation within the Uzboy West and Uzboy East deposits: Oxide mineralization; Transition zone mineralization; and Primary mineralisation.
An analysis of the gold distribution (within the Uzboy zones) indicates that gold grades ranging from 0.1 – 2.0 g Au/t is primarily restricted to homogeneous beresites, whereas gold grades of more than 5.0 g Au/t are primarily restricted to areas where silicification, carbonatization and veinlet pyrite mineralisation has been superposed on quartz-sericite-pyrite altered rocks. While the steeply dipping gold-bearing zones have been oxidized to a depth of approximately 50 meters, locally, in areas of shallow, vertical fracturing and faulting, oxidation has progressed to greater depth than the average profile. Underlying the oxidized unit, a semi-oxidized horizon displays a partial level of oxidation with some remaining sulphides (transition zone) which may be treatable for its gold content but with lower recoveries. The oxidation of this area has resulted in the decomposition of the gold-bearing sulphides and the subsequent liberation of the gold particles; with gold (mostly present in free form) amenable to cyanide solution. Deeper down, gold-sulphide-quartz is the main mineral association of economic interest; with this association forming thin (a few millimeters to 1-2 centimeters) veins and small impregnations within sericitized and silicified rocks. However, the Pyrite-marcasite-quartz association is more common than the gold-quartz-sulphide association (and usually forms veins, spots and disseminated aggregates in host rocks where gold-quartz-sulphide veins occur).
Mineralization at West Uzboy occurs within a faulted hydrothermal chlorite-sericite altered andesitic package (bounded by hangingwall and footwall sediments); and anomalous gold mineralization at the >0.2g/t Au level is currently outlined over an approximate strike length of 800 meters close to surface, with width of approximately 350 meters. Meanwhile, at depth, mineralization is interpreted to extend a strike length of approximately 900 meters, plunging toward the south west 100 meters beyond the near surface mineralization. Current depth extents of >0.2g/t Au mineralization reaches approximately 250 meters below surface around the core zone (extending to approximately 500 meters below surface in the south west).
Gold forms two main converging zones of steep northeast to sub-vertical discreet and diffuse structurally controlled laterally extensive lenses, interpreted to be formed in part as a wrench system; where discreet zones of increase brecciation (within diffuse structural zones) display increased gold grade. Meanwhile, within the upper (oxide zone part of the profile), secondary distribution of gold has lead to the formation of broader >0.2g/t Au halo’s.
- At West Uzboy, total Measured and Indicated in-situ resources at a 0.2g/t Au cut off is estimated at 26.3Mt @ 1.24g/t Au for approximately 845,700oz Au.
- Gold mineralization at East Uzboy occurs within a southeast dipping altered andesite package, bounded by sediments; and anomalous gold mineralization at a >0.2g/t Au boundary is currently interpreted to extend over a strike length of approximately 1 kilometer, with a surface width of approximately 300 meters.Mineralization at East Uzboy is currently defined within two main zones (southwest and northeast), which evidence suggests may well link to form one continuous zone of mineralization. Here, greater than 0.2g/t gold intercepts form a series of steep southeast dipping laterally extensive lodes or lenses typical of this style of structurally controlled mineralization. Current drilling defines up to five parallel laterally extensive sulphide lodes within each zone; and mineralization (within the sulphide zone) is interpreted down to between 250-350 meters below surface, depending upon drilling extents. Meanwhile, in the upper (oxide part of the East zone profile), discreet lenses seen in the sulphide zone have undergone gold remobilization resulting in the formation of broader >0.2g/t Au gold zones near surface. At East Uzboy, total Measured and Indicated in-situ resources at a 0.2g/t Au cut off are estimated at 9.7Mt @ 0.72g/t Au for approximately 223,300oz Au.
As can be seen from the above discussion, there are three mineralization types: Oxide (OX), Transitional (TR) and Primary (PR). Every geological zone will have different specific gravity, specific operating costs and processing parameters; and the company’s intention is that Oxide mineralization will be processed using the heap leach process, while Transitional and Primary mineralization will be processed using Grinding and Vat Leaching.
