Our primary holding is a 35% interest in the FSC Witwatersrand-type gold project in South Africa. The FSC Project (currently in the prospecting stage) is located adjacent to the historic Witwatersrand basin. We are joint venture partners with AfriOre Limited, a publicly-held company listed on the Toronto Stock Exchange (TSX: AFO). The exploration and exploitation rights are held by Kwagga Gold (Proprietary) Limited, of which we and AfriOre have ownership interests of 35% and 65% respectively. Kwagga holds exclusive prospecting rights to approximately 1,000 km2 combined in state-owned and private-owned lands.
The Witwatersrand basin is host to the world's largest gold reserves. It has produced over 1.5 billion ounces of gold during the past 118 years. During this period, over 120 mines have produced 3.9 billion tonnes of ore at an average grade of 9.5g/t (0.29 oz/t) from a cumulative 350 km strike length of the 430 km basin perimeter arc.
Leading Witwatersrand academics developed a geological model that identified areas they believed preserved extensions of the main Witwatersrand basin. This area forms the target of this exploration project. Currently, the cumulative strike length of the priority targets prospective for mineralized Witwatersrand-type rocks is some 90 km.
On June 8, 2004, the first drill hole, BH47, in the "range-finding" program at the FSC Project had been completed to a depth of 2,984 meters and intersected a well developed succession of lower Proterozoic rocks before it was terminated in a zone of shearing. Although BH47 was not successful in intersecting Witwatersrand-type rocks to the depths drilled, it was successful in enhancing the structural model and identifying future priority targets to intersect Witwatersrand-type rocks. The drilling results of BH47 intersected the following cover rock strata: 1,390 meters of Karoo cover rock, 1,307 meters of Transvaal dolomites and 260 meters of Ventersdorp lavas. These cover rocks play an important role in the preservation of Witwatersrand rocks elsewhere in the main Witwatersrand basin.
On October 25, 2004, drilling operations commenced at BH48. By February 24, 2005, drilling had progressed to 1,867 meters with recurring sidewall failures at the base of the hole. BH 48 drilled through Mesozoic sedimentary rocks to a depth of 1,644 meters, then through 159 meters of Transvaal Supergroup dolomites and then 133 meters of mafic lavas of the Ventersdorp Supergroup. At the base of the lavas, a zone of altered ultramafic rock was drilled before intersecting 56 meters of Witwatersrand type quartzites. It is not uncommon in altered ultramafic rock (consistent with the geological model and deep hole drilling) to experience significant sidewall weakness. The remedial steps to restore these weakened sidewalls are currently in progress. The presence of quartzite rocks beneath this zone of weakness is the reason for the value of this drill hole and the reason the integrity of the side walls needs to be corrected. The ongoing drilling progress will be slowed in BH 48 due to the remedial action. Further drilling will be required to determine the full extent of the Witwatersrand rocks and any economic gold reefs that may be present at the FSC Project.
We invested $2.1 million in Kwagga (to purchase our 35% interest) which is being used to fund the exploration program on the FSC Project. Our initial drill hole program was estimated to be between five to seven drill holes utilizing the $2.1 million we invested in Kwagga. Kwagga in turn transfers funds to AfriOre to be utilized for exploration expenditures. Since the exchange from US Dollars to the South African Rand has had a substantial reduction, its effect on actual funds available, has decreased our initial five to seven drill hole program to be revised to only a three drill hole program. Furthermore, we hold the right to acquire an additional 15% ownership, which would require us to invest on additional $1.4 million for prospecting.
The South African mining industry has undergone a series of significant changes culminating in the enactment of the Mineral and Petroleum Resources Development Act No. 28 of 2002 ("the Act") on May 1, 2004. The Act legislates the abolition of private mineral rights in South Africa and replaces them with a system of state licensing based on the patrimony over minerals, as is the case with the bulk of minerals in other established mining jurisdictions such as Canada and Australia. On May 3, 2004 the Department of Minerals and Energy (the "DME") announced that it was seeking legal advice on the implications of the Act in light of South Africa's international agreements.
Holders of old-order mining rights, of the type held by Kwagga, are required within five years of the May 1, 2004 commencement date to apply for conversion of their old-order rights into new-order mining rights in terms of the Act. Old-order mining rights will continue to be in force during the conversion period, subject to the terms and conditions under which they were granted. Once a new-order right is granted, security of tenure is guaranteed for a period of up to 30 years, subject to ongoing compliance with the conditions under which the right has been granted. A mining right may be renewed for further periods of up to 30 years at a time, subject to fulfillment of certain conditions.
In order to be able to convert old-order mining rights to new-order mining rights, a holder must primarily apply in the correct form for conversion at the relevant office of the DME before May 1, 2009, submit a prescribed social and labor plan, and undertake to "give effect to" the black economic empowerment and socio-economic objectives of the Act (the "Objectives") and set out the manner in which it will give effect to the Objectives.
In general, the Objectives are embodied in the broad-based socio-economic empowerment charter which was signed by the DME, the South African Chamber of Mines and others on October 11, 2002 (the "Charter"), and which was followed on February 18, 2003 by the release of the appendix to the Charter known as the Scorecard. The Charter and Scorecard has since been published for information during August 2004. The Charter is based on seven key principles, two of which are focused on ownership targets for historically disadvantaged South Africans ("HDSAs") and beneficiation, and five of which are operationally oriented and cover areas focused on improving conditions for HDSAs.
Regarding ownership targets, the Charter (as read with the Scorecard) requires each mining company to achieve the following HDSA ownership targets for the purpose of qualifying for the grant of new order rights: (i) 15% ownership by HDSAs in that company or its attributable units of production by May 1, 2009, and (ii) 26% ownership by HDSAs in that company or its attributable units of production by May 1, 2014. The Charter states that such transfers must take place in a transparent manner and for fair market value. It also states that the South African mining industry will assist HDSA companies in securing financing to fund HDSA participation, in the amount of ZAR100 billion within the first five years. The Charter does not specify the nature of the assistance to be provided.
Kwagga and AfriOre are actively engaged in discussions with DME officials and others to ensure that Kwagga fulfills the ownership requirements for conversion under the Act; however, the finalization of the means of achieving that end will require greater certainty regarding the operation and interpretation of the Act and pending related legislation.
At present, the financial implications and market-related risks brought about by the various pieces of the new legislation (including the Mineral and Petroleum Royalty Bill) cannot be assessed. It is not clear when the next draft of the Mineral and Petroleum Royalty Bill will be released. The Government has, however, indicated that no royalties will be payable until 2009. Material impacts on both the ownership structure and operational costs at the FSC Project are possible. Kwagga and AfriOre continue to explore their options and monitor the implementation and interpretation of the Act and the progress of other ancillary regulations and legislation closely.
Although the risks are acknowledged to be high, so are the rewards, if the aim of identifying a new gold field is achieved.
FSC Witwatersrand Project, South Africa
