Positive Economics from Pre-feasibility Study of Mara Rosa Gold Project Received

Amarillo Gold Corp. (TSX-V: AGC) (“Amarillo” or the “Company”) is pleased to release the summary economic results derived from a 43-101 compliant, pre-feasibility Study ("PFS") of Amarillo's 100% owned Posse gold deposit in the state of Goias, Brazil. The PFS is being completed by Coffey Mining International, the lead consultant on the project, and will be posted in full on SEDAR within 45 days.

Highlights of the economic model, and a summary description of the project, follow.    (all currency in $US unless otherwise stated):

  • Proven and Probable reserves of 17.1MT @ 1.72 g/t and 945,200 ounces of contained gold.  After processing 869,600 ounce of gold will be recovered.
  • Initial 7 year mine life with 2.5MT per year throughout, comprising a 12hour pre-oxidation stage feeding a conventional CIL gold recovery circuit.
  • Average gold production of 124,000 ounces per year.
  • Average total cash operating cost of $524/ounce (on-mine costs $464/ounce with the balance comprising refining, royalties, insurance, transport, security costs, etc).
  • Total gross revenue of $1.044 billion assuming a gold price of $1200/ounce.
  • Pre-Tax Net Present Value at a 5% discount rate ("NPV5") of $283M and an IRR of 37.9% based on a gold price of $1200/ounce.
  • After Tax NPV5 of $178M and an IRR of 26.6% based on a gold price of $1200/ounce
  • Estimated start-up capital of $184M which includes $5.4M working capital.
  • Recommendation to proceed to Feasibility Study (“FS”).

Buddy Doyle, CEO and President of the Company, stated, "Amarillo is pleased to have reached this milestone through the efforts of Frank Baker, our project manager, our staff and the consortium led by Coffey Mining International.  We are also pleased with the very positive outcome of the PFS. The project economics have improved over those presented in our 2008 Preliminary Economic Assessment ("PEA") (See news release March 13th 2008). The improved results were achieved even after a sizable increase in the capital expenditure ("CAPEX") (PEA CAPEX = $80M, PFS = $184M). The superior economic results arise from better metallurgical recoveries, higher gold prices and increased annual through-put as compared to the PEA. The PFS CAPEX now includes Pre-Strip costs, owner operated equipment, and power line construction. The CAPEX estimate is supported by an extensive review of mining project costs in Brazil and the magnitude is comparable to other projects of our size and scope.  This level of detailed engineering work conducted in the PFS has covered much of the work usually incorporated in a FS, and a number of key FS level components are already underway, including, environmental, hydrological, metallurgical and geotechnical studies.  We expect the FS to be completed during 2012.  The next step after completion of the FS would be the decision to become the next Brazilian-based producer of greater than 100,000 ounces per year, a task that is projected to be achievable by 2014."

The PFS study consortium was lead by Coffey Mining International.  Members and their roles are listed in Table 1.

Table 1.  Pre-Feasibility Study Consortium

Member

Expertise

AEFS/HCS*

Mineral Resources

Coffey Mining

Geotechnical Engineering

Coffey Mining

Mine Design

Coffey Mining

Mine Cost Estimation

Hidrovia

Hydrology and Hydrogeology

Coffey Mining

Metallurgical Testwork

Coffey Mining/Amarillo/Onix

Process Design

Amarillo/Onix

Process Plant Design & Cost Estimate

Coffey Mining/Onix

Infrastructure Design & Cost Estimate

Coffey Mining

Tailings Storage Facility

Neotropica

Environmental

Neotropica

Social

Coffey Mining

Marketing

Coffey Mining

Financial Modelling

William Ferreira

Legal Title Opinion

*Australian Exploration Field services and Hoogliviet Consulting Services

A Mineral Resource cut-off grade of 0.5 g/t Au was used for this PFS.  This was based on:

  • The work completed for the 43-101 compliant Independent Mineral Resource Estimate and Preliminary Economic Assessment (2010), (News Release dated September 1st 2010)
  • The Report on Independent Site Visit and Resource Estimate (2011), (News Release dated September 13th 2011)
  • And a Whittle* pit design using a gold price of US$1,100/oz, (3 year rolling average at the time the pit shape was calculated). `*Whittle is an industry standard pit design software package.

The financial analysis of the Project was completed using a discounted cash flow model (“DCF”) and was constructed based on this mineral resource.  Key criteria used in this model are listed in Table 2. Note the DCF assumes a gold price of $1200/ounce, the 3 year rolling average at the time of the DCF was calculated. .

