Marathon PGM Takes The Long View

SITE VISIT

MARATHON, ONT. — In the 40 years that Marathon PGM (MAR-T, MRPGF-O) president and CEO Phillip Walford has been in the mining and exploration business, he’s never seen an economic downturn as severe as today’s.

“It’s a disappointment, there’s no doubt about that, but it’s something we can’t control,” he says.

Walford has cause for concern; in December, Marathon PGM finished up a feasibility study on its platinum group metals (PGMs) and copper project in Marathon, Ont., as metals prices plunged.

The study looks at a 22,000- tonne-per-day open-pit mining operation that would produce 42 million lbs. copper, 201,000 oz. PGMs plus gold and 310,000 oz. silver each year for about 10 years. Preproduction capital costs for the project, which would come online in 2012, are estimated at $386 million.

But Walford says Marathon PGM is in a fairly comfortable place because it has two key things on its side: time and money.

“We have $16 million in the bank so we do have the money to survive for several years without raising any more money,” Walford says.

It will be two years before the company gets all the necessary permits to start construction, Walford says, so there is no reason to throw in the towel. In the meantime, Marathon PGM will be evaluating different funding solutions to get the project into production, be it a joint venture, financing, or selling the project — whatever it takes.

“I would hope that by the time we finish the permitting process, the conditions will have improved for financing,” he says.

That’s a good thing because the project doesn’t look that strong on paper right now. Metals prices have dropped so much that even the study’s base-case scenario seems far from reality.

The base case, calculated using the three-year trailing average metals prices as of August 2008, shows an after-tax internal rate of return of 12.4% and a net present value of $77 million. Cash costs are estimated at US28¢ per lb. of copper, net of credits, and the average annual cash flow before taxes, at $51 million. But today’s metals prices just don’t measure up to those used in the feasibility.

For copper, the base-case price used was US$3.12 per lb., but the red metal’s been going for half as much lately, at around US$1.45 per lb.

The study put base-case platinum at US$1,340 per oz., but the price dipped below US$800 per oz. in the fall, rising to US$1,096 per oz. at presstime. That’s still not close enough to the base case and a long way off US$2,200 per oz. in March 2008.

A base-case palladium price of US$345 per oz. falls short of its price this winter at US$218 per oz. — an improvement over the US$170 per oz. it fetched in December.

Gold and silver were a different story. Gold has surged above US$900 per oz. compared with a base case price of US$688 per oz. Silver is a dollar above the US$13 per oz. price in the study, though it did slump as low as US$9 per oz. in late 2008.

At today’s prices, a 12.4% internal rate of return after taxes wouldn’t be possible, something Walford openly recognizes.

“The feasibility study was to show that clearly, we need better metals prices to make it work,” he says.

Fortunately for Marathon PGM, it has enough cash in the bank to see it through for two more years — enough to pay salaries, to pay for mine permitting, and to keep its other projects in good standing.

Walford says the company will be spending about $1.5 million over the first quarter this year and less in subsequent quarters. But what will happen to the company’s 2012 production goal if the markets — and metals prices — don’t recover?

“It’s a big huge question,” Walford says. “We just have to do what a lot of people are doing, which is evaluate the economic situation accordingly on a quarterly basis.”

He admits there’s a chance that Marathon would have to delay construction for longer than expected, something not unheard of lately.

Not too far away, in Thunder Bay, Ont., North American Palladium (PDL-T, PAL-X) was forced to temporarily shut down its Lac des les mine in October because it was operating below the breakeven point. The company blamed the poor short-term outlook in the automotive sector, which uses platinum and palladium for catalytic converters. It’s now focusing on expanding resources.

Project details

The Marathon project is 10 km north of Marathon, a town of 5,000 that’s dependent on the mining and pulp and paper industries. It’s just off the Trans-Canada Highway along Lake Superior, about halfway between Thunder Bay and Sault Ste. Marie. The steep and hilly property is dense with trees and a few lakes and streams.

The project has been explored off and on since the 1960s. Marathon acquired the project in late 2003 and has since quadrupled the size of the deposit.

The project has proven and prob- able reserves of 79.3 million tonnes grading 0.266% copper, 0.079 gram gold per tonne, 0.234 gram platinum, 0.757 gram palladium, 1.58 grams silver and 0.0062 grams rhodium. This totals 465 million lbs. copper and 2.7 million oz. of PGMs plus gold.

But there’s more: the feasibility did not consider resources just outside of the Marathon pit design, nor the nearby Geordie Lake deposit because of economic constraints. The company hopes to mine these areas at a later stage.

Geordie Lake, 14 km west of Marathon, hosts measured and indicated resources of about 26 million tonnes grading 0.55 gram palladium per tonne, 0.03 gram platinum, 0.05 gram gold, 0.35% copper and 2.35 grams silver. This represents 457,000 oz. palladium, 46,000 oz. gold, 195.7 million lbs. copper and 1.9 million oz. silver.