Intense drilling activity at Uzboy has demonstrated an ore body configured dimensionally in such a way as to suggest an enormous amount of (measured) potential resources realizable through deeper, extension, and closer-spaced in-fill drilling, - drilling activity that marries deeper exploration activity with comprehensive ‘drill-grid’ delineation. All in all, since December 31, 2007, Alhambra’s exploration program has been very successful in identifying new zones of gold mineralization around the Uzboy mine site (both shallow and deep), and, when the totality of this robust activity is ‘taken into account’, the end result will be a large resource base to develop. Naturally, the updated Economic Assessment (Scoping Study) on the Uzboy gold deposit will also benefit significantly from incorporation of hefty gold prices into the NPV.
When not cash restrained, Alhambra produces gold from two open pits, the West and East pits; with the East zone located 300 meters east of the West zone pit. Alhambra’s “Heap Leach Method” is carried out by loading oxide gold mineralization into 30 ton off-road haul trucks and moving it from one of Uzboy’s zones (“run of mine”) to be dumped onto one of five leach pads, a process commonly referred to as “end dumping”; with the leach pad being an impermeable structure designed specifically to retain the solution used in the leaching process.
Given extremely high gold prices in recent years, Alhambra has taken the tactical decision of primarily relying on the ‘lower grade stuff’ from its east zone given that its economic viability has been significantly enhanced by high gold prices (rather than tapping into a larger base of higher-grade reserves in the west pay zone); and, given a limited number of leach pads (with this ‘space capacity’ unchanged regardless of the ore head grades being put onto the pads), there is, in principle, a fixed rate of capacity in tonnes that can be mined and milled; 'shaping' the achievable quantity of gold ounces ‘produced’ (during any given time frame). This strategy makes sound long-term sense; since preserving higher-grade mineral resources for later production serves as a viable hedge against falling gold prices.
Let’s not forget that, based upon drilling results to date, it seems quite conceivable that West Uzboy and East Uzboy actually represent two wings of a single mineralized anticline, the hinge line of which is plunging to the SW; and, if so, both mineralized zones could join (southward of the West Uzboy open pit) in a circumstance where higher grades and wider widths will coincide.
As of the last ‘reserve report’, total Measured and Indicated in-situ resources at West Uzboy (with a 0.2g/t Au cut off) were 1.24g/t Au for approximately 845,700oz Au; whereas mineralization at East Uzboy (currently being produced) is only as good by half, coming in at 0.72g/t Au (for approximately 223,300oz Au). So, clearly, during the last many years, the company has not been fully maximizing its intrinsic revenue-generation potential, and, to no small degree, the (near-term) economic P & L consequences of pursuing such a long-term strategy have hurt its ‘operating costs’.
Actually, when Alhambra was tapping into its higher grade reserves, it certainly was a low-cost producer; and it harbors the potential to be so again; should it decide to draw upon “run of mine” primarily from West Uzboy.
- When initially setting up this heap leach operation during 2005, with (“run of mine”) ore coming from the West zone alone, the cash cost per ounce of gold was just $267, substantially less than the 2005 industry average; and, this was achieved by using only 50% of the gold recovery plant design capacity. To repeat, - during 2005, average cash operating costs to recover gold were estimated at just $267 per ounce; which was fantastic.
- Then, during 2006, operating costs were reported as being $334 per ounce; reflecting increases in the cost of materials and consumables; as well as problems with the drill and blast contractor (during the second quarter) that slowed the stacking schedule; plus, in 2006, the volume of waste mined increased 36% over that mined in 2005. As can be seen by this statistic, ore mined in 2006 was beginning to emanate from both the West and East zones.
- As for 2007, average operating costs were still just $354 per ounce sold. Actually, this is a strange one. The operating cost to produce an ounce of gold is a function of many factors, including waste to ore ratio and quantity and grade of ore mined, and, while the mining of lower grade ore normally would result in a higher per ounce operating cost, during 2007 the company was able to significantly increase the quantity of the ore mined and stacked on the heaps for leaching by mining the near surface oxide ore from the East zone. For that one year alone, by mining from the East zone (with a lower gold grade), this helped keep the waste to ore ratio down; thus reducing the cost of moving waste material.
- During 2008 (up until receiving the unfavorable decision in the Kazakhstan lawsuit), oxide gold mineralization was being mined from both the West and East zones; with operating costs having risen as a consequence to $561.12/oz of gold sold.
