Alamos ups resource at Mulatos (April 02, 2007)

In a year where production did not meet forecasts, Alamos Gold (AGI-T, AGIGF-O) has increased the resource at its Mulatos gold property in Sonora state, Mexico, including resources on new zones drilled off in 2006.

The new Mulatos resource stands at 86.4 million tonnes grading 1.24 grams gold per tonne, using a cutoff grade of 0.5 gram per tonne. It includes new resources drilled off on three zones that were the subject of resource drilling during the year — El Salto, Mina Vieja, and Escondida.

Feasibility studies from mid-2004, before the project went into production, put the resource at 75.6 million tonnes grading 1.34 grams per tonne. Since production began, Alamos has produced 102,000 oz. from 4.6 million tonnes of ore grading 1.66 grams gold.

In February Alamos announced an initial resource estimate from Escondida, “a big flat breccia zone,” in the words of Alamos’s vice-president Ken Balleweg, which Alamos had discovered in the course of exploration around the main Estrella deposit. The resource is 17.3 million tonnes grading 1.1 grams gold per tonne, based on a cutoff grade of 0.5 gram per tonne, but the gold in the material is coarse and not readily recoverable by heap leaching.

A resource on El Salto and Mina Vieja, calculated in November 2006, totals 17.4 million tonnes at an average 0.94 gram gold per tonne. Metallurgical testing and pit design are under way for those deposits, which sit immediately to the north of the working Estrella pit.

The technical success is a counterpoint to the operational struggles at Mulatos, which has taken its financial strength from a soaring gold price while costs have increased and production fallen short of plans. The project’s 2006 production of 102,000 oz. fell about 40,000 oz. short of projection, mainly because of unexpected crusher downtime early in the year. Some excavated material from the Estrella pit was placed on the pad without crushing in the first part of the year, but Alamos has since made some modifications to the crusher complex to decrease the downtime, and final-quarter gold production, near 32,000 oz., came close to budget.

The low throughput meant that crushing costs per tonne were 60% above the feasibility study’s projections. Added to that, the crusher’s failure to reduce ore to specified particle sizes cut into recoveries. Alamos is adding a fourth-stage crusher to the circuit to bring the material to specification.

Mining costs, at US$1.12 per tonne, were also higher, although they were lower later in the year as contractor-owned equipment was replaced by an in-house fleet. Early stage stripping ratios were above the life-of-mine ratio, which also increased costs.

The mine consumed less lime and cyanide than had been planned for, a saving that was partly offset by increases in prices for reagents.

The mine’s cash production cost ran to US$294 per oz., against a projection of US$210 per oz. when production started. Higher costs for fuel made up a significant part of the difference between projected and actual costs. Lower recoveries and production increased the cost per ounce as well.

Still, the higher gold price — which averaged US$603 per oz. in 2006 — allowed Alamos to realize an average US$599 per oz. for its gold, and an operating margin (not simply the difference between realized price and cash cost) of US$281 per oz.

Alamos earned US$2 million on revenue of US$54.7 million in 2006, which, after including US$6 million in conversions of debentures and a carried deficit of US$23.6 million, made for a fully diluted US5 loss per share. In 2005, the company lost US$9.4 million and carried a deficit of US$14.2 million, for a loss of US12 per share.

Conversion of the debentures — which at mid-2006 was up to 97% — chopped Alamos’s interest costs for the year.