More reward than risk at Kutcho Creek

Dease Lake, B.C. — The Kutcho Creek volcanogenic massive sulphide (VMS) project located 100 km east of this Northern community made it to prefeasibility in the mid-1980s, only to be put on the back burner by two senior companies that saw more risk than reward based on the (then) prevailing view that copper would sell below US$1 per lb. for many years to come.

Fast-forward 20 years and current owner Western Keltic Mines (WKM-V, WLKTF-O) sees much more reward than risk, even based on the most conservative projections for copper prices going forward. Earlier this year, the company’s board gave the go-ahead to complete permitting and a bankable feasibility study for a mine capable of producing 60 million lbs. copper and 75 million lbs. zinc each year at an annual throughput rate of 1.5 million tonnes. A prefeasibility study is expected within the next few months, followed by the final feasibility study by year-end 2007.

Kutcho Creek ranks as one of the most advanced undeveloped deposits of its type in Canada, yet has a low profile relative to other nearby projects, partly because of many years of inactivity and its remote location. But as Western Keltic management pointed out during a recent visit, systematic work programs conducted over the past few years have confirmed favourable attributes that more than compensate for the lack of infrastructure.

“The key to this project is a deposit grading about two per cent copper that is open-pittable,” said Peter Holbek, vice-president of exploration. “We also wanted to increase resources to a higher threshold, which we’ve achieved through our recent drilling programs.”

Since acquiring Kutcho Creek in March 2004, Western Keltic has boosted resources from about 13.5 million tonnes to 20 million tonnes within three massive sulphide deposits. These deposits occur within a 4-km-long, gently plunging linear trend within a portion of the regional-scale Kutcho Formation. The VMS deposits are of the Kuroko-type, with mineralization related to felsic volcanism in an island-arc or back-arc tectonic setting.

The updated 2006 resource estimate was used to develop a conceptual development model for a combined open-pit and underground mine capable of delivering 3,800 tonnes per day to a conventional process plant over at least a 15-year mine life.

Kutcho, the largest and most advanced deposit, hosts an open-pittable resource of 14.2 million tonnes grading 1.86% copper, 2.44% zinc, 33 grams silver and 0.4 gram gold per tonne. The deposit outcrops on surface and has the advantage of a high-grade core that could be developed into a potential starter pit.

The Esso West deposit hosts an additional 2.03 million tonnes at 2.93% copper, 5.5% zinc, 69 grams silver and 0.6 gram gold, while the Sumac deposit contains an inferred resource of 4.2 million tonnes grading 1.35% copper, 1.85% zinc, 21 grams silver and 0.2 gram gold.

The resource estimate released in early 2006 was based on 188 drill holes in the Kutcho deposit, 72 holes in and around the Esso West deposit, and 14 holes in the Sumac deposit. These include 66 holes drilled by the company in 2004 (7,700 metres) and 2005 (6,400 metres).

Predictable geology

While VMS deposits typically require tight-spaced drilling to trace and define resources, particularly in Archean environments, this is less the case at Kutcho Creek. The geology is more predictable as the deposits aren’t metamorphosed or broken up by folding and faulting, resulting in exceptional continuity and a high level of confidence for the total resource.

“There aren’t many VMS deposits in the world left in their original state,” Holbek says, adding that it’s possible to see the deposition and layered textures. Another favourable factor is that the higher grades tend to occur close to surface, allowing for faster payback of capital costs.

Kutcho Creek was discovered at a time when the VMS model was barely understood at all. The first discovery was made in 1968 by an exploration joint venture operated by Imperial Oil, which later became Esso Minerals Canada. The claims were allowed to lapse when other partners declined to continue exploration.

The project was revived in 1972 when a subsidiary of Sumitomo Metal Mining of Japan staked claims overlying the western part of the main Kutcho deposit. Imperial Oil returned to the region and the two groups worked co-operatively but independently until they eventually joined forces in the early 1980s. By this point, the VMS model was much better understood, which helped guide ongoing exploration efforts.

A prefeasibility study completed by Wright Engineers in 1985 indicated an 11% internal rate of return at a copper price of US95 per lb., but with long-term price predictions at or below that level, the partners opted to put the project on hold pending further exploration results.

Kutcho Creek changed hands several times after Esso Minerals decided to exit the mining business, but in every case the new owners were major companies that had other priorities. Even so, work during the 1970s and early 1980s defined three sulphide deposits or lenses along a gently plunging, east-west-oriented, linear trend.

The near-surface Kutcho deposit is the largest and best defined to date. The middle deposit, Sumac West, is large but lower-grade and sparsely drilled. Esso West is the most westerly of the three deposits, and occurs 3.5 km along strike from the Kutcho deposit and at a depth of about 400 metres below surface.

Holbek, who has been involved with the project intermittently almost since discovery, believes that the Kutcho Formation hosting the known deposits still has good exploration potential.

