Gold developers rethink mine strategies in new market reality

VANCOUVER — Recent headlines have focused on the impact of a lower gold-price environment on the in-situ reserves and spending habits of majors and producers, but there’s also been a shift amongst smaller-cap companies with development-stage assets. The market has changed in terms of what it wants from developers, and many management teams are reimagining scoping and economic strategies to make deposits more digestible for prospective investors.

In early 2011 gold prices were around US$1,900 per oz. It was difficult to find a “non-economic” ounce of gold, so the market was obsessed with reserve and resource size. There was also much more appetite from majors and producers for global acquisition opportunities.

At the time many juniors outlined economic studies with fairly significant capital budgets, which often focused on hybrid mine plans that used flotation, carbon-in-leach (CIL) and heap-leach technologies to pull every last bit of gold out of the ground.

With gold prices sitting at US$1,330 per oz. at press time — and having dropped below  US$1,200 per oz. to end 2013 — many of those ounces are off the table. Popular industry rhetoric now includes “staged development” and “capital efficiency.”

For example, in late January junior Orezone Gold (TSX: ORE; US-OTC: ORZCF) announced the results of a new strategy at its Bomboré gold project in Burkina Faso. The company had been pursuing a prefeasibility study on the deposit in mid-2011 that focused on a capital-intensive US$705-million CIL and heap-leach operation.

In January Orezone CEO Ronald Little commented that the company had been put into “the box of the low-grade, big-capital project,” which was hurting its market valuation. In response, Orezone stepped back and revisited a preliminary economic assessment (PEA) that modelled a heap-leach operation at a lower development cost.

The company focused on just 28% of its overall measured and indicated resources and dropped its strip ratio from 2.44 to 1.6, while upfront development costs dropped to US$180 million. Bomboré’s after-tax net present value (NPV) at a 5% discount rate rose 50% to US$159 million, while the internal rate of return (IRR) jumped from 10% to 24% at a US$1,250 per oz. gold price.

Similarly, in late September Colombia-based Red Eagle Mining (TSXV: RD) released a PEA on its San Ramon gold deposit in Antioquia that was different from the company’s initial vision for the project.

Red Eagle had contemplated open-pit mining a global resource of 10.3 million measured and indicated tonnes averaging 1.81 grams gold per tonne, but ended up with an underground model and a 2.7-million-tonne deposit averaging 5.1 grams gold. The company left gold ounces on the table — along with some exploration upside — but also built an expansion option at its mill to accommodate increased throughput down the road.

The operation would carry capital expenditures of US$84 million and boast a US$113-million NPV at a 5% discount rate, as well as a 38% IRR and 1.7-year payback period at a US$1,300 per oz. gold price.

Australian developer Troy Resources (TSX: TRY; US-OTC: TRYRF) took the same path at its West Omai gold property in southern Guyana in late January. The company released a PEA on its Smarts and Hicks deposits, which zeroed in on 42% of the project’s global indicated and inferred resources. West Omai’s indicated resources total 2.9 million tonnes grading 4.7 grams gold, while inferred resources tack on 14.2 million tonnes grading 2.6 grams. The company plans to process 5.2 million tonnes grading 4.13 grams gold per tonne.

Assuming the base-case study at US$1,250 per oz., West Omai would generate a US$101-million NPV at a 6% discount rate, along with a 44% IRR and 1.8-year payback period. Upfront development capital was pegged at just US$87 million.

More recently Belo Sun Mining (TSX: BSX) reimagined the mine plan at its Volta Grande gold project in Brazil’s Para state. In late February the company revealed a PEA on the project that dropped its capex by 56% to US$329 million.

Most notable is a 38% drop in strip ratio to 4.3 to 1. In many cases dealing with waste can be one of the most costly aspects of a development budget. Increasing the size of tailings facilities — in the form of embankments or barriers — can affect project economics.

The company’s PEA contemplates recovering more ounces over a longer period. The mine plan would recover 3.5 million oz. over 21 years, compared to 2.6 million oz. over 10 years under a previous study. Volta Grande hosts global measured and indicated resources totalling 94 million tonnes grading 1.69 grams gold for 5.1 million contained oz.

The mill would process material at an average grade of 1.14 grams gold. Higher-grade material will be processed in the initial years of mine life, with lower-grade material stockpiled to expedite the project payback, with the operation ramping up from 3 million tonnes per day to 6 million tonnes per day.

Assuming a US$1,300 per oz. gold price and a 5% discount rate, Volta Grande now has a US$418-million after-tax NPV and 16.1% IRR. Payback should take four years.

Mark O’Dea and his team at True Gold Mining (TSXV: TGM; US-OTC: RVREF) have built similar flexibility into the Karma gold project in Burkina Faso. O’Dea has described Karma as a “project perfectly suited for our investment world today,” which translates to scalability, low capex and growth potential. True Gold focused on a US$132-million, open-pit, heap-leach operation at Karma that bypasses much of the project’s global resources.

Overall in-pit resources at Karma total 75 million indicated tonnes grading 1.08 grams gold, plus 17.5 million inferred tonnes averaging 1.25 grams gold. Within that, leachable reserves stand at 33.2 million probable tonnes grading 0.89 gram gold. The planned mine at Karma would generate a 43.1% after-tax IRR and a US$178.2 million NPV, using a 5% discount rate at a US$1,250 per oz. gold price.

Sulliden Gold (TSX: SUE; US-OTC: SDDDF) was ahead of the curve in September 2012 when it released a feasibility study on its Shahuindo gold–silver property in Peru that zeroed in on 40% of the project’s total oxide resources.

President and CEO Peter Tagliamonte said at the time that the option provided “modestly sized capital costs that we believe should provide faster cash-flow generation, expeditious permitting and a shorter construction schedule.”

Sulliden’s study focused on 38 million proven and probable oz. grading 0.84 gram gold and 9.5 grams silver for 1 million contained oz. gold equivalent. Total oxide and mixed resources at Shahuindo total 147 million tonnes averaging 0.52 gram gold and 7.1 grams silver. The US$131-million proposal featured a US$249-million after-tax value at a 5% discount rate, along with a 38% IRR and a 2.2-year payback period.