Rainy River Resources’ (RR-T) updated preliminary economic assessment (PEA) proposes a smaller, higher-grade and lower-cost gold mine at its namesake project in northwestern Ontario.
Given the current negative market conditions, the Toronto-based junior studied a handful of scenarios with varying throughput and stockpiles to outline a more “robust and defensible” project, company president and CEO Raymond Threlkeld said on a conference call.
Over the last five months, it investigated options ranging from a mill processing 20,000 tonnes per day to up to 40,000 daily tonnes, with resource pits sized from 4.1 million oz. gold to 5.7 million oz. gold, and a mine life ranging from 13 to 27 years.
It has opted for a smaller-scale project feeding a 20,000-tonne-per-day plant over a 16-year life, compared to a 32,000-tonne-per-day operation with a 13-year mine life originally envisioned in last November’s PEA.
“The option we have ultimately selected in the updated PEA of the Rainy River gold project highlights the strength of this project, also showcasing its potential,” Threlkeld said.
The revised mine plan appears more favourable than the original, with average cash costs and total capital costs both dropping by 14%, and mill head grade improving by 50%.
During the first 10 years, the proposed mine is anticipated to produce 308,000 oz. gold and 478,000 oz. silver a year, at an average mill head grade of 1.45 grams gold per tonne. Average cash costs are estimated at US$486 per oz. gold, including royalties and silver credits. The cost to build the mine is slated at $1.25 billion, including $694 million for open-pit pre-production capital.
In comparison, the previous study estimated a similar annual output, but at a lower head grade of 0.97 gram gold and higher cash costs of US$569 per oz., with total capital costs amounting to $1.46 billion, including $681 million to build the pit.
While the pre-production capital for the new pit is slightly higher because of power needs, sustaining capital dropped by $258 million, bringing down the total capital requirements.
The open pit contains 68.6 million tonnes grading 1.26 grams gold and 2.83 grams silver, and a stockpile of 40.6 million tonnes averaging 0.35 gram gold and 2 grams silver, whereas last year’s PEA envisioned a larger pit of 144 million tonnes grading 0.9 gram gold and 1.9 grams silver.
“The key features of this operating scenario are its lower overall capital costs, despite an environment of cost inflation, smaller footprint, higher processed grades and improved gold recoveries,” BMO Capital Markets analyst John Hayes writes in a note.
“The principal trade-offs are a more complex mining strategy involving stockpiling and lower life-of-mine gold production,” he adds.
Rainy River improved open-pit gold grade by 39% by stockpiling low-grade material and achieving better gold recoveries. This helped lift the project’s pre-tax net present value to $846 million and its internal rate of return to 21%, from the previous $786 million and 19.4%, respectively. The study used a 5% discount rate, US$1,250 per oz. gold and US$25 per oz. silver. Payback is expected within 3.8 years.
Surface mining is expected to start in 2016, with underground in 2018.
Underground mining would swing into full production in the fifth year of open-pit mining. In total, the underground portion would add 840,000 oz. gold and 780,000 oz. silver, from 6.8 million tonnes at 4.2 grams gold and 5.3 grams silver.
Over the mine’s life, metal production would total 3.8 million oz. gold and 6.8 million oz. silver, at recoveries of 91% gold and 67.4% silver.
“We think the revised estimates provided in the PEA are realistic, but believe further conservatism is warranted to account for potential inflation for several parameters,”
CIBC analyst Kevin Chiew writes in a note. He has reduced Rainy River’s price target to $7.25 from $8, and maintains a “sector perform” rating on the stock.
The Rainy River project is in Richardson Township, about 162 km south of Kenora and 418 km west of Thunder Bay.
An updated resource estimate is expected later this year, followed by a definitive feasibility study in early 2013.
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