Table 2.  Key Criteria used in the DCF Model and Reserve Determinations

Description

Units

Value

Gold price for DCF

US$/oz

1,200

Gold price for Pit model and reserve statement

US$/oz

1,100

Resource Au cut-off

g/t

0.5

Mining Method

 

Open Pit

Annual production Rate

Mtpa

2.5

Mining Operating Cost

US$/t of ore

12.59

Processing Operating Cost

US/t of ore

9.73

G & A operating Cost

US$/t of ore

1.83

Total operating cost

US$/t of ore

24.63

Total Operating Costs
Refining Transport and Insurance

US$/oz

US$/oz

464

18

Royalties

US$/oz

42

Cash cost per Ounce

US$/oz

524

Average annual gold production

oz/year

124,000

Mining Dilution

%

3

Mining Recovery or loss

%

97

Plant Recovery

%

92

Project Capital Cost (includes working Cap).

US$M

184

Sustaining capital cost

US$M

11

Royalty

%

2

End of mine salvage sales

US$M

23

Reclamation costs

US$M

8.5

Pit Slope

Degrees

55° HW 40° FW

Total Strip ratio (incl. pre-strip)

Ratio

8:1

Operating Strip ratio (excl. pre-strip)

Ratio

7.4:1

Gross Revenue

US$ Billions

1.044

Nominal Tax Rate

%

34

Pay Back Period post tax

Years

3

Project life

Years

7

Contingency

$USM

$16

Project start

Year

2014

Total gold recovered

Oz

869,600

 

The positive economic results of the economic assessment allows for part of the mineralization at the Posse deposit to be classified as ore.  Parameters for reserves and the DCF model are listed in Tables 3 and 4.  The Mineral Reserve estimate has been prepared and reported in accordance with the CIM Definition Standards (2010) and compiled under the supervision of João Augusto Hilário, BSc, MAIG, an employee of Coffey Consultoria e Serviços Ltda. (Belo Horizonte office) and is 43-101 compliant. The effective date for the reserve calculation is October 24th, 2011.

 

Table 3. Mineral Reserve estimate for the Mara Rosa Project*

Classification

Tonnes (t)

Au grade (g/t)

Contained Gold (oz)

Proven Mineral Reserve

5,361,500

1.97

339,600

Probable Mineral Reserve

11,739,800

1.60

606,600

Total Mineral Reserve

17,116,800

1.72

945,200

* Run of mine plant feed

Table 3 illustrates the Mineral Reserve estimate based on the following Mineral Resource using a cut-off grade of 0.5 g/t Au. The Posse Deposit contains 1,174,900 ounces of gold resource, measured and indicated, from 20.85 MT at 1.75 g/t Au, and 156,400 ounces of gold inferred resource from 3.63 MT at 1.38 g/t Au (0.5 g/t cut-off grade) (NI 43-101 compliant resource as independently determined by Australian Exploration Field Services Pty. AEFS) and Hoogvliet Consulting Services, 13th September 2011. The measured and indicated resource categories where used to calculate the reserve where this ore occurs within the $1100/oz optimized pit.  

It should be noted this is a diluted mineable reserve incorporating 0.5 Mt of dilution at an average grade of <0.2 g/t and recovering 97% of the ore after incorporating losses due to ore handling.  The main input factors for calculating the reserve are shown in Table 2.  Mineral Reserve Estimates were constrained by mining, metallurgical and infrastructure factors.  The reserves are not expected to be affected by permitting or any other factors.

For tax calculation purposes, the economic model uses a straight-line depreciation method based on the mine life, and does not take into account other tax benefits that may be applicable under Brazilian tax rules.  These issues will be addressed in the FS.  At a gold price of US$1,200 per ounce, the average yearly EBITDA is approximately US$83.7 million.

Table 4 summarizes key after-tax financial results for the Base Case assumptions of $1200/oz gold price and a 5 percent discount rate.  The table also shows the sensitivity of results to a range of gold price and discount rate assumptions.

Table 4. Summary of Financial Results for Gold Price and Discount Rate Assumptions

 

$1000/oz

$1100/oz

$1200/oz

$1300/oz

$1400/oz

$1500/oz

IRR (internal rate of return)

16.8%

21.8%

26.6%

31.3%

35.9%

40.3%

NPV0 $M

165

219

274

328

383

437

NPV5 $M (Base Case)

93

136

178

221

264

307

NPV7 $M

71

110

149

188

227

266

NPV10 $M

44

78

112

146

181

215

Pay Back period

5.1

4.1

3.5

3.0

2.7

2.5

PIT GEOMETRY

The final pit measures 1.4 kilometres long in the north-south direction and 0.6 kilometres wide in the east-west direction.  The highest wall will be about 260 metres.  The total area impacted by the pit is approximately 87 hectares. The hanging wall will be carried at a slope of approximately 55° and the footwall at a slope of 40°.

MINING

The mine requires 11M tones of waste pre-stripping during the pre-production period at a total cost of $14.2M.

