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April 27, 2012 at 17:55:29 EST by The Bottom Line Report
Boasting high-grade gold and silver on its Las Huaquillas
Property, Inca One moves forward towards production, while enhancing
coffee farmer lives in the process.
The Peruvian news cycle over the last year has been dominated by major
protests in revolt against mining activities. These incidences have
caused mining companies, large and small, to rethink their strategy when
it comes to community relations. Gone are the days of aiming to appease
the government and standing behind its decisions when faced with
adversity from the locals that are affected. For Inca One Resources
(TSXV: IO), a new approach is being implemented that presents a giant
win for both the locals and for the company's shareholders.
THE LAS HUAQUILLAS PROPERTY
Inca
One entered the Peruvian fray by securing a property within the
prosperous region known as Cajamarca, which already houses a mine owned
by Newmont Mining (TSX:
NMC)(NYSE:
NEM)
that has produced 26 million ounces of gold since 1993. The Las
Huaquillas property was originally prospected on in the 1970s by the
Peruvian government, which included eight drill holes for 1500m, and
four underground tunnels reaching four different levels that span 1.1
kms in total.
Sulliden Resources took over the property in the 1990s, and proceeded
to drill over 28 more holes, adding 6500 metres and identifying what
would be considered today as a historic resource. Since this work was
done in the pre-Bre-X era, the resource isn't compliant by today's
standards, but what they unearthed was quite interesting.
Over a width of 20 metres, and with an average cutoff of 1.5 g/t and
2.09 g/t gold and 25.2 g/t silver, factoring in approximately 6.5
million tons, Sulliden was able to calculate a resource of 600,000
ounces of gold equivalent (443 ounces of gold and 5.3 million ounces of
silver). On top of the drilling, some valuable exploration and surface
work was done, that would identify that there was more to the 500 metres
that was previously worked upon by the Peruvian Government. The 500
metres previously identified was later found to be extended along
strike, to the tune of a total of 2.2 kms, adding 1.7kms to the total
package. As well, Sulliden identified two copper porphyries to the north
and south of the Los Socavones property within the Las Huaquillas.
Though Sulliden saw many promising attributes within the property, the
timing for the company was less than ideal. At the time, much of the
investment dollars typically funneled into the junior mining sector was
being diverted away by the DotCom boom. As well, gold was only trading
between $250-$300, thus leaving the door open to future development.
There is still plenty of blue sky on the property, as there will be a
requirement to drill the remaining 1.7 km along strike. As well, Inca
One has identified another gold epithermal system very similar to Los
Socavones that warrants further exploration work. Of the work that was
done on the Los Socavones, the previous drill holes were done to a depth
of only 200 metres, whereas typically these kinds of systems are
mineralized to 350m-400m. En route to developing a 43-101 compliant
resource, Inca One is going to want to drill it out and find out what
they really have there.
This is particularly a property of interest to Director and Chief
Geologist Thomas Henricksen, who has been eyeing this property for many
years, having tried to acquire it on three previous occasions with
different companies. Now with Inca One having secured the Las
Huaquillas, it's time for Henricksen and the company to really see what
they've got.
INVESTING IN PERU
Despite the shaky news cycle, the potential for future production in
Peru is massive. The country is currently the world's second largest
producer of silver, third largest copper and zinc producer, and the
sixth largest gold producer. But it's impossible to ignore the
community relations issues that come with mining in Peru. The highest
profile company experiencing these types of issues is Newmont. Their
experiences are pertinent to the Inca One story, in that Newmont's
disputed Conga property is also located in the Cajamarca region.
Problems arose when the local population lost confidence in the
environmental impact study and felt there was a lack of attention
towards residents.
Inca One's strategic approach to any foreseeable events such as what
Newmont has encountered is quite innovative and could possibly provide
the breakthrough needed to bridge the gap between producers and locals.
