TSXV and OTCQB-listed Amarillo Gold was formed in 2004 specifically to purchase the Mara Rosa Property – a greenstone belt, shear hosted meso-thermal gold mineralised system of Neo-Proterozoic age – located in the Brazilian state of Goiás. Mara Rosa is comprised of 2,600 hectares of mining permits, of which the main accumulation of gold is inside what is known as the Posse Deposit.
Posse was discovered by BHP in the 1980s, mined by Western Mining in the 90s and eventually sold to Amarillo by a troubled Metallica. Toronto-based Amarillo soon acquired a second Brazilian project in 2006 before conducting around 40,000 metres of drilling at Mara Rosa over several years up to 2011, when it published a pre-feasibility study (PFS) for the project. Further geotechnical work was conducted and used to update the +1 million ounces (oz) resource and PFS in 2016-17, before some upheaval resulted in several corporate changes.
Rowland Uloth joined as executive chairman in mid-2017, Hemdat Sawh was appointed CFO later that year and in early January 2018 Mike Mutchler became Amarillo’s new CEO. “Since then we’ve been busy getting Mara Rosa back on track,” says Mutchler.
“We did a 15,000 metres drill programme in 2018–19, moved all of our inferred and measured into indicated resources, updated our PFS in late 2018 and started our feasibility study early in 2019. We put it on hold later in the year, but a $15 million capital raise in August put us in a strong position to finish the feasibility study in 2020.”
Unbeknown to the company was the onset of an unprecedented global pandemic this year, which necessitated a shift in work patterns for Amarillo’s office and field-based staff in Canada and Brazil, as well as for the engineering teams working on the feasibility.
Finalising the feasibility
However, the feasibility work was finalised in May with staff working remotely and the findings published at the beginning of June. Before delving into the results, it would be remis not to discuss the impact of COVID-19 on Amarillo’s operations, particularly given that Brazil has the second highest recorded infections in the world and was closing in on a million cases at the time of writing.
Fortunately, the areas where Amarillo’s sites are located have been relatively untouched by the virus, which allowed the company to continue operating throughout the peak of the pandemic, albeit in line with social distancing measures.
There have been few recorded infections near the Mara Rosa project, which can be partially attributed to the swift reaction of the Goiás State authorities, according to Mutchler. Existing mines in the state were initially shutdown before reopening again, and despite not being in operation, Amarillo continued with around a dozen field technicians on-site throughout the pandemic.
It is a similar situation at Amarillo’s Lavras do Sul property in Southern Brazil. There have been few recorded cases near the project, and only six employees have been working on-site shipping core from an earlier exploration programme.
The company’s Toronto team was already working from home, but its Belo Horizonte office closed around the same time and all staff were quickly set up to work from home. “Our engineering groups Ausenco, SRK and GHT Engenharia also started working from home. There may have been a couple of weeks of disruption, but it didn’t slow us down and we were able to continue with our feasibility work.”
Two significant changes to the project were outlined in the Mara Rosa feasibility study, compared to the 2018 PFS, the first of which being a switch from multiple indicator kriging (MIK) to ordinary kriging for resource and reserve estimates.
“Our infill drilling was delivering lower grades than previous drilling had, based on MIK models. So we did a jack knifing study, which is where you drop a hole out of the database and let the model predict the grade at that point and then compare that to the actual grade. We saw further evidence that MIK was overstating the grade.”
Mutchler points out that MIK is a reliable tool that works well for veiny deposits, but that the Posse Deposit is more strata-bound into a shear zone and there are chemical alterations within the shear zone that affect the grade, but not quite what you would call a vein.
“While the switch to ordinary kriging dropped the grade by about 20%, from 1.4 g/t in the PFS to 1.2 g/t in the feasibility, the new model provides much greater confidence in the resource and we feel we have a much higher chance of reconciliation in the mine plan when we do get started with the operation.”
The second major change in the feasibility study concerned the decision to switch to dry stack tailings as opposed to a downstream construction dam at the Mara Rosa project.