The project will employ owner operated conventional open-pit mining using drill and blast, hydraulic excavators, haul trucks, and auxiliary mobile equipment to support a mining operation of a nominal 2.5 million tonnes per year of ore and a maximum of 24.6 million tonnes per year of waste.  An operational strip ratio of 7.4 to 1 is achieved after excluding the waste removed by the pre-stripping.

The run-of-mine ("ROM") ore will be hauled from the open-pit with 45 tonne haul trucks and dumped directly into a hopper that feeds the primary crusher.  A small stockpile will be established at the primary crusher area.  A low grade ore stockpile is envisaged for material grading between 0.3 g/t and 0.5g/t. (which the model treats as waste).   Waste material will be moved by 100 tonne trucks.

A life of mine production schedule was prepared by pit phases and years to determine the requirements for the mine infrastructure development, the tonnes and grade of the ore, tonnes of waste rock and tonnes extracted by year.  The distribution of ore and waste contained in each of the mining phases was used to develop the schedule, assuring criteria such as continuous ore exposure, mining accessibility, and consistent material movements were met.

PROCESSING

The PFS incorporates a conventional Carbon in Leach ("CIL") circuit preceded by a pre-oxidation stage ("Pre-Ox").

The plant consists of a conventional crushing circuit (including tertiary crushing) followed by primary and secondary milling in closed circuit with cyclones.  After adding lime to lift the Ph to 12 (using 2kg/t of lime), the final pulp (P80 @ 45microns) is sent to the Pre-Ox tanks (3 tanks), where it is agitated for 12 hours using oxygen enhanced air produced from a PSA (Pressure Swing Absorption)  unit.  This oxidizes tellurides to enable subsequent successful cyanidation of the gold. The pulp is then moved to the CIL tanks where it is contacted with cyanide (0.2kg of cyanide per tonne of pulp) and activated carbon in a typical CIL circuit of six agitated tanks for a total of 24 hours.

Loaded carbon is extracted daily from the CIL circuit and processed in a typical Zadra-style elution circuit with a 4 tonne capacity.  The eluted solution is passed continuously through the electrowinning cells until efficient desorption has been achieved.  At intervals the gold is removed from the cells and smelted into doré bars for sale.  The activated carbon is regenerated in a gas fired rotating kiln before being sent back to the CIL circuit.

Tails form the CIL circuit are thickened to recover some of the solution before the thickened pulp is subjected to detoxification using SO2/air and a copper sulphate catalyst to destroy free cyanide before being pumped to a tailings storage facility (TSF”).  The water from TSF is re-circulated to the plant under conditions of zero discharge.

INFRASTRUCTURE

The Project benefits from good infrastructure development with the planned mine-site layout facilitating a compact design with pit-proximal process plant, TSF, and waste dump. There is a railway within 1.5 kilometres of the pit, a main highway 11 kilometres away and a small town of 12000 people, 5 kilometres away. A four kilometre gravel road connects the deposit to a good asphalted local highway. Although there is an electric power line nearby the proposed pit, the grid does not contain enough capacity for the project’s needs.  Electrical power for the project operations will be provided by installing a 63km long, 138 kV power line.  The present 69kV power line does contain enough capacity to be used during construction period.  Peak demand of the process plant is calculated at 12.7MW and continuous running demand is calculated at 11.3MW.  Power will be distributed throughout the site at 13.8kv, reducing to 460 volts for all smaller motors.  The line is expected to cost, US$7.9M and power will be provided at $R 0.07 kWh. ($US 0.04 kWh at current exchange rates).

ENVIRONMENTAL SOCIAL STUDIES AND PERMITING

Amarillo's consultants will submit the base line environmental study in January.  This is the basic component of the permitting process, the EIA/RIMA statement.  The PFS has delivered an appropriately accurate description of the process planned at the mine allowing the second stage of the environmental permitting process to begin after the EIA/RIMA statement is submitted.  Other mines in Goias are currently being permitted using similar procedures to that planned for Posse.

Frank Baker, the project manager, advises with respect to project upside that, “There is material scope for improvement on this PFS in the subsequent DFS.

There is scope to increase the footwall slope: The current model uses a 40 degree footwall slope.  The optimal pit slope would follow the dip of the ore-body at 45-47 degrees. However this is also is the dip of cleavage in the footwall.  Accordingly the geotechnical experts at Coffey have chosen a more conservative 40 degree footwall slope to mitigate concern over increased footwall failure risk if the pit wall is carried parallel to cleavage.  This has the effect of increasing the strip ratio from approximately 6:1 to 8:1.  It should be noted that the previous mining operation at the deposit by Western Mining Inc. followed the dip of the ore-body and that pit had no geotechnical issues.  Furthermore Western Mining also had plans to expand the pit using a 70 degree angle for the hanging wall and a footwall slope parallel to the ore body slope of 45-47 degrees .  The country rock at Posse has few joints, is competent, not fissile, and there is a second stress direction that folds the cleavage plane that would help reduce the risk of slippage along this plane.  Amarillo has already completed 70% of the Coffey designed geotech drilling program designed to generate the rock quality data and tri-axial stress test data needed to determine the definitive optimal slope angles for the Posse Pit. Amarillo's geologists are optimistic on the prospects for increasing the footwall slope once the analysis of the geotech drilling program has been completed by the relevant independent entity.