THE COFFEE APPROACH
Since 2008, it has been required by law in Peru to have proper
consultation with the surrounding communities. Understandably, baseline
and environmental studies are required prior to getting to work. When
Inca One began their baseline study last November, they identified that
the residents nearby were primarily coffee farmers. Despite the fact
that they were landowners and small business owners, its was apparent to
Inca One's management that these people were quite poor and in need of
some aid to make lives better for themselves.
As part of the negotiations with the vendors of the Las Huaquillas
package, Inca One promised a win-win scenario that came away with
positives not only for the vendors and Inca One's shareholders, but for
the locals themselves. The starting point was quite poor, as many of the
residents did not have running water or electricity coming through
their properties.
Fortunately
enough, Inca One's President and CEO, Edward Kelly, has former ties to
the coffee industry through the connections he made while connected with
the Blenz Coffee franchise. At first glance, Kelly could see that much
of the locals' problems laid from their lack of distribution channels,
as only a portion of their supplies were being shipped to places like
North America and Europe. The bulk of their coffee was being dumped by
wholesalers into Colombia which itself has more distribution for coffee
than Peru. By expanding the distribution channels, the locals could
receive higher prices for their coffee, and in return be happier to deal
with when approaching future exploration work.
But, on top of the pricing, Kelly noticed that these coffee farmers
were also suffering from lack of expertise and were failing their own
crops' potential. Industry standard yields for these types of coffee
farms are between 50-60 sacks of coffee per hectare (counting 52
kilograms per sack). These farmers were only producing around 11 sacks
of coffee per hectare, seeing yields of less than 25% of their
potential.
So, instead of just throwing money at the locals, and creating jealous
neighbours around them, Inca One decided to take the empowerment
approach, enhancing the lifestyles of the locals through restructuring
their businesses for efficiency. Initial studies found that there were
100 direct-area influencers, and an additional 700 indirect-area
influencers. Companies that seek to only address the direct area
individuals can have big problems on their hands later on, so Inca One
included all 800 when factoring its plan, and believes that it can be
done frugally. The company enlisted the help of a coffee co-op, through
which money will be channeled into the enhancement of these local farms,
and ideally tripling their incomes and yields to bring up the lifestyle
of the entire community.
Through coffee and forward thinking community relations, much of the
risk is mitigated, potentially allowing Inca One to work freely, at
least for the next three years. This is the amount of time that it takes
for the strategic improvements to these coffee operations to take
place, and hopefully for Inca One, is enough time to get the bulk of
their exploration work completed.
THE BOTTOM LINE
Inca One has plenty of blue sky going forward, and the room to work
safely to achieve their goals. By essentially insuring a three-year
grace period, free from the threat of operational disruptions, Inca One
seems to have cracked the Peruvian community relations code.
With country risk properly mitigated, we can look at the essentials in
terms that we are used to with exploration companies. Inca One is poised
to bring the Los Socavones property to a 43-101 compliant resource. The
original calculation of 600,000 ounces of gold equivalency was done on
only 500 metres of strike, whereas it's been identified that
mineralization extends 2.2 kilometres along strike. So, 2012 will
involve drilling to bring the resource to modern day compliance, while
also increasing the resource through the additional 1.7km of
mineralization that will be explored over the year. On top of the gold
and silver properties, there is also still the upside that two copper
porphyries to the north and south of Los Socavones provide. Look to
those being further developed in 2013.
As witnessed with the handling of the coffee farmers, Inca One is led
by a doer in Edward Kelly, while being staffed with a highly capable
board with valuable international geological expertise. The team is
quite active on the ground in Peru, making sure that the property is
moved forward, while also presenting a win-win situation with the
locals.
Lastly, the company is still tightly held with a sound share structure
of 28 million shares, 43% of which is held by management. Among the
players within the Cajamarca Region, Inca One is at an ideal stage of
growth in a district with high rewards for those that properly maneuver
the local challenges.
G. Joel Chury
for the Bottom Line Report
