Northgate Minerals approves Young-Davidson mine

SITE VISIT

MATACHEWAN, ONT.– Tom Obradovich has accomplished a lot for a small-town boy from Kirkland Lake, Ont.

He co-founded Canadian Royalties which discovered and developed the Raglan South nickel belt in the province of Quebec, and Aurelian Resources which discovered and developed the Fruta Del Norte gold deposit in Ecuador.

He helped raise the seed capital to create U308 Corp. (UWE-V), which is developing uranium deposits in Guyana, and early last year joined the board of Anglo Swiss Resources (ASW-V, ASWRF-O) to assist the junior in its development of the Nelson mining camp and its Kenville gold mine in British Columbia.

But it was developing the Matachewan gold camp, 60 km west of Kirkland Lake, which has given him the biggest kick. As president and chief executive of the former Young-Davidson Mines, Obradovich consolidated the company’s ground position in the Matachewan area of northern Ontario and doubled its resource base before selling the company and its assets in November 2005 for $20 million to Northgate Minerals (NGX-T, NXG-X).

On a recent trip to Matachewan to attend a flag-raising ceremony in celebration of Northgate’s decision to start building the Young-Davidson mine, Obradovich confided that it was this project more than any other in his nearly 30-year mining career that has given him the most joy.

“With the collapse of the forestry industry and later mining, it is employing a lot of my closest friends,” he explained. “One of my good friends got a job as the security guard. He’ll be the first in and the last out.”

Obradovich had been prospecting around Matachewan for many years and acquired claims near the mine property after the Temagami Land Caution was lifted in the 1990s, which had held up development, primarily mining exploration, since 1973 on Crown land within native claim areas.

At the time, Royal Oak Mines owned the project and would not agree to let Obradovich cross its property to access his own claims. When Royal Oak went bankrupt in 1999, Obradovich purchased the assets from the receiver and did a reverse takeover of Young Davidson on a shoestring budget.

“No one wanted the project when gold was US$260 per oz.,” he recalls. “Persistence and people like Eric Sprott and Cam Prange who believed in me and a loyal, hard-working team — Ray Zalnarius, Dave Healy, Joe Horne, Dan McCormack and Todd Keast — made it a success.”

By the time Obradovich knocked on Northgate’s door, recalls Ken Stowe, the company’s president and chief executive, management was already looking for something in that area of northern Ontario. “We knew that was an area we wanted to be in. Tom came along at the right time. Within three hours of being on the property we did the deal.”

Stowe adds that the Young- Davidson project may not have appealed to other companies due to the low grades extracted by previous mines, but explains that Northgate sees things a little differently.

“Most people didn’t take a look because the grades at the historical mines were low, but we were comfortable dealing with low-grade operations and in our business it’s the difference between revenue and costs,” he explains. “I look at the margins. We saw Young- Davidson as having excellent ground conditions, excellent metallurgy and the only challenge was to find enough ounces to justify an operation.”

Four years and about $55 million later, Northgate expanded the deposit’s proven and probable reserves to 31.15 million tonnes grading 2.75 grams gold per tonne for contained gold of 2.8 million oz. gold.

On Feb. 8, Northgate’s board of directors gave their formal approval to develop the mine, which management believes can produce 180,000 oz. gold a year at net cash costs of US$351 per oz. over a mine life of 15 years. If all goes well the mine should start production in 2012.

After the first two years of open-pit production, average annual production for the remaining mine life will rise to 190,000 oz. gold at a net cash cost of US$341 per oz.

Initial capital costs are estimated to run to US$339 million with sustaining capital costs of US$236 million during the life of the mine.

At a base case gold price of US$825 per oz., pretax operating cash flow is forecast to be US$646 million. The mine will yield a pretax 5% net present value of US$264 million, and a pretax internal rate of return of 12.4%. Payback is estimated at 6.9 years.

Those economics don’t include the 6 million tonnes of inferred resources Young-Davidson contains grading 3.4 grams gold per tonne.

For people living in the area, the mine, 3 km west of Matachewan, will bring employment for 600 people during its two-year construction phase and direct employment for 275 people over its lifetime.