There is scope to increase the inferred resource in the pit.  There is an area of low drill density between the southern and northern portions of the ore-body that consequently is classified as inferred resource material that can't be included in the reserve calculation.  A drill program with a drill hole density necessary to convert this material from inferred to measured is planned.  There is potential to add in the order of 50,000 ounces to the reserve which would further reduce the waste to be mined in this area.  This drilling will commence as soon as the geo-tech program is completed."

In Frank Baker's opinion, "Other optimizations may be possible and the team at Amarillo looks forward to investigating them as we progress through the DFS."

The supervising Qualified Person for Coffey Mining international is Norman Lock C.Geol FGS, PrSciNat. The Qualified Person for Amarillo is Frank Baker, M. IOM3 and MAusIMM.

The reader is advised to read the forward looking statements portion of this news release, as although this study indicates the Mara Rosa project will be economic, there are many factors that may alter this. This news release is not intended to be a statement of future production.

About Amarillo Gold Corp.

Amarillo Gold Corp. is focused on acquisition, discovery, and definition of gold resources in Brazil.  The Company’s principal projects are the Mara Rosa Project in the state of Goias, and the Lavras do Sul Project in the state of Rio Grande do Sul.  The Posse Deposit at Mara Rosa contains 1,174,900 ounces of gold measured and indicated from 20.85 MT at 1.75 g/t Au, and 156,400 ounces of gold inferred from 3.63 MT at 1.38 g/t Au (0.5 g/t cut-off grade) (NI 43-101 compliant resource as independently determined by Australian Exploration Field Services Pty. AEFS).  The Mara Rosa Gold Project has received a positive economic assessment from a Pre-feasibility study and is preparing to proceed to a definitive feasibility study. Should this continue to be positive it would be possible to commence mining by 2014.

The Posse Deposit was successfully mined by Western Mining Company (WMC) during the 1990s (mined areas are excluded from the above-stated resource figures), and is located in an area of excellent infrastructure: approximately 35 km NE of Yamana’s Chapada open pit Cu-Au operation, some 60 km NE of Yamana’s Pilar Au project (in Feasibility), 95 km NW of Votarintim’s Niquelandia Ni laterite mine,  105 km from NE of Serra Grande’s underground Au mine, and 105 km NNW of Anglo American’s Ni laterite project at Barro Alto.  Grid power to the site was established during WMC’s open pit mining operation.  The Serra da Mesa (450 MW) hydro-electric dam lies 35 km to the east.

The Lavras do Sul Project is an advanced exploration stage property (190 sq. km.) comprising more than 19 prospects centered on historic gold workings, with encouraging gold mineralization discovered and defined by more than 16,000 metres of drilling.  The initial resource estimate at the Butia prospect reported 215,000 ounces of gold indicated from 6.4 MT at 1.05 g/t Au, and 308,000 ounces of gold inferred from 12.9 MT at 0.74 g/t Au using a0.3 g/t cut-off grade in a NI 43-101 compliant resource as independently determined by Atticus Consulting 2010.  Lavras do Sul is also located near excellent infrastructure.  The Company also has a portfolio of earlier stage projects and all properties under Amarillo’s management are located in areas of good infrastructure and mining-friendly communities.

ON BEHALF OF THE BOARD OF DIRECTORS

AMARILLO GOLD CORP.

Per: “Buddy Doyle”
Buddy Doyle, President

Contacts:

Amarillo Gold Corp.
+ 1-604-689-1799 (Canada)
+55-31-3261-5974 (Brazil)
info@amarillogold.com

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.
FORWARD LOOKING STATEMENTS:-

This news release contains Forward Looking Statements regarding our intentions and plans. The PFS described in this news release is not a production forecast by the Company. There remains at present insufficient certainty in the PFS to reliably estimate future production and economics; further engineering and geology studies are required.  The scope of the PFS is to deliver a project with plus or minus 20% accuracy in its estimates.  Various factors may prevent or delay our plans, including but not limited to, contractor availability and performance, weather, access, mineral prices, market conditions, government policies  and success or failure, as the case may be, of the exploration and development carried out at various stages of the program. The proposed FS will be designed to achieve a higher level of accuracy in our engineering and economic estimates. Permission from various authorities will be required to proceed with future mining production. Although the state of Goias has to date been supportive of mining activity, there can be no assurance that the necessary permits will be received timely or at all. Readers should review risk factors applicable to junior mining exploration companies generally to understand the variety of risks that can affect the Company.