Bema looks to Russia for future growth

The economics of an advanced-stage deposit in the Russian Far East containing 1 million gold-equivalent ounces are strong enough that Bema Gold (BGO-T) is making a bid to acquire its 79% owner, British-based Arian Resources (ARA.U-T), despite the depressed gold market and the project’s location.

The two companies have entered into a business combination agreement, whereby Arian shareholders will exchange 3.3 of their shares for one Bema share. Certain Arian shareholders holding an aggregate 38.7% of the company’s 33 million outstanding shares have already agreed to tender their shares.

This transaction is subject to a two-thirds majority approval by Arian shareholders, as well as regulatory approval; both are expected by mid-June.

The proposed arrangement calls for Bema to issue a total of 10 million shares, resulting in a 10% dilution of the company’s current 104 million outstanding shares (109.3 million fully diluted), while increasing Bema’s minable reserve base by 11%.

Arian’s principal asset is a 79% interest in the Russian joint-stock company Omsukchansk Mining & Geological, which owns a number of licences, including the high-grade Julietta gold-silver deposit in Russia’s Magadan region. The other 21% of Omsukchansk is owned by private Russian interests.

The 110-sq.-km Julietta property is 250 km northeast of the port city of Magadan and 600 km south of Amax Gold’s (AU-N) 50%-owned Kubaka gold mine.

Julietta is accessible year-round by road; it is a 520-km drive from Magadan.

During a conference call, President Clive Johnson said an important factor in Bema’s decision to go ahead with the deal was the presence of other major mining companies working in the region, most notably Amax Gold, which successfully brought the Kubaka mine into production. Kubaka is a high-grade, open-pit, conventional milling operation that commenced commercial production on July 1, 1997, and is expected to produce 460,000 oz. gold in 1998 at a projected cash cost of US$183 per oz.

Another important condition for Bema was being able to arrange production financing for Julietta at today’s gold prices. Barclay’s Capital and Standard Bank of London have committed to underwrite US$60 million of the US$70-million capital cost of building the mine. The debt financing includes a US$40-million, non-recourse project loan facility and a US$20-million, 5-year revolving corporate loan facility. Bema is required to contribute US$10 million of equity to the capital costs.

The loans are subject only to final documentation.

“Obviously there is political risk in mining in Russia. We think Russia is heading in the right direction,” said Johnson. “We’re convinced there will be numerous challenges along the way; Amax Gold is quite open in terms of discussing some of the challenges that they faced.

“The banks are obviously comfortable with the risk and, after much due diligence, we’re comfortable with it and we expect Magadan to emerge over the next five to ten years as a major force for gold discoveries and mining.” Discovered in 1989, the Julietta deposit has been extensively explored and developed, first by Russian expeditions, and, since 1994, by Arian. The work, which has focused only on a small part of the 110-sq.-km property, has included detailed geological mapping, extensive trenching, 40,000 metres of diamond drilling and 1,800 metres of underground development.

“The work was well done and done in a lot of detail,” said Johnson. “In our view, Arian has done a very professional job, technically, on advancing the project.”

The Julietta deposit is a low-sulphidation epithermal vein deposit hosted within Cretaceous-age volcanics. Tom Garagan, Bema’s vice-president of exploration, termed it a caldera complex. Julietta’s steeply dipping veins trend east-west and vary from 10 cm to 7 metres wide; their average width is 1 to 1.5 metres.

A bankable feasibility study was completed by Davy International in July 1996 and updated by The Industrial Company (ITC) and Jacobs Engineering in January 1997. The deposit is estimated to contain a minable reserve in the proven, probable and possible categories totalling 1.1 million tonnes grading 20.05 grams gold and 339.11 grams silver per tonne, for a contained 734,400 oz. gold and 12.4 million oz. silver, or approximately 1 million gold-equivalent ounces. The reserve figures take into account a 20% dilution factor.

Proven and probable minable reserves account for 538,446 tonnes grading 24.65 grams gold and 407.46 grams silver, for 426,700 contained ounces of gold and nearly 7.1 million contained ounces of silver.

The possible component of the minable reserve stands at 600,854 tonnes grading 15.93 grams gold and 277.86 grams silver, for a contained 307,700 oz. gold and 5.4 million oz. silver.

Bema is quite comfortable with the estimate of the possible reserves, which is an important component of the project. The proven and probable reserves were developed from underground and 25-metre-centre drilling, while possible reserves were developed from 50-metre-centre drilling on the same vein structures.

“The veins tend to be fairly consistent with grade and tend to average in the 15-to 20-gram range, and then we’ll get these large pockets of up to 500 and 600 grams of gold and several thousand grams of silver, which brings the average grade up,” said Garagan.

The wider-spaced drilling tends to miss the higher-grade pockets, returning grades at roughly the background level of the veins. Garagan is confident that more detailed drilling will boost the grade of the possible reserves.

Garagan said exploration potential exists not only in the immediate area of the Julietta deposit, but in the rest of the 110 sq. km property as well.

Limited fieldwork has revealed several mineralized areas, including the Engteri prospect, 5 km northwest of the Julietta deposit, where grab samples of float material returned values up to 100 grams gold and 660 grams silver.

Omsukchansk holds three licences that cover over 200 sq. km of ground surrounding the Julietta licence.

Underground mining will employ cut-and-fill methods, using paste and backfill. Dennis Stansbury, vice-president of development and production, said excellent ground conditions and a well-defined hangingwall and footwall should keep dilution to a minimum. The actual dilution is expected to be less than 20% of that which was factored into the minable reserve estimate.

The metallurgy of the Julietta deposit is said to be straightforward; a standard crushing and grinding circuit with Merrill-Crowe recovery methods is projected to recover 95% of the gold and 85% of the silver.

The feasibility study indicated that a small-scale, 350-tonne-per-day operation could produce an average of 96,000 gold-equivalent ounces annually over an initial mine life of 9.3 years. Production in the first three years is projected at 135,000 oz. gold-equivalent. Operating costs over the mine’s life are estimated at US$119 per oz. gold-equivalent.

The effective payback of the US$60-million debt facility at today’s gold and silver prices is three years. Once all debt and equity funding for the project has been repaid to the banks and Bema, cash flows will divided among the owners of Omsukchansk.

All the necessary environmental and mine permits to begin construction are in place. Bema is looking to kick-off an 18-month construction schedule in June, beginning with detailed engineering and on-site road work; the bulk of the on-site construction will not begin until the spring of 1999.

Production is scheduled to commence in January 2000.

To avoid cost overruns, Bema is negotiating a fixed-price contract for the construction of the mine, excluding a few items such as freight.

A gold sales and export contract with the Russian government has been negotiated, under which the Russian government has three days from the time a gold shipment is ready to purchase the gold and deposit the money in the bank. The gold is payable 50% in U.S. dollars and 50% in Russian rubles.

Should the government decide not to make the purchase, the gold can be sold ex
ternally.

Going forward, Bema is looking at a net profit tax in Russia of 35%, with an additional 2% or 3% attributed to a road tax, sales tax and other minor taxes. A one-shot tax, based on past exploration and development expenditures incurred by the Russian government, of no more than US$1.7 million is payable in the first year.

“We think Magadan has some of the best exploration potential in the world and, on a risk-to-reward basis, we felt this was important to take on,” said Johnson. “We’re not betting the farm; we’re very comfortable with the risk.

“We are not changing our primary focus, which remains Latin America, but we think in five to ten years from now this could look like an extremely smart move,” Johnson continued, noting that Bema’s foray into Chile a decade ago was viewed with skepticism.