It is ironic that this annual report represents 100 years since the discovery of the Sixteen to One Mine. It is a simple report, presented to you in Sections A, B, and C, hardly fitting for a centennial year. Section A is what you are reading now, the President's annual message. Section B is the U.S. Securities and Exchange Commission filing of our 1996 form 10-KSB. Section C is the historic chronology of events we showcase at the end of each annual report.
The irony is that we find ourselves on the edge of great success or bitter disappointment. I am unable to predict the outcome. Seasoned shareholders know all about the production vagaries of the Sixteen to One vein system. Our last great success was the 5000 ounces we mined in a week in July 1995. That pocket, whose discovery provided the capital to sink and mine below the 2400-foot level, also gave rise to our first dividend in forty-two years.
Our confidence and investment in deepening the mine in the south central area were based upon the hard facts and calculated faith. It seems we were right. The quartz vein below the old workings carries gold, in many locations, including a concentration of about 300 ounces mined on April 1, 1997. The recovery of gold is always a strong impetus to continue mining that area. Here, the newly exposed vein also has the size, configuration and minerals associated with major concentrations of gold. We are mining in the right spot.
Throughout 1996, we looked at all areas of operations and challenged ourselves to make each more efficient. This resulted in decisions affecting mining, milling and administration.
In order to achieve our long-term goals of profitability, special dividends based upon mining large high-grade pockets, and building wealth through increasing our gold properties, the Company has intentionally directed its resources towards developing access to promising areas of gold. We have consciously decided to create value by continuing to develop the deep central Sixteen to One vein system that should result in significant gold finds in the future.
During 1996, the 2600-foot level was driven about 400 feet south along the strike of the vein. Continuing the level another 165 feet will place the tunnel underneath a known ore shoot on the 2400-foot level. This has been a difficult heading due to problems with holding the ground. About seventy-five feet of timber sets were required for support, which increased labor costs. Rock bolts were installed throughout the level. In February 1997, the vein appeared to split. This discovery is important because it provides geological information and indicates favorable conditions for gold deposition. Two raises were excavated from the 2600-foot level. The first raise, completed in the second quarter, provided a second exit, ventilation and utility access. The second raise, the 26-105, was started on November 10, 1996, and holed through on the 2400-foot level the end of January. As work progressed, what appeared to be the Sixteen to One vein and K vein junction split about 50 feet up from the 2600 foot level. This important discovery assisted mine plans to locate the raise currently underway towards the gold mapped in the 2233 Underhand Stope, our primary target.
During 1996, the 800 foot level north and the 2400-foot level south were cleared of historical debris and repaired. Track and utilities were installed. Both levels provide access for future mining. The 800-foot level allows miners' access to previously mined mill rock and small blocks of ground previously testing positive for gold. Into this area we initiated placer operations in rich muck piles lying below the level. Instead of transporting this ore to the mill, a crew is processing it underground with a trommel specifically designed for the job.
Rehabilitation work on the 2400-foot level began in the fourth quarter of 1996. Once it was completed, miners began a cross cut from the Sixteen to One vein on the 2400-foot level in March 1997, seeking to intersect the K vein. Surprisingly, the vein was only two feet off the level, contrary to the forty-foot estimate from geological cross sections. This new 2400 foot level K vein drift and the 26-105 K vein raise eventually met, allowing miners improved access and ore handling, plus we mined some gold.
We began work on the 2203 heading, affectionately called "Whopper Country", on December 23, 1996. An initial winze was sunk fifty feet and drifting began north and south. Gold was consistent, creating mill grade ore. The area provided us some revenue with mill rock. No whopper junior surfaced and the area was recently abandoned.
MILLING AND PROCESSING ORE
In 1992, our success with metal detectors underground altered the manner of mining the Sixteen to One vein system and processing the ore to recover gold. High-grade ore grading between one and three ounces per pound sacked underground and processed in a small high-grade mill on the property. Low-grade ore has been left underground or stockpiled on the surface near the mill. Between 1994 and the end of 1996, approximately 5,000 tons of ore accumulated above ground. A cautious estimate of 15,000 tons is currently stored underground.
The Company decided to process the ore on the surface during 1996; however, the mill, damaged by fire in 1994 needed repairs. The fire caused more damage to the electrical system than estimated and the mill renovation was not completed until this fall.
The last time the company operated the mill during 1993, we followed the same basic procedures as outlined on the flow sheet (sequencing of equipment) designed by prior lessees. As part of our efficiency drive, we decided to study a 1000-ton sample, testing the mill slurry at different points to determine the efficiency of the recovery equipment. The results showed that gold was escaping into the mill waste, creating an unhealthy loss of revenue. We chose to remedy the situation by installing a new concentrator in December. It has required a series of changes in mill feed, water usage and tailing disposal to get the concentrator operating. We continue to modify the crushing and concentrating equipment in the low sheet while processing about 100 tons of ore per shift.