The Marathon deposit is hosted in the Eastern Gabbro Series of the Proterozoic Coldwell Complex. The Coldwell Complex intrudes and bisects the much older Archean Schreiber-Hemlo greenstone belt that spreads over 580 sq. km and is the largest alkaline intrusive complex in North America.

Mineralization at the Marathon deposit is part of a large magmatic system that consists of at least three crosscutting intrusive olivine gabbro units known as the Layered Gabbro Series, the Layered Magnetite Olivine Cumulate and the Two Duck Lake Gabbro. The Two Duck Lake Gabbro is the dominant host rock of the deposit and has been the focus of exploration.

Ore from the mine would be hauled by truck to the primary crusher at the mill on the eastern side of the open pit at a rate of 22,000 tonnes per day.

The mill would include a primary crusher, secondary crusher, high-pressure grinding rolls (HPGR), ball mill, flotation, concentrate dewatering and tailings disposal. The concentrator will produce a copper sulphide flotation concentrate containing PGMs plus gold.

Raymond Mason, vice-president of operations, says that before the company chose to go with the HPGR instead of the more common semi-autogenous grinding (SAG) method, it sent two samples to Germany “to ensure no shadow of a doubt.”

The first sample was from surface and the second from drill core that was representative of the orebody, from both near surface and at depth.

HPGR isn’t that new — it was invented about 30 years ago in Germany but was used mostly in the aggregate industry until about 15 years ago.

“Some hard-rock miners took a look at the technology and for a particular type of rock, this kind of technology is much more energy efficient and cost efficient,” Mason says. He says HPGR uses up to 30% less energy.

Mason likens HPGR to the old ringer washers, like Grandma used to have for laundry. Crushed ore is fed into a gap between two rollers, one fixed and one floating, causing the rocks to crush against other rocks, termed inter-particle breakage. The grinding force is controlled by a spring on the floating roll. No steel balls are needed, unlike the SAG method, which Mason says has been the standard process for about 50 years.

The final concentrate would be thi
ckened, filtered and stored in a stockpile located on the ground floor of the mill building and would be regularly transported by truck to the concentrate storage and rail load-out area in Marathon.

The study says the concentrate produced by the mine would be unique, as from a marketing perspective, it would be considered a copper concentrate with a high PGM content. The copper content is considered to be low, at 21-22%, so Marathon’s ore would have to be blended to meet the requirements of most smelters. A few potential buyers of the concentrate that have the facilities to smelt and refine a copper-PGM concentrate have been identified. The net smelter return is proportionally 55% copper, 19% platinum, 20% palladium, 4% gold and 2% silver.

The waste dump would have a storage capacity for 114 million cubic metres of waste rock. The company plans to dump about 23.8 million cubic metres in the northern part of the pit or use it for construction of new access roads, mine infrastructure and dams.

A small portion of the waste rock could be acid-generating and would need to be disposed of under water to avoid oxidation. Mason says that test work shows less than 7% of waste rock is potentially acid-generating. In fact, some of this waste rock contains carbonate minerals that will help to naturally modify the sulphide mineralization that may cause acid.

Seven possible sites for tailings were examined before the best one was chosen. The company would make thickened tailings, which would be put in a designated 2.4- sq.-km area west of the open pit. The tailings-thickening plant would be about 1.8 km northwest of the mill on the eastern edge of the tailings facility.

Thickened tailings would be deposited in thin lifts with rest cycles between lifts, gaining strength from drying due to evaporation and drainage before the next lift is deposited.

Marathon PGM used a computer software program that uses the topographical information about the area to show who would be able to see the tailings from different locations. This ensures that the tailings won’t be too visible during the life of the mine (after closure, the company will plant trees there).

Making progress

Walford says the company has come a long way and that the current financial crisis is just one more bump in a long road.

“We’ve been very successful in overcoming a lot of obstacles on this project, and it’s really unfortunate that the feasibility study is coming out when it’s coming out,” Walford says.

Through exploration, staking, acquisition and joint ventures, Marathon has increased the size of the project, extending the known strike length to 17 km from 3 km and quadrupling the resource.

“People said it was too small; we’ve proven that the resource is there and there’s potential to make it bigger,” Walford says.

Now the company will bide its time until permitting is complete, working on its other projects.

Walford says the company is in a good place to become one of a few PGM producers in North America. Most of the world’s platinum and palladium comes from South Africa, Russia and Zimbabwe.

There are only three significant sources of PGMs in North America, accounting for about 6% of global production: as a byproduct from several large nickel mines in Sudbury, Stillwater Mining’s (SWC-N) PGM mine in Montana, and North American Palladium’s Lac des les mine in Thunder Bay.

Walford isn’t letting the doom and gloom of the current state of the markets ruin his long-range vision.

“These are tough times and I’ve been through tough times before in the mining business, with copper and zinc and gold,” Walford says. “I hope that the metal markets return more to normal over the next year or two, but it’s definitely going to be a very difficult time for everybody, and fortunately, we are cashed up to survive that.”