Northgate cuts costs at Kemess

Debt-burdened Northgate Exploration (NGX-T) is trying to accomplish something Peggy Witte’s Royal Oak Mines couldn’t do — turn the Kemess mine, 300 km northwest of Mackenzie, B.C., into an economically viable mining operation.

That’s a tough proposition for the porphyry copper-gold project, which achieved design capacity more than two years ago and has been struggling to turn a profit ever since. Indeed, Kemess is exactly the type of low-grade, high-cost mining operation that hastened the downfall of Royal Oak, whose precarious position high in the gold cost curve ultimately proved to be its undoing.

Northgate is determined to avoid a similar fate, but has faced an uphill battle because of depressed commodity markets, especially for gold. With the goal of achieving profitability as soon as possible, the company has implemented a series of operational improvements that have helped reduce cash operating costs by 32% for gold.

In the second quarter, the mine produced gold for US$239.25 an oz., compared with US$351.62 per oz. in the previous quarter, largely because of higher mill throughput and improved gold recoveries.

Nonetheless, the mine still has a long way to go to achieve the enviable cash cost of US$140 per oz. over the 16-year life (based on a copper credit of US80 per lb.) that was assumed when Northgate first became involved with Kemess. While the price of gold continues to languish, the price of copper has risen significantly off its recent lows and appears to have some modest upside. Continued strength in the red metal will help Northgate improve the financial performance of Kemess.

Improvements in productivity have already been achieved. For example, second quarter gold output was 49% higher at 60,660 oz., while copper production rose 26% to 11.3 million lbs. Gold recoveries improved 7% to 63.6%, but copper recoveries dropped slightly to 68%, reflecting a scheduled change to supergene ore from predominantly hypogene ore in the first quarter.

One operational deficiency Northgate focused on immediately after taking control of Kemess was the mine’s haulage fleet. It now has a 90% availability rate compared with 75% at the beginning of the year.

In the second quarter, mill availability improved significantly despite a brief power disruption and a 10-day maintenance shutdown, both described as “one time events.” Daily mill throughput improved by 27% to 36,420 tonnes per day in the second quarter, and Northgate emphasizes, “the mill is now positioned to meet its operating target of 48,000 tonnes per day.”

The mine installed a $2-million conventional thickener and completed a $1-million rebuild of two filter presses by the end of June which, in conjunction with additional modifications to the regrind and floatation circuits, are expected to have “an immediate and positive impact in the third quarter,” the company reports.

The company has also implemented a long-term exploration program to develop and maintain proven and probable reserves at 10-12 years of production. Mineral resources at Kemess North stand at 74 million tonnes, with a contained metal content of 816,000 ounces of gold and 306 million pounds of copper.

Northgate’s financial condition remains guarded because of interest costs associated with the US$145 million bridge facility the company negotiated to acquire its interest in the Kemess mine. The company recently arranged a US$100 million long-term project loan with Scotia Capital that is intended to reduce Trilon Financial’s bridge financing to Northgate. Trilon, part of the Brascan Group, agreed to provide the bridge loan to Northgate to purchase the property.

According to Northgate, “technical due diligence was commenced during the last week of May and is expected to be completed during early September.” The company expects the project loan will be drawn down before year-end and confirms it is considering “alternative transactions to refinance the balance of the bridge loan facility.”

For the six months ended June 30, Northgate recorded a consolidated loss of $8.8 million, or 29 per share, compared to net income of $1.3 million, or 4 per share, in the same period of 1999. During the three months ended June 30, the company incurred a loss of $6.8 million, or 23 per share, compared to a profit of $691,000, or 2 per share, for the same period in 1999. The majority of the loss ($6.1 million) for the latest quarter is attributable to interest charges while the interest charges for the 6-month period totaled almost $9.5 million.

During the second quarter, the mine generated positive operating cash flow of $2.3 million compared with a deficit of $2.9 million in the first quarter. Northgate predicts that “the improved results currently being achieved at the Kemess Mine should generate earnings” by year-end.

Northgate first became involved with Kemess after acquiring a US$35 million debenture issued by Royal Oak that was secured by a first charge on the Kemess Mine. Royal Oak was unable to resolve its financing difficulties with respect to Kemess, and Northgate later purchased the mine from the receiver, WaterhouseCoopers, for approximately US$180 million.