- Drilling down into these figures: during the last half of 2007 and the first half of 2008, mining activities had been concentrated on the lower grade East zone. Then, with the delivery and commissioning of the crushing unit in the third quarter of 2008, mining activities once again resumed at the higher grade West pit; resulting in an increase in overall grade for 2008 over 2007.
- During the second half of 2008 and 2009 (from September 15 to December 31) oxide gold mineralization was mined from both the West and East zones; (with the crushing unit on line). For the period September 15 to December 31, 2009, operating costs were $421.95 per ounce.
- As noted above (and the point of this entire discussion), substantially all of the ore mined during 2010 and 2011 has come from the East zone.
- During 2012, the company continued to mine substantially all its ore from the east zone of Uzboy; - resulting in lower grades and higher costs than would otherwise be the case.
- Yes. As the cost of mining relates to the quantity of ore mined rather than the gold content of ore mined, lower grade ore will result in higher per unit operating costs.
- One more thing. In recent years, lower sales volumes were primarily responsible for the higher unit costs; given that operating costs are not fully variable with gold grade and volumes mined. Moreover, higher per unit operating costs in 2011 and 2012 also reflect longer hauling distances to stack ore on the leach pads (and to remove waste), plus the mining of harder ore from deeper in the pit; necessitating more blasting and higher hauling costs.
- To repeat the main point, Alhambra’s mineral extraction emphasis at Uzboy has increasingly been to almost exclusively mine oxide gold mineralization from its two less-prolific East zones (rather than tapping into far ‘richer’ West deposits), - a policy of concentrating upon less-rich mineralization (when gold prices are high) while leaving far more attractive deposits in the ground against future necessity.
Sure many cost components have been steadily rising over time, but, by relying primarily on the higher-grade west zone, where the bulk of its reserves reside, Alhambra certainly has the potential to dramatically improve ‘free cash flow’ and be a low cost producer.
By the way, Alhambra has $10 million in gold inventories (current assets) on the heap to tide them over; and is currently producing this resource.
- This large amount of gold tied up in work-in-progress reflects the very difficult heap leaching conditions being encountered in Kazakhstan, for the efficiency of the heap leaching process (as measured by gold recovery rate) is significantly affected by weather conditions. Temperatures in Northern Kazakhstan range from +30_C in the summer to -30_C in the winter; so the recovery rate (of the heap leaching process) is significantly lower than average during February-March and significantly higher than average during July, August and September, depending on actual temperatures. This is due primarily to the cyanide solution freezing as the temperature drops. Low temperature can be a problem since the rate of reaction is slowed as solution temperature approaches freezing; and comparative laboratory column tests show that the recovery rate drops dramatically when the heap temperature drops below 5_C; causing solution viscosity to increase significantly as temperature drops, affecting both the heap and the process plant; and cold heaps tie up more process solution (and, more gold inventory) than warm heaps; with recoverable gold equal to 65% of estimated total gold stacked onto the leach pads.
Leaving its best ore in the ground is not the only tough, but correct, decision that management has made.
- Only by exporting drill cores to the Republic of Kyrgyzstan could proof of “consistently valid results” in assaying drill samples be obtained; and, while this straight-forward errand might seem trivial, in practice, obtaining approval from the Kazakhstan government Committee of Industry to do so has proven extremely exasperating (introducing many months of delay in obtaining drilling results). So, should we renounce the company for proceeding in such a fashion? I don’t think so. They are building a world class company and, according to them, “doing so does not happen by accident”.
The last resource update was announced on December 14th, 2009 (with the underlying NI-43-101 compliant resource estimate rendered from information dated December 31, 2007); so, in reality, for five years (in Hamlet’s words) exploration activity “passes through nature to eternity”, - not unlike a cork caught and revolving endlessly in a time-warp whirlpool, seemingly incapable of breaking loose. Finally, this whirlpool is settling, with Uzboy set to escape this pernicious time-warp.
Make no mistake about it. The ‘new’ NI-43-101 compliant resource estimate and ‘updated’ Scoping Study for open pit development of oxide, transitional and primary resources will constitute a decisive turning point, pegging a valuation (net present value of several hundred million dollars) amounting to several dollars per share.