Palito Gold Mine

The Palito Gold Operation consists of an underground mine with high-grade gold-copper sulphide ore, a small open pit extracting gold-only ore, as well as an adjacent processing plant capable of treating 220,000 tonnes per annum. The Palito Mine and a number of nearby areas had been part-worked near surface for a number of years by garimperos. The underground extension of the veins that they were mining continue to represent the long term value and potential for the area but current operations are focused on the near-surface oxide gold occurrence that can be found in the area.

Underground mining operations at Palito commenced production in late 2004 with selective mining of the high grade gold copper ores reaching an average throughput rate of 150 tonnes per day (tpd). In 2006 Serabi started to introduce a greater level of mechanisation into the mining operations in an effort to increase production and cash flow. Throughput increased to 340tpd with further increases in 2007 to 475tpd as the mine completed the transition to fully mechanised operations. During 2008, despite the commencement of surface oxide ore mining, the suspension of the underground operations meant throughput fell to 357 tpd.

Today mining is by open pit only, with the underground operation on care and maintenance until further notice.Throughputs are in the range of 200-300 tpd.

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Geology

A series of northwest-southeast, steeply dipping, quartz-gold-copper veins form the basis of the Palito Main Zone deposit.  The gold mineralisation of the Palito Main Zone is hosted within the upper levels of a large adamellite granite intrusive associated with felsic volcanics (rhyolites and dactites) and felsic breccias. Mineralisation is contained within vertical to sub-vertical, mesothermal quartz-chalcopyrite-pyrite veins filling brittle extensional fault systems.  Vein widths typically average over one metre in width with grades typically between 15g/t and 30g/t.  Gold grades in excess of this are associated with semi-massive, chalcopyrite-pyrite 'blowouts' within the quartz veins.

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Geological Resources

In March 2008, independent consultants NCL Brasil Ltda updated the geological resource and ore reserve estimate for the Palito Operations.The total geological resource at Palito Operations, including all categories as at 31st March 2008, has been estimated at 0.67 million ounces of gold equivalent assuming a 1.0 g/t cut-off.These resources are based on extensive surface and underground drilling combined with sampling results from underground development.Within the 0.67 million ounces of mineral resources, 224,300 ounces of gold equivalent occur in the higher confidence Measured and Indicated categories, with the balance in the Inferred resource category.

1. Mineral resources are reported at a cut-off grade of 1.0 g/t

2. The Mineral Resources as set out in the table above have been estimated by Rodrigo Mello from NCL, who is a competent person under the JORC Code for mineral deposits such as Palito. The Mineral Resources are classified as Measured, Indicated and Inferred in compliance with the JORC Code

3. Numbers may not add up due to rounding

4. Equivalent gold is calculated using an average long-term gold price of US$700 per ounce, a long-term copper price of US$2.75 per pound, average metallurgical recovery of 90.3% for gold and 93.9% for copper

5. It should be noted that the definition of the Inferred mineral resource category typically has lower certainty as to resource existence and economic viability.
   

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Ore Reserves

 Within the total mineral resource estimate, NCL Brasil Ltda has estimated an ore reserve of 187,500 ounces gold equivalent, comprising 732,500 tonnes @ 7.34 g/t gold and 0.22% copper.It should be noted that these reserves are derived from the Measured and Indicated resource categories within the Total Mineral Resource of 0.67 million ounces tabulated above and are NOT additional.

In reporting an ore reserve at Palito for the first time it is important to note the parameters adopted at the base of the table.

1. Ore reserves are reported at a cut-off grade of 4.7 g/t.2007 and 2008 year to date costs have been assumed.An exchange rate of US$1 = R$1.90 has been considered over the reserve life.

2. Minimum mining widths of 1.2m have been assumed

3. The Ore Reserves as set out in the table above have been estimated by Carlos Guzmán from NCL, who is a competent person under the JORC Code.The Ore Reserves are classified as Proved and Probable in compliance with the JORC Code

4. Equivalent gold is calculated using an average long-term gold price of US$700 per ounce, a long-term copper price of US$2.75 per pound, average metallurgical recovery of 90.3% for gold and 93.9% for copper

5. Numbers may not add up due to rounding

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Mining Method

The Palito underground mine originally commenced production through selective mining by the shrinkage stoping  method from a series of adits.This method continued reasonably successfully until the end of 2006 with that year being our best to date with approximately 39,200 ounces gold equivalent produced.However, to expand production, the decision was taken during 2006 to move to trackless mechanised mining by longhole method, which at the time was believed to bring with it improved productivity benefits.The quest for early production to generate cash-flow for future operational expansion and exploration had restricted the level of detailed mining studies that could be undertaken. This, combined with long lead times on equipment and therefore a need to acquire mining fleet that was readily available but not necessarily ideal, has with hindsght impacted negatively.

