MINING MARKETS & INVESTMENT NEWS – INVESTMENT COMMENTARY — Bulyanhulu viewed as robust despite weak gold prices

Michael Westcott, mining analyst for Goepel McDermid Securities, believes the Bulyanhulu gold deposit in Tanzania’s Lake Victoria Goldfields region will transform Sutton Resources (STT-T) into a low-cost, mid-tier gold producer.

In a recent research report, he cites a newly released feasibility study that concludes that the economics of the project are sufficiently robust to warrant a “go-ahead” decision, even at today’s depressed gold prices.

Sutton has 36.7 million shares outstanding and currently trades at $7.50, which Westcott says represents a 35% discount to the firm’s base-case net asset value of $11.80. He rates the company a buy, with a 12-month target of $13.60.

Sutton holds an 85% interest in Bulyanhulu, as well as a 40% stake in the Kabanga nickel-copper-cobalt project (also in Tanzania), which is being explored by partner Anglo American.

Sutton was one of the first North American companies to explore projects in Tanzania. Despite the recent attack on the American embassy in the city of Dar Es Salaam, the country is considered one of the most stable in Africa.

Westcott says the reason Tanzania has not experienced much civil unrest is because the population of 26 million comprises a wide diversity of tribal groups. As well, the East African nation has had multi-party elections since 1995, with the present government now in its second term.

“The Tanzanian government has created a favorable fiscal regime and investment climate that is attracting record levels of foreign investment, particularly in the mining sector,” Westcott writes. “A reformed Mineral Policy and a new Mining Act have passed through parliament and are in the process of being enacted. As a result, Tanzania is regarded as one of the best countries for mining investment in Africa.”

Westcott cautions that because Tanzania is a developing country, with a limited track record of foreign investment, “political risk cannot be completely ignored.” He points out that infrastructure is poor and that transportation issues will require “special attention.” The planned route entails a combination of road and rail to Dar Es Salaam.

On the technical front, Sutton’s feasibility study for Bulyanhulu is based on a 2,500-tonne-per-day underground mine capable of producing more than 300,000 oz. gold annually. The engineering, procurement and construction management contract has been awarded to Placer Dome’s Technical Services division.

Westcott points out that even if the gold price remains at US$300 per oz. throughout the 11.3-year (proven and probable) reserve life, the project still generates an internal rate of return (IRR) of about 12%. “At US$350 per oz. gold, a long-term price easily realizable today through forward selling, the Bulyanhulu project’s base-case IRR exceeds 19%,” he adds.

Bulyanhulu is characterized as an Archean, greenstone-hosted reef or shear-vein system similar to those mined in Canada. Mineralization is hosted in a sheared, quartz-rich, variably graphitic and argillaceous unit, sandwiched along the contact between two volcanic units.

The main body, dubbed Reef 1, dips steeply, averages 4.4 metres wide and has been traced horizontally for about 1,400 metres and vertically for 1,100 metres. Proven and probable reserves in Reef 1 stand at 10 million tonnes grading 11.65 grams gold per tonne (3.75 million contained ounces). Resources in other zones bring total reserves and resources to 17.1 million tonnes grading 12.13 grams (or 6.6 million contained ounces).

Westcott says the deposit should be relatively simple to mine, with material initially accessible by a ramp, then by a shaft. The main method used will be long-hole stope mining, with paste backfill. The feasibility study contemplates a 13% grade dilution and a 96% extraction rate. “One of the bigest challenges will be developing a skilled workforce for the mine,” Westcott points out. “Tanzania has few skilled miners.”

The metallurgy is described as “relatively complex,” requiring multi-stage processing in order to optimize recovery.

“The nature of the gold mineralization itself is not particularly problematic,” Westcott writes. “It occurs as liberated grains and as fine grains in pyrite and chalcopyrite. The complexity relates to the presence of graphite, which can have the effect of stripping gold from solution, and cyanide-soluble copper minerals, which can cause higher reagent consumption, leading to higher costs.”

The feasibility study envisions a 3-stage circuit producing two products: a gold-silver dor poured into bars on site, and a sulphide concentrate containing 20% copper, 300 grams gold and 235 grams silver per tonne, which will be shipped to a smelter for refining.

Overall gold recovery is projected to be 92.5%, with gravity tables recovering 42% of the gold. The copper concentrates will contain 43% of the gold, with 7.5% captured in a carbon-in-leach circuit.

Westcott says Bulyanhulu will be a low-cost mine, with cash production costs expected to average US$165 per oz. over the mine life, net of copper and silver by-product credits.

Capital costs are estimated at US$274 million — somewhat higher than originally envisioned, owing to workforce training, inclusion of the cyanide recovery circuit and higher underground development costs in the first three years.

“Unfortunately, the company has reached the financing stage at an inopportune time,” Westcott cautions. “Fortunately, Bulyanhulu is not a typical gold deposit. It is larger than most and will enjoy lower production costs. Accordingly, we expect [it] to get financed and developed, even in this dismal gold market.”