The board of directors at its December 1996 meeting promoted Ian Haley, manager of the underground mining operations, to mine superintendent. The directors' decision was "based on his excellent performance over the past five years as an employee and his twenty year association with the Company." He was one of the first miners to urge the use of metal detecting devices in the mine and continues to be an enthusiastic supporter of development in this area.
During 1996, the Company's computer hardware was updated, and a new software program was installed that allows the Company flexibility in accounting and managing its growing shareholders relations activities. A primary area of change was the separation of the gold sales division from mining operations.
Beginning in 1997, future financial statements will reflect expenses and revenues from gold sales as distinguished from mining operations and corporate administration. This will allow the Company to analyze its efforts in selling fine jewelry and specimens versus crushing all the high-grade gold and selling it as bullion on the open market.
The Company redeveloped its website during 1996, which can be seen at http://www.origsix.com. It has an educational format along with a marketing program for customers to purchase gold.
A revised employee handbook was prepared and extensively reviewed for compliance with current labor practices. Employee job descriptions were redefined in order to meet the growth and transition from a company with a dozen employees to one with four-dozen or more.
Throughout 1996, the Company expanded its efforts to locate or develop electronic equipment that identifies gold hidden beneath the surface of the quartz vein. We are working with five companies or individuals who have demonstrated the interest, intelligence and resources to advance our current level of detection. Each one has a distinctly different approach. The Company believes that there exists sophisticated micro-powered electromagnetic technology capable of increasing the depth of identification beyond the current twenty to thirty inches. Obtaining equipment to use in the Sixteen to One Mine capable of increasing this depth will have a significant and positive effect on identifying places to mine and the ratio of production cost to ounces of recovered gold. It remains a board priority to pursue technological advancements in metal detection and other areas of operation.
BOARD OF DIRECTORS
The board of directors elected Dr. Sandor Holly, 64, a director on March 14, 1997. Dr. Holly has been associated with Rocketdyne in Canoga Park, California since 1976. He created the design of Pulsed Wavefront Sensor, interferometric sensor systems development and multiwavelength probe laser fabrication. He has been granted nineteen patents including one of the first Free Electron Laser patents issued by the U.S. Patent Office in 1960. He has the following academic degrees: M.S. (Electrical Engineering) from MIT in 1960; S.M. (Physics) from Harvard University in 1962; Ph.D. (Applied Physics) from Harvard University in 1969; and Post Doctoral (Modern Optics) from Northeastern University in 1970. Dr. Holly has been involved in beta site metal detection experiments in the mine during the past year.
Dr. Holly's intensive experience in research and development will be very valuable to the mine as it enters a new era of growth for gold mine discoveries. He is a believer that the new applications and technology currently being tested in the mine today will have a major impact on the profitability of the mine in the near future.
The Company is experiencing no problems with the underground workings, its personnel, its equipment or its plans of operation for 1997. Our goal is to find enough gold to keep the operation running at its present level. While we break rock and develop our current paychute, production from the mill has provided us much needed revenue; however, operations have been interrupted due to breakdowns or fine tuning the new equipment. Each change in the mill must be evaluated by testing it with a run of ore. Only then can the next improvement be introduced. Lost time means the loss of much needed revenue.
Now that you have reviewed our immediate past I am returning to my opening statement, "we find ourselves on the edge of great success or bitter disappointment." The gold inventory that we squirreled away to develop the south central area of the mine in dwindling down. New gold production has not kept pace with the present level of operation, and what we do produce and sell is generating less revenue at current gold prices than a year ago. We may choose to decrease the size of our operation resulting in less mining. This would be the bitter disappointment.
The great success is before us because of the mining targets we are currently exploiting. Since 1983, when I became president, no operation at the Sixteen to One Mine has had the upside potential for finding gold than we have today. For the first time in the last thirty years our miners are breaking ore in fresh ground.
The very genuine possibility exists for us today to mine a pocket of gold the size of past pockets of 20-40,000 ounces. The possibility exists because we chose to reinvest some of our production in the depths of the Sixteen to One veins, a huge known area of gold concentrations. We still have faith in the Sixteen to One, but no on e can call the outcome.
Michael M. Miller
GLOSSARY OF MINING WORDS
DRIFT: A nearly horizontal excavation.
MANWAY: A safe passage for personnel.
ORE: Quartz and other natural substances containing gold.
RAISE: An upward drift.
STOPE: An excavation in the form of steps.
TROMMEL: A perforated cylinder used to screen ore.
WINZE: Steeply inclined or vertical excavation between levels.