AuRico CEO Richter on Kemess permits, royalty strategy

VANCOUVER — AuRico Metals (TSX: AMI; US-OTC: ARCTF) is closing in on regulatory approvals to revive the Kemess copper-gold mine, 250 km north of Smithers in north-central British Columbia. On March 15, the company received its environmental assessment certificate from the Canadian Environmental Assessment Agency to restart underground mining at the site, where open-pit operations cranked out 3 million oz. gold and 750 million lb. copper between 1998 and 2011.

The brownfield Kemess South project includes a 300-person camp footprint, 52,000-tonne-per-day processing plant, service roads, airstrip and an electrical substation. Contingent on higher metals prices, AuRico plans to restart mining with ore from the Kemess Underground deposit, which sits 6.5 km north of the grinding, flotation, thickening and concentrate-handling facilities. The redevelopment would require US$380 million in capital expenses, which would be largely earmarked for underground development.

The camp at the Kemess project looking northeast. Credit: AuRico Metals.

Infrastructure at AuRico Metals’ past-producing Kemess copper-gold project, 250 km north of Smithers, British Columbia. Credit: AuRico Metals.

“It was a good process for us. We kicked it off in 2015, so it’s been a long road,” president and CEO Chris Richter says during an interview. “What’s interesting in terms of the environmental assessment is that we’re the first company to receive our certificate and decision statement from the federal government under substituted permitting, which involves B.C. and the government of Canada coordinating on the process. It’s the only province that has that type of framework, and we’re the first mining project to make it through.”

The Kemess Underground reserves are located between 200 to 550 metres below surface, and total 107.4 million tonnes grading 0.53 gram gold per tonne, 0.27% copper and 1.99 grams silver per tonne, which equates to 1.9 million contained oz. gold, 630 million contained lb. copper and 6.9 million contained oz. silver.

Kirkland Lake Gold’s Fosterville gold mine in Australia. Credit: Kirkland Lake Gold.

The company would process ore at an average 25,000 tonnes per day, while placing waste rock and tailings in the old Kemess South open pit. Test work on underground material has reportedly recovered 91% copper, 72% gold and 65% silver.

The reimagined Kemess operation would have life-of-mine production of 1.4 million oz. gold and 573 million lb. copper. Average annual production is estimated at 106,000 oz. gold and 47 million lb. copper.

At US$1,250 per oz. gold and US$3 per lb. copper, AuRico’s feasibility study features a 15.4% after-tax internal rate of return and a $421-million net present value at a 5% discount rate. The project will require more normal course licences and permits, which are expected in early 2018.

“We’d like to see sustainable metal prices at those levels before making a positive production decision. In terms of permitting, there’s an interesting discussion about B.C. as a mining jurisdiction right now. We’re very positive on the province,” Richter says.

AuRico Metals President and CEO Chris Richter. Credit: AuRico Metals.

“We’ve just moved through the environmental assessment process, and we feel the government worked well with all the interested parties … they helped drive the process and assured that timelines were met. The federal-provincial substitution framework worked well for us. We’re positive on how it’s shaping up, but you need to be patient,” he adds.

AuRico also plans to advance a preliminary economic assessment for the Kemess East deposit, which sits 1 km east of the Kemess Underground. The company is working to increase confidence on a “high-grade core” at the satellite deposit, and released an updated resource in January. Kemess East has 113.1 million indicated tonnes grading 0.38% Cu and 0.46 gram gold, and 63.8 million inferred tonnes grading 0.34% copper and 0.31 gram gold. The high-grade subsection hosts 67.2 million indicated tonnes grading 0.43% copper and 0.60 gram gold.

“We view Kemess East as an upside scenario, and it’s been really exciting over the past year. The resource update demonstrated a significant increase in our resources. It’s early-stage, but it’s emerging as an important component,” Richter says.

“The economics on the Kemess Underground remain quite compelling, even before you consider  potential upside. But we don’t have to make a decision today. That might be a decision for early next year. We’ll obviously look at the metal environment at that time,” he says.

Meanwhile, AuRico remains an active player in the royalty business. The company inherited its core royalty assets after its spin-out during the $1.5-billion merger of AuRico Gold and Alamos Gold (TSX: AGI; NYSE: AGI). The portfolio is headlined by a 2% net smelter return royalty (NSR) on Kirkland Lake Gold’s (TSX: KLG; US-OTC: KLGDF; LON: KGI) Fosterville gold mine in Australia, and a 1.5% NSR on Alamos’ Young-Davidson mine in Ontario.

Drillers at Independence Gold’s Boulevard gold project in the Yukon’s White Gold region, 135 km south of Dawson City. Credit: Independence Gold.

AuRico expects to generate between $8 million and $8.4 million in pre-tax royalty revenue in 2017.

The company announced the $9.6-million, all-share acquisition of Kiska Metals in late 2016. The deal added six royalties to the portfolio, including a 0.5% NSR on Kirkland Lake’s East Timmins project and a 1% NSR on Independence Gold’s (TSXV: IGO; US-OTC: IEGCF) Boulevard property in the Yukon.

“We continue to see good opportunity on the royalty side in the market segment we occupy. Certainly you hear about the competition among the large royalty players, but we don’t see as much of that competition at the intermediate level,” Richter says.

“We’re not necessarily participating in some of the big bid processes, and we’re not looking to finance developers by creating new royalties. We’re looking to shake loose existing royalties that are in the hands of third parties who don’t get much value for them. There are a lot of those opportunities out there, and that’s our focus,” he continues.

AuRico has traded within a 52-week range of 67¢ to $1.26, and has gained 35%, or 29¢, over the past three months, en route to a $1.13-per-share close at press time. The company reported $15 million in cash, along with no debt, and has 158 million shares outstanding for a $185-million market capitalization.

“We have two parts to our business, but that could always change,” Richter says. “There was a lot of negativity on copper as recently as six months ago. Certainly there’s a buzz out there now, and a lot of the players in the space have been clear in articulating that there’s not a lot out there in terms of development opportunities at an advanced stage. So if you’re expecting a significant deficit opening up in a few years, we feel Kemess underground represents a potentially well-timed scenario.”