Extorre to stagger Cerro Moro’s buildup

Extorre Gold Mines (XG-T, XG-X) is looking to build its Cerro Moro gold-silver project in Argentina’s Santa Cruz province in two stages and halve its start-up costs, but it could see less metal production during the mine’s early years.

In a preliminary internal study released on May 30, Extorre examined the possibility of delaying underground mining and recovering 500 to 600 tonnes per day from a pit, before ramping up to 1,000 to 1,100 tonnes per day in the second stage.

While throughput is slightly lower than envisioned in the recent, third preliminary economic assessment (PEA-3), which outlined a 1,300-tonne-per-day open-pit and underground operation, the company says the new staged approach would slice the mine’s upfront capital requirements and lower operating costs.  

Initial capital expenditure (capex) for the first stage is pegged at US$124 million to US$136 million, down from US$284 million estimated in the PEA-3.

Extorre requires less start-up capital because it can make do with a small processing plant and limited infrastructure to mine the high-grade mineralization in the pit, while maintaining first year production at 170,000 to 180,000 equivalent oz. gold.

The Vancouver-based junior would use the cash flow generated from the high-grade pit to cover the rest of the mine’s capex. Those funds would go towards expanding the plant and infrastructure, and starting underground mine development within six months of the mine’s start-up.

The 1,100-tonne-per-day expansion could be reached within 18 months of first production, while the plant expansion is anticipated within three years of the mine’s start-up. Cerro Moro is scheduled to come online in 2014.

While the staggered development would allow the company to raise less capital to start-up, it would also mean lower gold and silver production in the early years given the smaller throughput, notes Bank of Montreal  (BMO) analyst John Hayes.

During the first five years, Cerro Moro on average would turn out 190,000 to 200,000 equivalent oz. gold, compared to the previously estimated 248,036 oz.

Acknowledging that annual production for the first five years would be 60-70% of what was modelled in the PEA-3, Extorre’s CEO Trevor Mulroney highlights that the trade-off is a 57% reduction in the upfront capital requirement.

He points out operating cash costs on a gold-equivalent basis are also lower than modelled because miners would initially be feeding higher head grades to the plant.  

Operating cash costs for the first five years in the PEA-3 are pegged at US$304 per equivalent oz. gold, whereas in the staged approach it comes in at US$290 to US$300 per oz. for the first six years.

“That is to say the higher grades more than offset the higher unit costs associated with a smaller mine throughput,” Mulroney says in a statement.

When the mine winds down, it could produce 1.8 million equivalent oz. gold over 12 years, which is a three-year increase in mine life compared to the PEA-3.  

“While BMO Research considers it prudent to pursue a staged development, we note that Extorre has not released any feasibility-level studies on the project, which are required to classify resources as reserves,” Hayes comments.

He adds that a mine-development decision based on a PEA or internal study carries more risk than if it were based on a feasibility study.

The stock closed at $3.09, within a 52-week share price of $2.18 to $14.84.