“Most VMS deposits end up much larger than they started,” he explains. “We don’t see much potential for another surface deposit . . . We’ve done enough geophysics to know that, but a number of potential targets have been identified that warrant follow-up exploration.”

Another priority is to expand the Esso West deposit, which is open in several directions and is believed to have good potential to expand resources that would improve project economics. The first goal is to place the near-surface Kutcho deposit into production as soon as possible using low-cost, open-pit mining techniques, while continuing to explore for new deposits, as well as extensions of known deposits and zones at depth and along strike.

Progressive Management

Western Keltic’s plans to advance Kutcho Creek to production were given a kick-start earlier this year when John McConnell was appointed president and CEO with a mandate to complete mine permitting and a bankable feasibility study.

McConnell left a senior post with De Beers Canada to take the position, and brought to the company more than 30 years of experience in Canadian mine development and operations. Most recently, he was vice-president of N.W.T. (Northwest Territories) projects for De Beers, where he supervised development of the 3,000-tonne-per-day Snap Lake underground diamond mine, from permitting through to construction. He also has extensive experience in base metals, gained at the Nanisivik and Caribou mines in Northern and Eastern Canada, respectively.

Months after taking the helm of Western Keltic, McConnell lured away a number of key executives involved in the Snap Lake project, including individuals directly involved in the permitting process. The list includes John Goyman, vice-president of construction and operations, and Robin Johnstone, vice-president of environmental and government affairs, among others.

Brian Butterworth, vice-president of business development, says this in-house expertise in permitting, consultation, mine development and operations provides Western Keltic with “a strategic and competitive advantage in the junior mining sector,” particularly as the company continues the environmental assessment (EAP) and permitting process for Kutcho Creek.

Western Keltic formally entered the EAP process in August 2005, and began meeting with stakeholders tha
t fall. So far at least, the project hasn’t attracted the attention of native groups opposed to mine development in northwestern British Columbia. Even so, the company is mindful that several higher-profile projects in the general region have encountered native opposition, which in some cases has interrupted or even stalled proposed programs in the 2006 summer season.

Western Keltic has adopted a two-pronged approach to advancing Kutcho Creek, focused on both the technical aspects of the proposed operation and the permitting and environmental issues.

Permitting process

As McConnell sees it, companies looking to develop projects in environmentally sensitive regions or lands claimed by native groups as traditional territory should be prepared to “do things differently” than in the past. He has extensive experience doing just that at the Snap Lake diamond mine project, and is one of the few mining executives with positive things to say about the N.W.T. permitting process and its lead agency, the MacKenzie Valley Environmental Impact Review Board.

“The new permitting process in Northern Canada was designed to give Northerners a greater say in resource development, instead of leaving the important decisions to bureaucrats in Ottawa. Local people have a better understanding of local issues,” McConnell says.

“Some people may not like the changes, and there may be some growing pains along the way, but I think Northerners over the long term will be more supportive of developments in which they have some say.”

Western Keltic has retained Rescan Tahltan Environmental Consultants, a firm owned 50% by the Tahltan Nation Development Corp. to provide environmental and base-line studies, prepare the environmental assessment required for the project, and support the company’s application for permits to develop the mine.

Butterworth says the overall footprint at Kutcho Creek will be small and compact, with the existing road corridor minimizing impacts on the environment. The project is currently serviced by an on-site airstrip. A pre-existing tote road connects the site to Dease Lake, but would require upgrading for production purposes. Diesel-generated power is viewed as the most likely option for the high-grade project.

Unlike some mineral projects in northwestern B.C., the terrain at Kutcho Creek is moderate and characterized by rolling hills rather than rugged mountains. Sufficient space exists on the valley floor for the proposed milling facilities and storage of tailings.

The prefeasibility study, expected to be in hand by year-end, will determine the optimal layout for the proposed mine and mill facilities, and will also include an updated resource estimate along with capital and operating cost estimates.

The existing resources contain an estimated 850 million lbs. copper and 1.2 billion lbs. zinc. Initial production in the first seven years is estimated at 60 million lbs. copper and 75 million lbs. zinc, along with silver and gold credits.

The prefeasibility study will also detail the process design based on recent metallurgical test work, which has shown a marked improvement in both copper recovery and concentrate grade from previous work.

The proposed process consists of bulk flotation at a primary grind of 75 microns to produce a copper-zinc bulk concentrate, with copper and zinc separation carried out after regrinding to about 20-micron size and using conventional flotation technologies.

Results show that 90.7% of the copper can be recovered to a copper concentrate grading 31.8% copper, 4.3% zinc, 325 grams silver per tonne and 3.5 grams gold, and 76.8% zinc recovery to a zinc concentrate grading 55.4% zinc and 0.8% copper, with neither concentrate containing penalty elements.

Concentrates would most likely be trucked to the port of Stewart, B.C., for shipment to Asian smelters, with trucks back-hauling fuel and supplies as required for the mining operation.