Small is beautiful for Alamos Gold

When Alamos Gold (AGI-T) first pondered building a 1,000-tonne-per-day mill that would process high-grade material from both the main Estrella pit at its Mulatos gold mine in Mexico as well as material from the Escondida deposit, 500 metres to the northeast, Wardrop Engineering concluded that it would not generate sufficient returns.

So Alamos Gold went back to the drawing board and commissioned a study by KD Engineering on a smaller 500-tonne-per day mill that would only process high-grade ore from Escondida.

For the purposes of that study, Escondida ore with grades in excess of 3.4 grams gold per tonne were considered as milling ore. Using that cut-off, the high-grade portion of the Escondida deposit represented National Instrument 43-101 compliant reserves of 289,000 tonnes of milling ore at an average grade of 10.54 grams gold per tonne.

But the company believes that the actual grade of the Escondida high-grade zone will be higher than the reserve grade, based on bulk samples, internal testing and sampling issues associated with coarse native gold or the “nugget effect. Indeed, a bulk sampling program in 2007 calculated a mean grade of 25.48 grams gold per tonne in a sample size about 50 times that of the drill samples.

What’s more, recent discoveries near the Escondida area seem to suggest that there will be opportunities to increase the tonnage of high-grade ore available to mine and process.

Based solely on the proven and probable reserves of the milling ore, however, the KDE report confirmed that the development and processing of Escondida’s high-grade zone is economically robust, and that 90% or more of the coarse high-grade Escondida ore is recoverable in a crushing, grinding, and gravity milling.

As a result the KDE report recommended that Alamos build a 500 tonne-per-day mill, leaching the mill tailings, and found that processing high-grade Escondida ore using a gravity circuit would be profitable.

The report also pegged gravity recovery at 90%, rising to 99.4% with gravity plus leach recovery, when ground to 88 microns.

The study also estimated initial capital costs of US$17.5 million including a 20% contingency, and operating costs of US$12.08 per tonne of ore, or US$39.62 per oz. gold.

In addition to processing potentially higher grade ore than the reserve grade, it may be possible to add to the currently estimated two-year mine life of the high-grade Escondida project. Discoveries of a southwest extension to the Escondida high-grade zone and the new northeast Escondida high-grade zone should provide additional ore for mill processing, the company says.

Other projects on the same property, such as San Carlos, 2-3 km northeast of Escondida, show evidence of high-grade ore with similar characteristics to the high-grade Escondida ore.

As a standalone project, the economic benefit of the mill would be robust, assuming a gold price of US$700 per oz., the company said. Factoring in the company’s 5% net smelter return royalty, and applying the national tax rate of 28%, the project could yield an after-tax internal rate of return of 101% and a net present value at a 5% discount rate of US$22.6 million. After-tax NPV at 5% using a gold price of US$900 per oz. would be about US$34.5 million with an after-tax IRR of 150%.

Alamos has already acquired some of the mill components it needs and construction is scheduled to begin in 2010. The first mill production is forecast to be in the fourth quarter of 2011.

The mill will be designed in a modular way so that it can be modified at a later date.

In addition to the capital cost of the mill and related equipment, the mine plan calls for the pre-stripping and removal of 27 million tonnes of waste. Pre-stripping work is expected to begin in the third quarter of this year and to be completed by the third quarter of 2011.

At press-time the Toronto-headquartered company was trading at about $10.10 per share, at the high end of its 52-week trading range of $3.50-$10.12 per share.