A Gold Mine… For Real

On the dry landscape of the desert just south of the community of Mojave rises a volcanic peak that will become the first new gold and silver mine in Kern County in decades. If plans of Golden Queen Mining Co. Ltd. stay on track, by this time next year digging of the precious metals out of the desert will have started, kicking off what is expected to be a 15-year lifespan of the mine on Soledad Mountain. But potential complications have arisen for Golden Queen, a Vancouver, British Columbia company that has already begun work on the mine’s infrastructure. First, it does not have full financing. And, in late January, the Center for Biological Diversity, a Tucson, Ariz. environmental group, filed a petition with the federal government seeking emergency protection of the Mojave shoulderband snail, a half-inch mollusk only found in that region of the desert. Also, construction is moving ahead at a time when the gold market has softened. The price per ounce has fallen from the highs of nearly $1,900 in 2011 to about $1,330 at the end of February. Golden Queen President Lutz Klingmann, however, is bullish on gold, citing projections that the price per ounce should range from $1,350 to $1,400 by the end of the year. Those are prices, he said, that will attract potential investors. He also said the company is getting into the market at a time when sustained gold demand is high, particularly in Asian countries, and speculation is low. “If that price maintains, we should be able to finance the project,” Klingmann said. “New wealth is being created in places like China and the demand is really good for physical gold.” Golden Queen is a publicly traded company listed on the Toronto Stock Exchange in Canada and the OTC Market in the United States. The mine is the company’s only asset. It acquired the mine in 1985 and over the past dozen years has invested about $60 million into it for such things as metallurgical test and engineering work, environmental studies and extensive drill programs. Construction for the mining infrastructure is expected to total about $119 million. The company is fully permitted to remove 14 million tons of rock material a year. Out of that an expected 77,000 ounces of gold should be extracted, as well as 890,000 ounces of silver. At today’s prices, the gold haul for the life of the mine would be more than $1 billion. The rock left over from all that digging can be sold to become aggregate used in the construction industry. Officials in Kern County are eagerly awaiting the mine’s completion. When operational, it will bring about 160 full-time jobs in addition to up to 30 construction jobs to an area with double-digit unemployment. In December, Mojave had a 12 percent jobless rate while the county as a whole had 10.7 percent, said Richard Chapman, chief executive of the Kern County Economic Development Corp., in Bakersfield. In eastern Kern near the mine, the growing industries are in aerospace at the Mojave Air & Space Port, and alternative energy related to the solar and wind farm projects. The addition of Golden Queen would diversify the economy. “That is why these jobs are needed,” Chapman said. “Not everyone has an aerospace background or an energy background.” Mining heritage Mining in Kern County has a history dating back to the late 19th Century. It is the location of the largest borax mine in the world, owned by Rio Tinto Group, a British metals and mining corporation. Abandoned gold and silver mines dot the desert. The Soledad Mountain site was an active mine throughout the 1930s until 1943 when it was shut down during World War II because gold was not considered an essential element. The operations then were all done underground in tunnels burrowed into the mountainside targeting specific veins of gold, said Ken Mann, the administration manager for Golden Queen. After Golden Queen’s acquisition of the mine there were plans to re-open it in the 1990s. Permits were in place but were scrapped after gold prices significantly dropped. Then early last decade the company started seeking new permits, which were authorized in 2010 by the county, federal government and other agencies. Golden Queen has not produced any revenue. Its largest shareholders are members of the Clay family, including Boston businessman Landon T. Clay, who served on Golden Queen’s board for three years, and his son Thomas Clay, who currently serves on the board. Efforts are underway to bring in additional investors to keep the project on schedule. Klingmann would not disclose details of obtaining financing, except to say “it occupies us 24 hours a day.” In January, the company received a $10 million loan from members of the Clay family. The money will go toward the second phase of construction, which has an estimated cost of $5 million to $6 million. The work includes the workshop-warehouse, a wash slab for