Brazil’s mining sector was rocked by the fatal dam failure at one of Vale’s iron ore operations near Brumadinho in Minas Gerais early last year. The disaster prompted a deep rethink of health and safety protocols relating to tailings dams and led to new regulations, including the provision of an exclusion zone that is reachable by all staff on foot within 30 minutes of an audible warning.
In Amarillo’s case, the permitted location of its tailings dam is upstream from the open pit, so the company deemed it impractical to evacuate the open pit within 30 minutes of a warning message. In addition, Amarillo foresaw delays to the permitting process if it were to go ahead with the original plan and move the tailings dam downstream.
“I think you’re going to see Brazil leading the world in switching to dry stack tailings. The technology has caught up with industry such that you can use dry stack tailings now on a large plant. We’re going to build a 7,000 tonnes per day carbon-in-leach (CIL) plant and it’s entirely feasible to use dry stack tailings.”
Leveraging the high gold price
The feasibility study supports an open pit mine and CIL operation over a 9.6 year mine life, with gold production of 102,000 oz annually for the first four years of the operation and average annual production of 84,500 oz over the full LoM.
The study offered three cases relating to project economics, based on different gold prices. The base case used a gold price of $1,400 per oz, which predicted an after-tax NPV5 of $183 million and IRR of 25%.
However, when using the gold price at the time the study was published – around $1,700 per oz – the NPV increased to $360 million and the IRR reached 50%, which represents a big swing in the value of the project.
“We’re highly leveraged to the gold price,” says Mutchler. “A 10% change in the gold price changes our NPV by about 30%. We also showed a middle of the road consensus case which gave an attractive NPV of $272 million.”
In addition, 60% of the project costs are based locally in Brazilian reais, which has fallen in value compared to the US dollar in recent months and provided an opportunity for a lower project capex figure. Just like with the gold price, the feasibility compares different exchange rates and highlights the economic advantages available to Amarillo with a favourable rate.
“Brazil is getting control of their economy and has a business and industry friendly government in place. But in the meantime, I think we have an opportunity to take advantage of that higher exchange rate to build the project for a lower overall capex.”
Following a formal digital meeting in May involving several key individuals from the local government, Amarillo received a Protocol of Intent to build the Mara Rosa project from the governor of the State of Goiás in June.
The Protocol of Intent is another key step in the project’s progression through the permitting timeline, which began in 2016 when the company was awarded its preliminary licence (LP) – the first of a three-step process for all mining projects in Brazil – on the back of an environmental baseline study and a series of fruitful community meetings.
“Mara Rosa is a brownfield site and so there used to be mining jobs in the town of Mara Rosa, which is around 10 km from the mine. 10,000 people live here and there is no other major industry, so they want to see the mine reopen and jobs come back into the community. We learnt this during public meetings in 2016 and have maintained good local support since then.”
The next step of the process is the installation licence (LI), which requires basic engineering and a financial model. Amarillo completed this work and applied for the licence back in December 2019 and expects to receive the permit at some point in Q3 of this year.
The LI will give Amarillo the ability to build and commission the plant, with the final operating licence (LO) awarded after a formal inspection of the plant takes place once it reaches commercial production.
The home straight
Amarillo is shaping up well for this next crucial phase of development at Mara Rosa. The company is working with Auramet International on project financing and evaluating different debt–equity ratios for the construction period.
“We think we’ll lock in the construction financing in September or October. That roughly lines up with when we expect to receive the LI. This will allow us to break ground in April next year, following the end of the rainy season.
“From then it will take 15 months to complete the plant. So, we’ll be ready to commission the plant in mid-2022, with first commercial production by the end of the year.”
Alongside this, Amarillo will also be undertaking regional exploration at Mara Rosa and extensional drilling at the Posse Deposit to further grow the resource. And at the same time, the company will drill some of its 22 targets at the Lavras do Sul project, which Mutchler believes will eventually become a multi-million oz district. The future is bright and golden for Amarillo in Brazil.