Proposed mines showing robust economics

The week ended April 5, the fourteenth trading week of 2008, started off on a high note, with a positive new economic study of the top Canadian gold play of the past year: Osisko Exploration’s wholly owned Malartic gold exploration project in Malartic, Que.

• Building on last summer’s tally of 8.4 million inferred oz. gold, a new preliminary study compiled by BBA Inc. envisages a 400-metre-deep open-pit mine that would yield 572,000 oz. gold annually in the first three years of operation at a head grade of 1.05 grams gold per tonne and cash costs of US$314 per oz. The mine production would average 457,800 oz. gold annually over a projected 14-year mine life. Capital expenditures are estimated at US$760 million, with the company now boasting US$160 million in cash.

A definitive feasibility study and environmental impact assessment are due before year’s end, at which time the company will surely become a prime takeover target for an ounce-hungry gold major.

• The big M&A story of the week was the three-way merger between gold juniors Metallica Resources, New Gold and Peak Gold, which will create a new entity named New Gold that will have a market capitalization of about US$1.6 billion. It will have three operating gold mines in Australia, Brazil and Mexico, plus the financial muscle to fund existing development-stage projects in Canada and Chile — including the New Afton gold-copper mine in B. C., which is to start production in late 2009.

The newly merged company would mine at an annual rate of 297,000 oz. gold in 2008 and 335,000 oz. gold in 2009, plus byproduct silver and copper.

New Gold lost $61.4 million in 2007 compared with a loss of $3.5 million in 2006. The red ink is mostly due to a $50.1-million impairment charge in 2007 in respect of investments in non-banksponsored asset-backed commercial paper.

Meanwhile, capital costs for New Gold’s Afton mine have ballooned 20% since the project’s feasibility study was tabled, to $592 million.

• In South Africa, Gold Fields CEO Ian Cockerill resigned after nine years with the company, including six as CEO, to join Anglo Coal as CEO. Taking Cockerill’s place is current Gold Fields CFO Nick Holland. Terence Goodlace, executive vice-president and head of South African Operations, will be appointed to the new position of chief operating officer.

That’s not all: John Munro, Gold Fields’ executive vice-president of corporate development is leaving after 21 years to become CEO of a new uranium company.

• There was a ray of hope for the Mongolia-weary, with SouthGobi Energy Resources receiving a mine permit from Mongolia’s minister of Industry and Trade for the Ovoot Tolgoi coal project in southern Mongolia. The permit means that open-pit mine development can now proceed full tilt, with deliveries to customers in China expected in the third quarter. A Chinese steel mill has already built a railway line to the Ceke entry point on the Chinese-Mongolia border, where a major, automated railcar loading facility opened last year.

• Speaking of fast development, Sally Malay Mining and Brilliant Mining reported that commercial production had started on the highgrade Deacon orebody at their joint-ventured Lanfranchi nickel mine in Western Australia’s Kambalda district — an orebody that was only discovered 18 months ago. Deacon hosts a probable reserve of 1.7 million tonnes grading 2.54% nickel for 43,000 tonnes contained nickel, or 70% of the reserves for the entire Lanfranchi property.

• There was good news from another Canadian development project, with Thompson Creek Metals tabling a positive feasibility study for the Davidson molybdenum deposit on the outskirts of Smithers, B. C.

The study reckons that with a capital expenditure of only $109 million, an underground mine could produce 4 million lbs. moly per year over 10 years. The average annual cash costs are estimated to be US$9.46 per lb., resulting in a pretax internal rate of return of 20% and a 3.4-year payback, assuming moly prices are just US$14 per lb. starting in 2012.

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