Mining & Processing

Chelopech is presently expanding its mine and mill operations to approximately double its annual concentrate production capacity to 150,000 tonnes (the “Project”), containing on average, from 2012 to 2021, 46 million pounds of copper and approximately 130,000 ounces of gold. The Project comprises:

1. The expansion of mine production capacity to 2.0 million tonnes of ore per year, including the installation of an underground crushing and conveying system, upgrade of the mine ventilation system and construction of a paste fill plant; 
2. The installation of a new semi-autogenous grinding ("SAG") mill; and
3. The modernization and upgrade of the existing concentrator.

The longest portion or critical path for the overall project is the excavation and installation of the underground crusher and conveyor (see figure below) which, as reported in July 2011, is now scheduled to be completed in July 2012, seven months later than originally planned.  The delay in the scheduled completion of the underground crusher and conveyor is estimated to have a minimal impact on the planned production of 1.8 million tonnes of ore which was originally scheduled for 2012.  With additional trucking capacity, it is currently expected that Chelopech will achieve its target production of 1.8 million tonnes of ore in 2012.

As at September 30, 2011, the Company had invested $122.5 million in the Project and the estimated cost to complete the Project was $53.4 million.  Following commissioning, the cash operating cost for the expanded facility is expected to decrease to approximately $30 per tonne of ore processed (assuming US $1.35/Euro and excluding royalties).   

Milestones in the Mine/Mill Expansion

1. The paste fill plant is fully operational and an integral part of the operational circuit.
2. The major equipment related to the concentrator upgrade (SAG mill, flotation capacity and conveyors) has been operational since February 2011 and current throughput is 230 tonnes per hour. The new filter unit and load out facility were completed in the third quarter of 2011.  It is currently expected that the balance of the concentrator upgrade (process control system, the new tailings thickener, water recirculation system and tailings flume upgrade) will be completed in the fourth quarter of 2011.  The process plant flowsheet will be fully utilized once the underground crusher and conveyor and the stockpile systems come online.   
3. The Sever main exhaust ventilating fan was installed and commissioned as scheduled in the third quarter of 2011 and has increased the ventilation volume in the mine to the levels required for the production ramp-up.
4. The underground crushing and conveying project (see figure below) commenced in January 2010, with hard rock mining of an inclined tunnel (the “Vyara” incline). The tunnel will be 4,295 metres long and approximately 5 metres in diameter lined with fibrecrete.  It is mined by drilling and blasting at an incline angle of 16%. Seven conveyors are to be installed in the inclined tunnel and an underground crusher will be situated at the bottom end of the tunnel on level 165.  As of September 30, 2011, approximately 95% of the required 4,295 metres of tunnelling for the conveyor drives had been completed.
5. The civil and steelwork installation work in teh crusher chamber commenced during the third quarter of 2011 and is on schedule.  The civil and structural work in the conveyor transfer and drive stations is scheduled to commence during the fourth quarter of 2011.  
6. Work on the engineering design of the ore passes, transfer stations and crushing station is complete.  The engineering design of all mechanical, electrical and instrumentation works will be completed during the fourth quarter of 2011.  The electrical installation and piping contracts related to the conveyor and ore passes are expected to be awarded during the fourth quarter of 2011.
7. Apron feeders, plate feeder, conveyor belt drives, conveyors and the bulk of the crusher chamber steelwork have been delivered to site and the delivery of the balance of the equipment for the project is on schedule.
8. The above ground stockpile and reclaim facility is underway.  Construction of the surface stockpile vault is underway and is scheduled to be complete during the fourth quarter of 2011.  The balance of the surface conveyor facility is on schedule for completion during the second quarter of 2012.

Ore handling Infrastructure

Exploration

In the third quarter of 2011, underground exploration diamond drilling comprised 5,849 metres with a continued focus on Chelopech North (including Block 147, Block 143 and Target 181), Block 19E and Chelopech South West.  These areas have been systematically defined through geological review and have been identified as having the highest potential for delivering additional reserves to the life of mine plan.   Exploration drilling in Block 19E defined extensions to the north east of Block 19.  Additional grade control drilling has highlighted the potential for supplementary economic mineralization proximal to the current mining area.  The zone north east of Block 19 has been defined as an area with high potential for new discoveries and therefore, an independent exploration drive has been designed from the 380 mine level to access the area.

During the period, drilling of the Chelopech North zone focused on defining the continuity of Block 143, which is located 150 m east of Block 149 and extending the upper eastern boundary of Block 147.  This area is developing into a corridor of podiform lenses of mineralization stretching over 600 metres to Block 19.  With additional drilling, Block 147 still remainds open to the east and west.  The extent of Target 181 was also tested and is found to be 15 metres by 50 metres by 50 metres.  Drilling will continue to the North in the fourth quarter of 2011 in order to define economic mineralization and to improve the ongoing development of the geological model.

Additional wide spaced drilling to explore the Chelopech South West zone continues to define the extents of the alteration envelope to the Chelopech deposit with the presence of indicator alteration assemblages.  Drilling will continue in order to provide drill hole access for a down-hole geophysical program planned for the second quarter of 2012.

2011 Outlook

For 2011, mine output at Chelopech is expected to range between 1.2 million and 1.3 million tonnes of ore, in line with its planned ramp up to an annualized production rate of two million tonnes of ore. At this level, Chelopech is expected to produce approximately 100,000 tonnes of concentrate, 93,000 - 94,000 ounces of gold, 35.0 - 36.0  million pounds of copper and 150,000 - 155,000 ounces of silver.  Capital expenditures for the mine and mill expansions are expected to be $63 million.  Unit cash cost per tonne of ore processed, excluding royalties, at Chelopech for the year 2011 is expected to be approximately 5% lower than the year 2010 average unit cash cost of ore processed assuming the current exchange rate Euro to U.S. dollar remains unchanged.