Editorial: Gold megaprojects lurch forward

Mid-December was filled with substantial news about some of the world’s largest gold deposits.

• NovaGold Resources unveiled another feasibility study of its enormous but remote Donlin gold deposit in the middle of Alaska, which it shares on a fifty-fifty basis with Barrick Gold.

The headline numbers are big in every way: a conventional open-pit mine could churn out an average of 1.1 million oz. gold a year for 27 years at a cash cost of US$585 per oz., but the capital costs are estimated at a wallet-busting US$6.7 billion, including building a natural gas pipeline and US$1 billion in contingencies.

Gold production could start in 2018 at the earliest, tapping into reserves of 505 million tonnes at 2.09 grams gold per tonne, or 33.8 million oz. gold, up 16% from a previous study in 2009.

But it’s Donlin’s net present value (NPV) at a 5% discount rate and various gold prices that really tells the story: at a gold price of US$1,200 per oz., the NPV is a mere US$547 million; at today’s US$1,700 per oz., the NPV is a respectable US$4.6 billion; and at a record but reasonably attainable gold price of US$2,000 per oz., the NPV gets juiced up to US$6.7 billion.

It’s still too early to tell whether this project will be greenlighted anytime soon, or whether it will sit on the shelf for two or three decades before it becomes relatively attractive to develop, in a manner similar to many of the low-grade, high-altitude or metallurgically difficult base-metal deposits in the Andes that saw several decades pass between their discovery in the sixties and seventies, and their development in the nineties and 2000s.

• Kinross Gold once again lived up to its reputation of succeeding in places most others fear to tread, as it announced progress on its world-class Fruta del Norte gold deposit in southeastern Ecuador in the form of a preliminary development agreement.

Kinross picked up the high-grade, grassroots discovery through an $870-million acquisition of Aurelian Resources in 2008 – a time when mining prospects in Ecuador were at their lowest, owing to the government freezing mineral exploration early in 2008 and slapping on a new, costly mining royalty regime.

Ecuador is the Costa Rica of South America: a small country with little mining history that’s dependent on agriculture, fishing and ecotourism, and consequently deeply wary of any large new mining operation that could damage these vital economic pillars.

And so the new Fruta del Norte development terms are relatively onerous, including an obligation to maintain the government’s share of project economic benefits at a minimum of 52% – with benefits comprised of a royalty, corporate income tax, the state portion of a 15% profit-sharing contribution and a windfall-profit tax that can hit 70%, and a 12% value added tax – and a sliding-scale net smelter return royalty of 6% for gold sold above US$1,200 up to $1,600 per oz., and 8% for gold sold above US$2,000 per oz.

Fruta del Norte’s extraordinary richness lets Kinross be generous. Reserves are 26 million tonnes at 8.07 grams gold per tonne and 10.9 grams silver, for 6.7 million contained oz. gold and 9.1 million contained oz. silver. A further 23 million tonnes at 5.5 grams gold sit in the resource category, adding 4 million oz. gold to the tally.

Kinross expects to complete a full feasibility study by year-end.

• At the Oyu Tolgoi gold-copper mega deposit in Mongolia, the at-times prickly partnership between Ivanhoe Mines and its 49% owner Rio Tinto reached a conclusion regarding Ivanhoe’s poison-pill structure, with Rio winning an arbitration ruling.

Ivanhoe’s shareholder rights plan will remain in place until April 2013, subject to Rio’s right not to be diluted from its current 48.5% shareholding. Rio may buy more Ivanhoe shares beyond its current percent interest after Jan. 18, 2013 – i.e. the end of an existing standstill agreement.

Rio commented that it has no immediate plan to take over Ivanhoe, but could change its mind later. What else could it say?

Little has changed in the relationship between the two companies, and yet Ivanhoe shares fell 22% in the aftermath.

• Meanwhile at the prototype for Oyu Tolgoi’s development, Freeport-McMoRan Copper & Gold’s vast Grasberg copper-gold mining complex in Indonesia – where Rio Tinto has a 40% interest in PT Freeport Indonesia’s Contract of Work – a long-running strike looks to be reaching a conclusion at presstime.