By early 2007, it was apparent that the move to mechanised mining required greater study.The early days of mechanised mining saw excessive levels of dilution - far beyond forecast - largely as a result of development levels spaced excessively far apart.During the latter part of 2007, with newer levels spaced more closely allowing a greater degree of selectivity, dilution levels did improve. However, this required a consequent and significant increase in development metres and thus an increase in costs.As a result of the diluted grade the operation produced 33,963 ounces gold equivalent in 2007- some 8,000 ounces below budget.

In an attempt to achieve the 2008 mine plan, the company placed orders by mid 2007 for new, dedicated, narrow vein mining equipment to accelerate the development capability.However (as was the case at the time), equipment lead times were a major problem for mining companies and not until late 2008 did this improve.Despite contrary assurances significant delays were experienced in the delivery of this key equipment.The net effect of these was that we suffered a difficult first half year in 2008 and failed to achieve the required rates of mine development necessary.Despite best efforts to expedite the delivery of new equipment to site, and a concerted effort in Q3 of 2008 when it did arrive to recover some of the lost development metres, the damage done to the mine plan over the first six months of the 2008 meant that to re-establish full scale operations at Palito would require placing the mine into a dedicated phase of development for a period of some 12 months.This would re-establish adequate mining faces and stoping panels.However, such a development plan would for the first six to nine months generate insufficient ore to feed the plant with consequential cash flow implications as well as a significant working capital requirement. During the last quarter of 2008, the uncertainty in the capital markets meant it was very unlikely the company could secure the necessary funding to implement this plan, so the option to place the mine into expanded development was not a realistic option for Serabi.In the absence of any viable alternative plan we reluctantly had to take the decision to reduce the level of mining activity at Palito, ultimately suspending underground mining by the end of 2008.

During 2008, some of the remnant surface oxidized deposits not mined by garimpeiros were evaluated and mined by open pit method.While this was not seen as a major ore supply, oxide gold production has been far more successful than ever anticipated and continues to date.For the first 6 months of 2009, ore production has averaged 200 tpd.

The Palito underground mine has been under care and maintenance since January 2009 but remains in a state whereby operations could re-commence at relatively short notice.Any re-establishment of underground mining at Palito to levels of production similar to those originally targeted for 2008 could only be achieved through continued use of mechanised methods and would require a phase of long-term development (up to 12 months) - bringing with it a substantial working capital requirement.However, in light of our experience over the past three years, the Directors are firmly of the opinion that the re-introduction of selective manual mining at Palito is necessary.Lower levels of production would still require a significant working capital outlay and also the identification and recruitment of suitable mining personnel.Such methods, whilst yielding lower ore volumes, would produce an ore feed to the plant of higher grade and thus be expected to produce lower cost ounces and improved and more robust economics. The unavoidable higher fixed costs of operating in a remote location all lead us to the conclusion that to achieve sustainable profitable ounces with healthy margins an increase in geological resource and mineable reserves are also required.

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Processing Method

The plant currently consists of a crushing circuit and stockpiles to feed the milling section. The mill feeds a flotation circuit to produce a gold-copper concentrate that has been regularly shipped to a smelter in Europe. Tailings from the flotation circuit report to a traditional CIP circuit which produces gold bullion on site. At present, as the operation is only mining oxidized gold ores which are copper free, the flotation plant is idle and milled ore passes straight to cyanidation.

Final refinements to the plant have established a throughput capacity of 600-650 tpd. The process method has now run for four years and is tried, tested and suited to the operational environment of the mine.  Plant recoveries have been in excess of 90%.

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Palito Gold Mine

• Geology

• Geological Resources

• Ore Reserves

• Mining Method

• Processing Method

Operations

• Overview

• Palito Gold Mine

• Jardim do Ouro District Exploration

• Tapajos Regional Exploration

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