Chesapeake Gold (CKG) - Technical Analysis and Due Diligence

Since 1993, Chesapeake Gold’s management team has had a successful track record working in the Americas. The strength of the company is the ability of its people to recognize prospective geologic settings, generate quality projects and finance its exploration and development. The team’s strategic vision and initiative rewarded Francisco Gold Corp’s shareholders with the grassroots discoveries of El Sauzal and Marlin - two multi-million ounce gold deposits that became mines with robust economics. With the acquisition of Alderley Gold Corp., Chesapeake Gold is focusing on progressing the world-class Metates project towards production as a sulphide heap leach operation. 

Merlin-Marr Johnson caught up with Alan Pangbourne, President, and CEO, Chesapeake Gold. Mr. Pangbourne has over 35 years of experience in global mining operations and most recently was the President and CEO of Guyana Goldfields Inc. through to its sale to Zijin Mining Group Co., Ltd. in August 2020. Previously, he was CEO of SSR Mining Inc., Vice President of Projects South America for Kinross Gold Corp, and held increasingly senior roles at BHP Billiton Ltd., including President and CEO of Nickel Americas, Projects Director for BHP’s Uranium Division, which includes the Olympic Dam Expansion and Project Manager for BHP’s Spence copper project in Chile.

Pangbourne was also General Manager at an engineering company that specialised in gold heap leach and carbon-in-pulp plans. His educational credentials include a Bachelor of Applied Science (Extractive Metallurgy) and a Graduate Diploma in Mineral Processing from the Western Australian School of Mines. 

Company Overview

Chesapeake Gold Corp. is a development stage company that focuses on the discovery, exploration, and development of gold and silver deposits in North and South America. The company was founded in 2002 and is headquartered in Vancouver, Canada. It is listed on the Toronto Stock Exchange (TSX-V: CKG). The company's major assets include the Metates Gold-Silver Project in Mexico and the Talapoosa project in Reno, Nevada. 

Chesapeake Gold has a massive-scale gold-silver project called Metates in Durango, Mexico. This project features a  20Moz gold and 560Moz silver resource. The company recently completed drilling on the project. It published a PEA (Preliminary Economic Assessment) in August 2021.  As per the PEA, the project has a CAD$360M  CapEx (Capital Expenditure) and a CAD$1.4Bn NPV (Net Present Value). This is a small starter project with a 15,000t daily production capacity. The company is looking to produce 115,000oz gold along with 2Moz+ silver on an annual basis. 

Drill Operations

Interestingly, the original project was planned under a different development approach as it was a $3.5Bn autoclave. Chesapeake took over the project’s management and focused its resources on locating the higher-grade core. It used a process that allows the heap leaching of sulphides which, following the sulphide oxidation, can then leach the gold and silver. 

Following the acquisition of the project, the company drilled 5 holes in order to get a large diameter core. This helped it in identifying the underlying geology, and the age of the underlying deposit. The assay results from the 5 drill holes led to a 20% increase in the resource. 

Past drilling conducted by Alderley was focused on using half core per assay. Essentially, the previous drilling was done on a half-core HQ basis, while Chesapeake Gold conducted drilling on a quarter-core PQ basis. In order to intercept the ore bodies, the company ensured that the drilling was done as close to normal as possible. It decided to drill an additional 16 holes, the results for which were released a few weeks back. This was the 5 -spot program. 

As per the program, the company drilled holes in the middle and stepped out into unexplored areas, leading to the discovery of the geographical edges of the deposit. This program also provided the material for a future test program. The 5-spot program has been the major area of focus for the company. 

Ever since the acquisition, the company has been focused on developing a project that can be built. The wide-spaced drilling and the development of block models have helped target a massive resource development opportunity. As the company targeted the bigger ounces, it was found that in places where the high grade goes down, the low grade comes up. The boundaries between the different material grades aren’t solid.

Chesapeake Gold’s approach is to start small and expand the project over time. This helps allocate funds efficiently. The company’s CEO is an 11% shareholder with a considerable, vested interest in the project. 

