Prudence pays off for Atlantic Gold in Nova Scotia

VANCOUVER — Steven Dean, chairman and CEO of Atlantic Gold (TSXV: AGB) says it took the company three years of “wading through the rubble of the gold sector” before it stumbled upon the Moose River gold project, 85 km northeast of Halifax, N.S., and recognized it as the jewel Atlantic had long been looking for. 

“This is not our first rodeo,” Dean said during a presentation at the Sprott investor conference in Vancouver in late July. “It’s the part of the cycle that we love the most. There’s a lot of money to be made right now by investing soundly, and Moose River for us was clearly outstanding.”

The project is nestled within a historic gold mining camp that, according to Dean, hasn’t been touched by shovels since the Second World War. Traditionally, miners went underground and focused on “saddle reef” gold quartz veins — a style of vein that develops between sedimentary layers at the crests of folds.

Regionally, the gold-bearing veins are scattered across deformed and folded sedimentary rocks that extend for 400 km throughout southwestern Nova Scotia. 

But at Moose River, what previous explorers and miners didn’t realize was that gold mineralization extends past the veins and disseminates into the surrounding sedimentary rocks.

“Previous explorers never analyzed the drill core for gold outside the target veins,” Dean said. “But if you combine the two styles of mineralization you’re getting open-pittable material, which now makes the economics possible.”

Since acquiring the project in September last year, Atlantic has produced a bankable feasibility on the Touquoy and Beaver Dam deposits — two of the four main deposits across the property. Dean says the results, which were released in early July, demonstrate a project is “in the money.”

The study envisages a 2-million-tonne-per-annum operation, producing 87,000 oz. gold each year from measured and indicated resources of 10.1 million tonnes of 1.5 grams gold per tonne for 480,000 oz. gold at Touquoy, and 9.3 million tonnes at 1.43 grams gold for 426,600 oz. gold at Beaver Hill (using 0.5 gram gold cut-off).

Using a 0.80 US$/C$ exchange rate and a US$1,200 per oz. gold price, the project offers an after-tax net present value of $168 million at a 5% discount rate, and a 30% after-tax internal rate of return.

Dean says the projected eight-year mine life could be extended by funnelling resources from the Cochrane Hill and Fifteen Mile Stream deposits, which are within 57 km by road from Touquoy.

The two deposits could contribute 252,000 oz. gold at 1.8 grams gold in 4.5 million tonnes as measured and indicated resources, and 17.3 million tonnes at 1.6 grams gold for 882,000 oz. gold as inferred.

With all the major permitting in place for the Touquoy and Beaver Dam deposits, all that’s left now for Atlantic is to secure $137 million for its capital expenditures. Dean reckons a large part of that can be financed with bank debt, and for now the company has a strong cash position of $16 million. 

“I think once we secure that credit approval for the capex, people will suddenly wake up and say ‘this isn’t just one of those junior companies that are really only hoping to build something,” he said, adding that mine construction could begin in the first half of 2016. 

But the biggest challenge any gold miner faces, he said, is dilution. Out of the 140 gold projects the company evaluated before Moose River, 95% of them failed its technical due diligence, largely because of what Atlantic considers bloated and unrealistic resource estimates driven by poor geostatistical modelling and arbitrary cut-off values.

Dean explained that gold deposits are particularly vulnerable to error, as economic grades are often confined to narrow intervals. 

“There are companies who choose arbitrary cut-offs for reserves with no science to support them, and the wireframes they base their block models off are poorly done,” he said.

Wireframes are three-dimensional images of the orebody used in technical software to help illustrate the deposit and direct mining activities. If it uses inaccurate wireframes, a miner could end up mixing too much waste material into the ore and diluting grade.

The result, he said, is the “same old movie we’ve seen play over and over again during the downturn. A gold company builds a mine around its feasibility study, but when it doesn’t encounter the tonnes and grade it tries to expand the mill to compensate, adding capex, diluting shareholders and driving up cash costs.”

The rapid inflation in mining costs also played a star role in the show, he added. In many cases, companies failed on forecasts and guidance as prices for steel, cyanide, energy and labour soared. 

“During the peak the industry became a little lazy, and certainly too comfortable with capital management, which is partly why we find ourselves where we are today,” he said. “So with Atlantic, we were sure to assemble a team of people who have built mines before and know what they’re doing.” 

As a former president of Teck Cominco (now Teck Resources [TSX: TCK.B; NYSE: TCK]), Dean refered to the 145 years of technical mining experience on Atlantic’s senior management team. Many of Dean’s years were spent in Australia — a country he calls a global leader in mining innovation and skill.   

He added that Atlantic’s approach has been to use the latest thinking, and the best geostatistical methods to develop Moose River’s resource estimates. The company plans to implement thorough resource control during mining so the company knows, on a rolling basis, just how many tonnes and grade the mill will receive.

“Moose River is a gold developer’s dream,” he said. “We built our team and company around this project, and now we’re on the path towards turning it into a reality.”

Atlantic has traded within a 52-week range of 17¢ to 33¢, and closed at 28¢ at press time. The company has 115.5 million shares outstanding for a $32.3-million market capitalization.