washing earthmoving equipment and the assay laboratory used to analyze the composition of ore, metal or alloy. Among the key unfunded elements are a crushing-screening plant and other processing facilities, a leach pad for placing the rock taken out of the pit, a water supply and a power supply provided by Southern California Edison. While the financing issues are getting worked out, a new complication arose when the Center for Biological Diversity filed a petition in late January with the U.S. Fish & Wildlife Service to list the Mojave Shoulderband snail as a threatened or endangered species. Tierra Curry, a senior scientist in the Portland, Ore. office of the environmental non-profit, said the center’s goal was not to stop the mine but to make sure the snail does not become extinct. The shoulderband snail is found in only one place in the world – 7.5 square miles on three mountains in Kern County, including Soledad Mountain. The group’s petition states the snail cannot live elsewhere because it is dependent on the microclimate there. “It is a leftover relic from when the temperature was cooler and more temperate in what today is desert,” Curry said. Presence of the snail came as a surprise to Golden Queen, Mann said. Even the center was not aware of it until notified by a scientist last summer, Curry acknowledged. Should the agency grant the petition, it would not necessarily halt the mine. Mitigation measures would be determined by Fish & Wildlife and the U.S. Bureau of Land Management in consultation with snail experts to protect rocky areas where the snail lives, Curry said. “I expect the measures would involve setting some areas aside and avoiding mining in those specific areas and implementing measures such as dust control,” she added. Investor caution Mann noted the company already is taking measures to preserve the habitat of the burrowing owl. “Our goal is to protect the environment as much as possible,” he said. “If it (the snail) is something we can mitigate, we will.” Golden Queen is in the process of preparing a “vigorous” response to the petition, Klingmann said, adding it was disappointing the center took its action without ever contacting Golden Queen. The federal agency has 90 days to make a decision. The discovery of the snail hasn’t put a damper on Golden Queen’s stock, which is generally considered speculative. Shares were trading at 60 cents in mid-December but rose to $1.50 in February and closed at $1.48 on March 3 despite a recent stock downgrade. The company has a market cap of roughly $144 million. Joe Mazumdar, an analyst who follows Golden Queen and other mining companies at Canaccord Genuity, a Vancouver, British Columbia-based financial services firm, started coverage on the stock in June with a “speculative buy” rating and a $1.83 price target. However, news of the environmental petition prompted him to downgrade the stock to “hold” in February. “Historically in California we have seen other projects, as with the desert tortoise, that have been delayed,” he said. “We are wait-and-see right now.” Still, Golden Queen is hopeful it can begin processing ore from the mine by the second quarter 2015 assuming the financing is in place and the snail matter is resolved. And when it does get going it will operate as a typical open pit gold mine. Workers will remove rocky material from the pit using bulldozers that feed the rocks into a high-pressure grinding roll, a machine using two rollers rotating against each other to crush the material into small chunks. A conveyor belt transports the crushed material to a leach pad where it is saturated with water containing cyanide that dissolves the gold and silver out of the rock. The gold and silver then flows from the leach pad by gravity to an adjacent plant that extracts the gold and silver into a sludge. “You then melt the sludge into a dore bar, which is gold and silver mixed together,” Mann said. When the mine closes after about 15 years in operation, the company will be required to fill in the open pit with leftover waste rock. Despite the demanding work, the company should not be short of applicants for the 160 extraction and processing jobs. Mining jobs have an average yearly wage of about $78,000, said Luke Popovich, a spokesman for the National Mining Association, a trade group based in Washington, D.C. But, he complained state government has done little to encourage mining, while setting forth strict regulations. In California, there were 518 mining operations in 2011 with gold dominating in metal production. The state ranked fifth out of 11 states where gold was produced in 2011 with $324 million taken out of the ground, according to the California Geological Survey. “It is a rich storehouse of minerals and in the north and elsewhere there are sizeable reserves of metal, but it has not been an attractive (business) environment,” Popovich said.