Spanish writedowns swamp Rio Narcea

A US$28.4-million writedown on the carrying value of the El Valle and Carles mines in Spain pushed owner Rio Narcea Gold Mines (RNG-T) deep into the red in 2004.

The company ended the year with a net loss of US$44.4 million (or 36 per share), compared with earnings of $3.2 million (3 a share) in 2003. Contributing to the recent loss were lower production, higher mining costs, and a 10% appreciation of the euro against the dollar. Consolidated revenue between the two periods climbed by 11.5% to US$67.8 million, while revenue from El Valle and Carles fell 22% to US$47.3 million.

Cash flow from operations was more than halved to US$8.9 million, mainly because of higher costs for underground mining at El Valle and Carles. These costs totalled US$30.1 million, or US$1.9 million more than in 2003.

Open-pit mining at El Valle wrapped up in August; the company plans to use the pit as a tailings containment area during underground mining, the monthly rate of which is now 8,000 tonnes. The monthly mining rate is expected to reach 20,000 tonnes later this year.

At the end of 2004, proven and probable underground reserves at El Valle totalled 723,000 tonnes grading 4.4 grams gold per tonne, or 102,279 oz. In addition, there is a stockpile of 193,000 tonnes grading 7.6 grams, or 47,035 oz. The reserves also contain 17.6 million lbs. copper.

Underground mining at the Carles East deposit begain in mid-2003, and open-pit production ceased in May 2004. About 11,000 tonnes were mined from underground in each month of the fourth quarter. In 2005, the monthly mining rate is expected to reach 16,000 tonnes. At year-end, underground proven and probable reserves totalled 534,000 tonnes grading 4.3 grams gold per tonne, or 73,825 oz.

At the end of 2004, Rio Narcea began revising the mining plans for El Valle and Carles. Meanwhile, underground infill drilling at El Valle has extended to the two eastern zones of mineralization between the El Valle and Boinas East pits. Infill drilling will continue in 2005. The company also intends to do underground infill drilling at the Carles North and East zones.

In 2004, Rio Narcea produced a total of 118,580 oz. gold at a cash operating cost of US$215 per oz., compared with 174,175 oz. at US$146 apiece in 2003. The lower production reflects a 16% drop in the average head grade to 6.4 grams gold per tonne. The company realized an average selling price of US$408 per oz. during the year, up from US$356 per oz. in 2003.

Still, 2004 wasn’t all doom and gloom: in December, commissioning of the Aguablanca nickel project began.

Construction contractor Fluor is modifying the semi-autogenous grinding mill and flotation circuit. The work is expected to take up to six weeks.

“Its Fluor’s responsibility to hand us this plant running correctly,” says Rio Narcea CEO John Hick. “We’re not sitting around waiting for them to do that; we’re working closely with them.”

The open-pit and underground operation is designed for annual production of 18 million lbs. nickel, 11 million lbs. copper, and 20,000 oz. platinum group elements (PGEs). At the end of 2004, proven and probable reserves were unchanged at 15.7 million tonnes grading 0.66% nickel and 0.46% copper, plus 0.47 gram PGEs per tonne.

At year-end, Aguablanca’s planned 3-km-long decline had advanced to around 1,150 metres and is now expected to reach the higher-grade nickel mineralization in the second quarter. Underground mining at a rate of 285,000 tonnes per year is slated for the first half of 2006.

Also, the company acquired the Tasiast gold project in Mauritania via its takeover of Defiance Mining in September 2004.

The company expects to complete basic engineering for the project in April; construction will follow. The US$50-million project will be funded via debt financing and cash flow from operations.

Tasiast has proven and probable reserves totalling 9 million tonnes at 3.1 grams gold, or 885,000 oz. That reserve is included in a larger measured and indicated resource of 12.1 million tonnes grading 3.1 grams, or nearly 1.2 million oz. An additional 12.4 million tonnes of inferred material runs 2.25 grams gold.

At the end of 2004, Rio had long-term debt of US$31.1 million, up from US$6.8 million a year earlier. The increase is mostly attributed to the drawdown of US$30 million under the Aguablanca credit facility. The company also had cash and equivalents totalling US$81.9 million.

Looking ahead, Rio Narcea expects to produce 70,000 oz. gold from its existing operations in 2005; cash costs are figured at US$385 per oz.

The company plans to spend US$36 million developing the Tasiast open-pit gold mine. Plans call for metallurgical tests and 15,500 metres of infill drilling on the Salave deposit in northern Spain. Rio expects to table an updated resource estimate for Salave by the end of the second quarter.

Ultimately, concentrate from Salave will be processed at the El Valle plant.