Categories: Energy
Topics: General Energy

Update Goldsource Mines

Middelkoop Discovery Alert 
Update Goldsource Mines
(GXS.V) 

Hello all,

Just under a year ago, we alerted you to the very promising coal discovery by Goldsource Mines in Saskatchewan, after they hit two intercepts over 20 meters thick, and 1.6 km apart. Since then, Goldsource have been finding coal all over the place in their 2008 exploration program, and the latest set of news releases in February and March has convinced us we need to provide you with an update. 

Coal isn’t just black and heats stuff. It has many characteristics that may vary either subtly or in a more pronounced way, depending on the chunk of coal you look at, and these variations influence the quality of the coal, its use, and the price you get for it. In this sense, coal exploration resembles chromite, subject of our 7th Feb alert. We’ll start with giving you a short coal 101, after which we’ll turn to what Goldsource have found over the previous year. 
 

Coal usages

Coal is an ‘old’ commodity but still provides 41% of the world’s electricity. It is also the largest worldwide source of carbon dioxide emissions, thus bringing along a new dimension of complexity in its use as power generator. Coal used for electricity generation is often referred to as steam or thermal coal. A coal-fired power plant is typically ‘set up’ to burn coal with specific characteristics, from a specific source, making a jump to other coals inefficient. Besides electricity generation, various industries use coal’s heat and by-products, for making plastics, tar, synthetic fibers, fertilizers and even medicines. The concrete and paper industries are also large users of coal. Coal is also used in hot furnaces to make cokes, in turn used to smelt iron ore into iron needed for making steel. This type of coal is referred to metallurgical or coking coal, and is praised for its strength, purity, solidness, high energy and low ash and sulphur levels.

 

Coal types

Coal starts its life as plant remains that are preserved by water and mud from oxidization and biodegration, to form wet spongy peat. Peat was used as a fuel in Europe until recently, notably in Ireland and The Netherlands. After burial, and over time, the peat becomes subject to higher pressures and temperatures, compacting to become lignite, or brown coal, which is used as a low quality fuel for electricity generation, particularly in Germany. Further compactation and coalification, along with increased pressures and temperatures may, again over time, transform lignite into (sub)bituminous coal, generally a darker matter containing a higher carbon rate with a higher heating value. Coals with higher heating values imply a more efficient heating process, and are therefore a more preferred commodity. Bituminous coals make up around 52% of all types of coal found on earth. Bitmunious coal with certain specific characteristics of fluidity, a high swelling index, and strength, can be used to form cokes for the steel industry.
Steel makers buy the best quality coal as coking coal and pay a price that is usually twice that of normal coal. The next step up the carbon ladder is anthracite, a hard coal used primarily for residential or commercial space heating. Technically speaking, the highest rank is graphite, but because it is difficult to ignite, it is not often used as a fuel. It is put in pencils or used as a lubricant. The following figure, courtesy of the World Coal Institute, sums it up nicely.

Coal characteristics

  • Besides the heating value of coal, a number of other elements play a role in determining its industrial use, and subsequently, its value.
  • Caloric value – the amount of energy in coal, expressed in British Thermal Units per pound.
  • Moisture content – percentage of weight of the coal attributable to moist. Mositure is an undesirable constituent of coal, as it reduces its heating value and adds weight (and therefore transportation costs). Moist generally lessens with better coal grades, and can largely be removed by heating, a process step which adds to the costs of generating good quality coal.
  • Ash content – ash is a non-combustible residue formed from the inorganic or mineral components of coal. Being a residue, it is an unwanted additive, therefore the lower the ash content, the better. The ash content of coal is unrelated to the coal quality (caloric value).
  • Volatility – the higher the coal is volatile, the easier it is to ignite, but also the easier the coal burns. Thus, higher volatility measures imply lower heating values, and are therefore undesirable.

Coal is dirty…

  • However useful coal is for power generation, it is the dirtiest of all power sources. Nuclear, hydro and wind energy are about 100 times cleaner regarding their carbon emissions. Given the increasing focus on reducing carbon emissions because of their greenhouse gas characteristics, cleaning coal at all possible process steps is becoming a necessity, if a costly one. 
  • The first step is to find ore which is as clean as possible
    without compromising heating values. Low sulphur levels, low moist levels, and low ash content are sought for.
  • The second step is to refine the coal. Lower quality coal can
    be homogenized in blending stockpiles to upgrade the quality. Washing plants can add to this homogenization process.
  • Thirdly, the coal can be upgraded by removing ash, moisture,
    pollutants, sulphur and nitrogen in lower ranked coals. Again, these are costly methods.
  • Fourthly, power plants increasingly use scrubbers to remove
    sulphur and mercury so as to minimize pollution.
  • A final step may be to produce clean coal, by converting coal
    into gas (gasification) or liquid fuels (liquefication, or LNG). These technologies move coal beyond its use as a high energy fuel for electricity generation, into the oil-space as an input to transportation fuels.