Notably, the drilling was targeted toward acquiring metallurgical samples. The company is now looking to go over the assay results with a geologist in order to develop the hard-soft boundaries, the directional controls, the limits between the breccias and sediments along with the massive intrusive. 

The 16 drilled holes helped the company achieve a 20% upgrade in ounces. The details of the assay results were highlighted in a recent press release. The PEA pit is based on a 15,000t/day operation and has an estimated pit size of 205Mt. 

Interestingly, the sediments in the pit calculation were considered waste material, while the intrusives and the breccia were treated as ore. Both materials are stockpiled separately, and the waste material is eventually discarded. All the low-grade material which comes below the cut-off grade is also considered waste. The pit has a 2:1 strip ratio. 

This would be a 15,000t daily operation with a 5Moz yearly production and a 31-year mine life. A 15,000t operation is possible with a single line drill crusher; as soon as the operation increases to 20,000t a day, a smaller gyratory crusher would be needed. It is important to note that on a dollar per ton basis, the gyratory crusher costs 3 times as much to install compared to a similarly-sized drill crusher. 

One of the highlighted drill holes was found to carry grades of 432m of 1.15g. The drill program has allowed the company to achieve a 10%-20% resource upgrade within the intrusive. This generates free money straight to the project’s bottom line. While the pit and strip ratio remains the same, the value of the dollar per ton of rock has changed significantly. The high-grade core was initially expected to have a 1g/t equivalent with 0.75g/t gold and 16g/t silver. Adding 10%-20% as part of the resource upgrade increases the average grades by 0.1g/t-0.2g/t.

An estimated $50/g gold price with a 10%-20% increase leads to a $55-$60 pricing. The additional $5-$10 goes to the bottom line. The proportional increase makes a huge difference in the project’s economics. 

Chesapeake Gold has plans to develop a 1g/t+ equivalent operation producing 120,000oz - 130,000oz gold equivalent on a per-year basis as a starter project, which offers future expansion potential. 

Material Processing

The Metates project predominantly features pyrite, and the gold and silver are refractory. The company has found at least 4 types of refractories here. One of these is the sulphide refractory, where the gold and silver are present in fractures around in the pyrite crystals. 

The deposit also features carbonaceous materials and tellurides that are tested using preg-rob tests. In the case of silver, the company has found various types of mineralization that are found in feldspar and silver salts. Notably, the silver mineralogy is a class in itself. It also features silica locking where a particle of gold and/or sulphide is surrounded by silica. In order to extract material from silica locking, grinding is required. Similar to refractory carbon, telluride is processed using roasting. The roasting destroys the lattice. Sulphide is the only solution that can successfully destroy the lattice. 

The company’s test work around autoclaves has demonstrated a strong sulphide refractory presence at Metates. Notably, when sulphide is exposed to air and water, it turns into a brownish-red colour that washes down the river. This is called acid rock drainage which is highly damaging to the environment. This is an industry-wide issue. The company found that the time to oxidise the sulphides is inversely proportional to size. 

Oxide orebodies are always found on top of sulphides. This is because, oxidization takes place from the top-down, similar to the flow of water. The orebody here either turns into an oxide or gets washed down the river. The company is currently processing the oxide through the crushing, grinding, and flow process. Following this, the material is placed into a lattice-destroying process such as smelting, roasting, or autoclaving. In order to process the sulphides, the company is using autoclaves. 

Interestingly, bug leaches have also been used to process sulphides in the past. Here, the sulphides are oxidised by pumping arsenic in a way that doesn’t kill the bugs and then precipitating the ferric arsenate as scorodite, a disposable arsenic product. It is important to note that this is a complex process that requires a reasonable grade to be usable. Running the BIOX and the neutralisation costs are very high, which, in turn, drives up the overall operational costs. It is essential to capture the acid and dispose of it in an environmentally-conscious manner, whether the process employed is the autoclave, smelter, or roaster. 