“This has got to be the biggest economic news in our area for decades,” said David Ramsay, member of provincial parliament for Timiskaming-Cochrane, in an interview. “It’s an incredible new anchor for our area.”

Matachewan and nearby Kirkland Lake have gone through some tough times over the last 30 years. In the late 1980s, two of the largest employers in the region — the Adams and the Sherman iron ore mines — closed down, putting a lot of people out of work. The local forestry industry has struggled too. When the financial crisis struck, orders from the United States for the local sawmills dried up almost overnight, Ramsay said.

“This mine is going to be a great stimulus,” Kirkland Lake Mayor Bill Enouy told The Northern Miner during a luncheon at the Matachewan Community Hall. “Once there’s a success story in this business. . . there’s a spinoff effect.”

Richard Wincikaby, chief of the Matachewan First Nation, says the mine will bring opportunities for businesses — restaurants, hotels and other services — and with them, people from his community who moved away to seek livelihoods elsewhere. “It will attract our band members back here,” he said. “A lot will come back.”

Now that the decision has been made to build the mine, there is a lot of work to be done. Environmental and permitting activities are ongoing and this year Northgate plans to build a 6,000-tonne-per-day mill, deepen an existing shaft and construct a new production shaft. (The Young-Davidson mine sits on the site of two past-producing mines, yeilding about 1 million oz. gold between the mid-1930s and mid-1950s.)

Northgate says the existing underground workings are in excellent condition. Instead of blind sinking a new production shaft from surface, Northgate decided to deepen the existing Matachewan Consolidated Mine shaft from 775 metres to 1,515 metres and raise a new main production shaft in two sections from the bottom of the known reserve at 1,515 metres.

Purchase orders totaling US$6.75 million for underground equipment were made in the last quarter of 2009.

Electric power will be supplied by upgrading about 47 km of existing 115-kilovolt power line and installing 7 km of a new kilovolt line and a mine site transformer station.

This year Northgate also wants to target exploration elsewhere on the property to add to reserves and provide ore to the mill during the early years of production. Part of the exploration will focus on mafic volcanic rocks where historic gold production yielded higher grades and where Northgate recently reported near-surface gold discoveries including hole YD09-120, which intersected 7.6 grams gold over 13.5 metres.

“There’s a lot of exploration potential at Young-Davidson, certainly below where we’ve drilled so far,” Stowe says. “For every 1,000 ft. of the property there’s been 1 million oz. gold found. So when we get our shaft down and develop the bottom level of the mine it will be fairly easy to determine how many more ounces sit below us.”

Northgate is looking for further acquisitions in the area, which Stowe says is making a comeback. “People are taking a look at former
deposits and former mines and there are a lot of exciting projects in the region,” he says. “It’s actually quite a hot area right now, from Timmins, Ont., across to Val d’Or, Que.”

In addition to the Young-Davidson mine, Northgate Minerals has mining operations, development projects and exploration properties in British Columbia, and in Australia and anticipates gold production this year of 316,000 oz. gold.

Since 2000 Northgate has owned and operated the Kemess South copper-gold mine in north-central British Columbia, 430 km northwest of Prince George. The mine complex includes an open-pit mine and a 52,000-tonne-per-day mill.

Northgate also owns the Stawell and Fosterville gold mines, both of which it acquired in its acquisition of Perseverance Corp. in February 2008. In early March, the Stawell mine in central Victoria, about 250 km west of Melbourne, produced its two millionth ounce of gold. In 2010, Northgate forecasts Stawell will produce about 100,000 oz. gold and has earmarked $7 million in exploration funds to define additional reserves.

The Fosterville underground mine, 20 km east of Bendigo, a historic gold mining centre, is about 150 km north of Melbourne. Production this year is expected to be a record 113,000 oz. gold.

On March 22, Northgate was added to the S&P/TSX composite index. It has also been listed on the S&P/TSX Global Gold index as well as the S&P/TSX Global Mining index, leading benchmarks of gold and mining portfolios and invest- ment vehicles.

At presstime Northgate was trading at $3.06 per share. Over the last year, the stock has traded in a range of $1.48-3.70 per share.