Goldsource Border Project

So after this lengthy introduction to coal, we move on to Goldsource. In late April 2008, the increasingly inaccurately named diamond explorer Goldsource Mines hit two holes of over 23 metres of good quality coal at 80m depth, 1.6 km apart, in Saskatchewan. In both holes, the partings are minimal (less than 0.1 metres), implying solid continuity over the full 23 metres. Partings are non-coal layers regarded as waste, and therefore dilutive to the coal quality if mined non-selectively. 0.1 metres is pretty much negligible. In both holes, the lower 5-12 metres is coal mixed with sandy/ silty parting, if mined this will produce lower grades. Proximate analysis on the holes has revealed the quality of coal to rank between High Volatile Bitmunious C and Sub-Bituminous A.

Although not the highest of carbon values, the coal is decent enough, the calorific values exceeding those of the Alberta thermal coal fields and the major producers of the Powder River Basin. The lower coal/ sand mix still has a BTU value of around 5,000 per pound, making it amenable for lignite-quality burning. The full range of coal quality found at what is now dubbed the Durango Coal Seam is marked in yellow in the table below. 

At the end of June 2008, a third hole was drilled 3km northwest of the western most discovery hole, and revealed similar thickness and depths.

The parting was somewhat larger. A week later, a further hole, drilled 4.5 km northwest of the initial discovery hole, hit the coal seam at a thickness of 36.8 metres, again with minor partings in the seam. This area is now called Pasquia. As an interesting aside, the company states that the 36m of coal represents potentially 300 metres of vegetation accumulated over millions of years, a significant geologic event with respect to coal formation in Canada. 

Proximate analysis on the first six major intersects shows a good quality thermal coal, with ash values ranging between 11-19% (not the lowest of levels, but amenable to upgrading through washing), moisture contents of between 25-38% (down to 4% if dried), and a fairly high sulphur average of 2.36%. Ultimate analyses show that much of the sulphur is inorganic, and therefore also amenable to reduction in the washing process. A fair amount of processing is needed to improve coal of this quality, although they are of fairly standard nature. Lastly, Free Swelling Index tests, that may indicate potential coking characteristics, unfortunately did not produce any positive results. 

February 2009, Goldsource reported two holes drilled around 2.5 km southwest of the discovery hole, hitting the Durango seam with 50.9m and 47m thickness respectively.

Three weeks later, infill drilling at the discovery zone, now called Chemong, revealed an intercept hitting the Durango seam with an estimated true thickness of 100m coal, a huge intercept by any account, leading J. Scott Drever, President of Goldsource to qualify this find as “…absolutely stupendous. Think of it as a 33-story tall building. We are unaware of any other such coal occurrence in North America”. Coal was found at a depth of 240m core depth, probably around 200m true depth, leading Gouldsource to consider extending already drilled holes to greater depths. A day later, drilling in the Pasquia area showed continuity of the June 2008 hole, with two holes totalling 43.3m and 56.2m respectively. Beginning of March, drilling at Split Leaf, a third area 7 km south of Chemong intercepted coal intervals amounting to 35.3m. 

The map below shows the three coal zones, spread out from Pasquia, through Chemong, to Split-Leaf, around 12 km to the southeast. 

The potential of the area is still huge. J. Scott Drewer: “Additional geophysical anomalies within the Border Project area indicate potentially much broader sub basins that need to be tested and if they prove to be coal bearing this would bring a new dimension to the overall potential of the coal deposits within Border”.  

And let’s not forget where Goldsource are coming from. They were looking for diamonds, and hit coal. All their previous interpretation of geophysical exploration was based around finding diamonds. They are having to redefine all their previous work in order to construct an exploration model for coal. Add to this the further constraints of a limited technical database, and of limited physical access. And still they are hitting big coal intercepts all over the place.
 

Pricing & potential

Coal is traded on a product basis OTC or on futures exchanges, and each product has unique specifications relating to BTU levels, sulphur content and whether the coal is delivered loaded on a barge or train, or at the mine site. Again, there is a resemblance to chromite in the pricing and trading of coal. Weekly spot prices for various types of US produced coal differ quite a bit. Appalachian coal is a higher priced commodity than Powder River Basin coal, due in large part to higher BTU levels. Powder River Basin BTU averages are somewhat lower than those found so far at the Border Project, so using $15 per short ton is on the safe side for comparison purposes. 

Goldsource states it is targeting for a world class mine deposit, 500 million to 1 billion tonnes in size, at Border, in theory aiming for a value of between $7.5 – $15 billion in situ. Well, they have a lot of continuity yet to prove before reaching these milestones. However, 20m of continual coal seam over an area covering 5 km by 5 km will do the trick nicely. Nature never precisely works in this linear fashion, but a world class mine target doesn’t seem so far-fetched if they keep finding coal in the same manner they have so far. And if exploration at the larger potential basins hit the “new dimension”, we are in for a ride.

And all this for a market cap of just over $40 mil!

 

Willem Middelkoop, April 7th 2009
 

Disclaimer: 

Willem Middelkoop and the Gold&Discovery Fund are long the mentioned stock, but hasn’t received any compensation from the mentioned companies. Investing in exploration companies is a very high risk play.

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