Driving to the gold rush in Mexico

By Elisabeth Malkin
The New York Times
Wednesday, February 20, 2008

http://www.nytimes.com/2008/02/20/business/worldbusiness/20gold.html?_r=...

MAGUARICHIC, Mexico -- In these mountains, where conquistadors once gouged gold from open veins in the mountainside, the hardened gold miner of film lore is giving way to a new breed of prospector: geologists and engineers, armed with sophisticated equipment and millions of investor dollars.

Largely American and Canadian, they toiled for global mining giants for years. But, now that the price of gold is near record highs, they are leaving their companies, raising capital to start their own prospecting start-ups and heading for Mexico. On Tuesday, an ounce of gold hit $929.30, up from $665 a year ago. Back in 1980, oil shock and economic gloom drove the price to $875 an ounce; that would be more than $2,000 today.

Much of the recent run-up has been caused by economic uncertainty and rising anxiety about the risks of global inflation.

"Gold hit bottom in 2001 at $250 an ounce and it has been going up ever since," said Craig Stanley, a gold mining analyst at Desjardins Securities in Toronto. "That keeps dragging in more people."

But like any gold rush, he warned, the promise of riches can outshine the real possibilities -- even if more investors are willing to finance start-ups than ever before.

"It is easier to raise more money," Mr. Stanley said, "but it takes a lot of money to go out and find gold."

With the price of gold likely to continue its climb, mining companies are ramping up gold exploration budgets all over the world. But many countries that hold out the promise of significant new deposits are either politically capricious, like Russia, or dangerous, like Congo.

By contrast, Mexico has developed friendly investment rules and a relatively efficient bureaucracy, analysts said. Despite the escalating drug war in much of northern Mexico, miners operate quite safely. And Mexico offers an advantage for North American prospectors that no other country can match: geologists can make the drive down in a few days.

Just to start exploring, it takes tens of millions of dollars. The cost of finding and then mining gold has increased about 25 percent in the last year, a result of soaring costs for the energy, steel and cement used in mining.

Specialized equipment and qualified personnel are also in short supply. Modern-day exploration requires aerial mapping and sophisticated sensors.

Even with the most sophisticated sounding and drilling equipment, only one of every 1,000 exploration projects becomes a working mine, said Peter K. M. Megaw, president of Imdex, a consulting and contracting firm based in Tucson that helps foreign companies exploring in Mexico.

"There's gold everywhere," said François Auclair, vice president for exploration for Dia Bras Exploration, a small company in Montreal. "But you need special physical conditions to make your deposit worth something."

That has not slowed the exploratory drilling taking place here. Across the Sierra Madre, bulldozers flatten farm trails to create roads to remote sites and diamond drill tips bore hundreds of meters into rock, collecting truckloads of cylindrical samples for testing.

Even with its long history of mining, this land is relatively underdeveloped. Difficult terrain, Indian raids and political instability made mining a start-and-stop affair. Mexico prohibited foreign mining investment for three decades, relenting only in 1992 as the North American Free Trade Agreement was being negotiated.

Now, analysts say, Mexico is one of the most attractive countries in the world for mining -- the 14th-largest producer of gold, up from 18th place in 2006.

The new prospectors' chief market for raising seed money for their start-ups is a half-continent away from these mountains where volcanic activity laid rich deposits of gold, silver, zinc and lead as long as 130 million years ago. Most companies raise their first few million to begin mapping and testing claims at the TSX Venture Exchange in Toronto.

Known in the industry as juniors, they have become the exploration arm of the industry, said Larry Segerstrom, the chief operating officer of Paramount Gold and Silver, a junior based in Ottawa that is exploring in Chihuahua State.

Mr. Stanley, the analyst, said: "There are over a thousand junior miners listed. Most of them are a couple of guys with an idea, and they have staked some land somewhere."

Sometimes they stake their own claims, sometimes they ally themselves with other small companies or individual miners who have old claims but lack their modern equipment and their millions.

After spending tens of millions to map and then drill, the juniors may be able to form a joint venture with a bigger company if the results are promising enough. A really big discovery will get the attention of a global mining company.

As part of its pitch to investors, Paramount Gold and Silver say that the structure of its recent finds are similar to those of another project in Chihuahua State called Palmarejo. The Canadian and Australian owners of Palmarejo sold it last year for $1.1 billion to the American company Coeur d’Alene Mines.

Now, Paramount is spending about $1 million a month to explore an area of old mine workings in western Chihuahua for gold and silver. The company raised $24 million from the markets last year to finance the exploration. "Many mines have several lives," said Bill Reed, vice president for exploration. "As prices and technology change, then they become economical again."

But it can take years. Minefinders, a small company based in Vancouver, began exploration in 1994 near a mine that had prospered early in the 20th century. Silver and gold production will start at the mine later this year.

"Minefinders rode the gold price all the way to the bottom of the trough and hopefully they will ride it back up," said Gregg Bush, vice president for operations at the mine.

The company had to build the access roads itself and it took years to negotiate with communal farmers who owned the property. Between cash payments and investments, Minefinders will pay the farmers $17 million.

The old-style miners who are still around hope that the new gold rush will wash over them too.

After two decades of prospecting here, Jay Zebrowski, 64, still drives his 1983 Chevrolet Suburban every few months from his home near Denver to check on the abandoned mine he and his geologist brother own here.

In a contemporary version of "The Treasure of the Sierra Madre," the 1948 classic by the director John Huston, gold has put the Zebrowskis on the edge of ruin.

Almost all of the one million or so dollars they have sunk into mining has come from investors who have yet to see a return. Indebted, Mr. Zebrowski has stayed afloat by selling options on a couple of his claims to the small Montreal company, Dia Bras Exploration, and the Mexican mining giant Industrias Penoles.

The Zebrowskis' mine, under a hillside just outside the town of Maguarichic, was worked until the 1940s. Called La Poderosa, it looked anything but powerful when they restarted it in the early 1990s.

"We were not coming up with the grades and not hitting the vein," Mr. Zebrowski said, meaning they were not striking high-quality gold. Today, much of the mine's underground works are rotting under groundwater. "We simply ran out of money."

Looters have carried off part of the processing equipment that turns ore into gold concentrate and a snowstorm last year collapsed the tin roof over the tool shed.

The Zebrowski brothers eventually abandoned their mine and began staking claims instead, hoping to cut deals with bigger companies. When the market collapsed in 1997, they had to let many of the claims go, but held on to the best ones, Mr. Zebrowski said.

They have mining claims on some 14,000 hectares in northern Mexico, in addition to the mine, which is guarded by a goatherd.

Mr. Zebrowski hopes to sell more options on those claims to the companies exploring here. Buying an option would give them the right to prospect for gold, and would pay the Zebrowskis more money if a deposit is developed into a mine.

"We seem to have some good luck now," Mr. Zebrowski said.

He paused and added, "Well, at least good luck is all around us."

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