A working solution for this issue is to employ reasonably fine crushed heap, a process widely used across the copper industry. Chesapeake Gold is utilising chemical processing which is commonly used in the copper industry for its gold asset. This makes the operation significantly more economic than building a concentrator and a smelter. 

Back in the 1990s a couple of companies tried to make this process work but weren’t successful. This is because once the pH reaches 2, all the material gets dissolved and the sulphides get oxidised. A 10.5 pH is required in order to introduce cyanide into the solution which enables the gold and silver recovery. This leads to a huge uncontrolled precipitation event that causes problems with the autoclave circuits due to jarosite absorption, particularly in silver. Jarosite, being an amorphous iron hydroxide, locks up silver during the precipitation process. 

Chesapeake Gold has worked with different pH levels, within the 9.5 - 11 range in order to oxidise the sulphides in the presence of air and water. Here, the company is looking to avoid the precipitation event altogether. As part of the PEA, the company has carried out limited metallurgical work. It has conducted a few preliminary tests prior to the Alderley deal and this is the reason why the refractories are different. 

The company wanted to test whether the material was silica locked or not. Once the deal was completed, the company found some old samples from the original test work. However, the company plans to continue testing and is looking to publish the results at the earliest. 

Column Tests 

Chesapeake Gold has started new columns to run the met test work. The metallurgical test program is currently focused on intrusives and intrusive breccias. The test work is focused on producing the data to support the PEA assumptions. In the PEA, the operation was expected to be a half-inch crush with a 70%+ gold recovery, 70% silver recovery, and a 180-day oxidation time. Here, the process is to crush it, agglomerate it with alkali, introduce it on a heap with an air injection underneath, and oxidise it for up to 180 days. Following this, the material is rinsed and put onto a permanent heap lime cyanide. 

Chesapeake Gold is running the lime cyanide in the columns for another 90 days. The entire process takes about 9.5 months which is incredibly slow. Using this process, the company is looking to generate a time oxidation gold-silver recovery relationship curve. This will help it in establishing the various stages and parameters of oxidisation along with gold and silver recovery metrics. 

In a Vancouver lab, the company currently has 16-18 columns. These tests are developed to help the company establish a baseline relative to the pre-oxidation. It has developed a composite of intrusive and a composite of breccia samples, which are run through standard lime cyanide for 60, 120, and 180 days. It is important to note that the company has duplicates in each set, where identical columns are running at the same speeds and flow rates. This duplication would help the company demonstrate that the test results can be reproduced.  In the test work, the company is looking to ensure that the reproducibility, variability, depths, types, and other factors are included. 

The first set of columns is majorly focused on time, oxidation, and gold and silver recovery. Once the 60-day timeline has passed, 2 more columns are added, and so on. This way, the company will have a set of curves that demonstrate gold and silver recoveries over 60, 120, and 180-day periods. 

Cost Considerations 

According to Chesapeake Gold, the ideal strategy to tackle rising costs is to start from the ground up, rebuild it, and get approval. As soon as the approval is in place, the companies should buy the required materials as quickly as possible. This way, the price quotes get locked in and are not affected by the escalations that are a result of a higher inflation environment. 

Interestingly, the inflation observed in equipment and raw material is driven by copper, iron ore, and coking coal prices. This transfers to steel prices which mainly consist of labour, steel, copper, or concentrate. 

Despite rising energy costs, the gold market has seen a positive run. The gold pricing was between $1,350-$1,400 for a long time, before briefly touching $2,000 and then settling at $1,850. 

Given the commodity price increases, the market is now observing a 2-3 year lag that is coming through an increase in equipment prices. Furthermore, the pandemic situation has pushed a large majority of the low-level labour into unemployment, causing the workforce to move to other jobs for survival. 

Chesapeake Gold is focused on its metallurgical test work. It has plans to publish the findings once the results are in. It is looking to oxidise pyrite in an alkaline environment at a heap leach size. If successful, the process can be employed in a large number of deposits that have little-to-no oxides left on top of significant sulphide orebodies. 

To find out more, go to the Chesapeake Gold website