Newmont moves forward with Ahafo expansion

Newmont Mining (NYSE: NEM) started commercial production from its Ahafo open-pit gold mines in Ghana in 2006, and is now building an underground mine on the complex called Subika.

Newmont received its environmental permit to build and operate the underground operation in March, and in April, the company announced that it would proceed with the project, along with a corresponding expansion of its Ahafo mill.

The Subika mine, 307 km northwest of the capital, Accra, will produce 1.8 million oz. gold over an 11-year mine life, at average grades of 4.7 grams gold per tonne.

The company expects that the mine will reach first production in the second half of 2017, and commercial production in the second half of 2018.

Meanwhile, the Ahafo mill expansion will increase capacity by 50% to nearly 10 million tonnes, with a crusher, grinding mill and leach tanks added to the circuit.

The expansion will process harder, lower-grade ore from Ahafo’s open-pit mines, the company says, as well as from Ahafo stockpiles and from the new underground mine.

There are three open-pit mines operating at Ahafo: Subika, Awonsu and Amoma. A fourth open-pit mine, Apensu, will store water.

After the mill expansion, first gold production could arrive in the first half of 2019, with commercial production set to follow in the second half of 2019. The mill expansion is anticipated to improve margins and support profitable production through at least 2029, Newmont says.

In the first five years of full production (2020–2024), the two projects are forecast to add incremental gold production of between 200,000 and 300,000 oz. per year, for total average annual production from Ahafo of 550,000 to 650,000 ounces.

The company expects to see lower costs as a result. Costs applicable to sales (CAS) are forecast to fall by between US$150 and US$250 per oz., compared to total CAS in 2016, for total average CAS of US$650 to US$750 per ounce. All-in sustaining costs (AISCs) are expected to drop by between US$250 and US$350 per oz. compared to 2016, for AISCs of US$800 to US$900 per ounce.

Newmont will pay for the Subika underground mine and the mill expansion’s development costs of US$300 million to US$380 million with free cash flow and cash balances, and notes that the projects have been optimized to improve internal rates of return to more than 20% at a gold price of US$1,200 per ounce.

The Ahafo mine is situated along the Sefwi volcanic belt, a northeast- to southwest-trending volcanic belt in western Ghana’s Brong-Ahafo region.

The mill at Newmont Mining’s Ahafo gold mine in Ghana. Credit: Newmont Mining.

In addition to Ahafo, Newmont has a second gold mine in Ghana called Akyem. That mine, 179 km northwest of Accra, is situated in the Birim North District of the Eastern Region. Newmont obtained the mining lease for Akyem in 2010 and began commercial production in 2013.

Newmont’s Akyem operation is in the Birim North District of Ghana’s Eastern Region, 179 km northwest of Accra. The company acquired the Akyem mining lease in 2010 and started commercial production in 2013.

Omar Jabara, Newmont’s group executive corporate communications, tells The Northern Miner that the timeline to production at Subika underground is not as fast as it seems, given that it’s not a greenfield project and there is already infrastructure in place.

Access into Subika underground will be by ramp.

“What we’re doing is just an extension of our existing operations,” he says in a telephone interview.

Newmont studied the resource at Ahafo for 11 years and says execution and technical risks are well understood.

“As you know in the mining industry, developing projects can take long periods of time to ensure they’ve done it right, prove up the resource and factor in what’s going on with metal prices,” Jabara says in response to a question about why it took Newmont over a decade to build Subika underground.

“Developing projects is one thing, but developing projects at the right time is what brings value to shareholders and other stakeholders.”

As for operating in Ghana, Newmont is quite comfortable there, he adds.

“Ghana is definitely a favourable mining jurisdiction because of the resources it has, but also because of the stability in the country, and its experience and history with gold mining.”

BMO Capital Markets’ analyst, Andrew Kaip, who has a target price on Newmont of $40 per share, said in a research note that “the increase in production and lower cost profile with reasonable capital requirements will cast favourably on Newmont’s outlook.”

David Haughton of CIBC notes that while the Subika mine and mill expansion were “well communicated, the scope (timing, size and cost savings) is better than anticipated.”

He also pointed out that Newmont’s recent success developing its Merian mine in Suriname (20% under budget for US$700 million) and its Long Canyon mine in Nevada (US$50 million under budget and two months early) “provide confidence in the Ahafo plans.”

Haughton’s 12- to 18-month target price of $48 per share reflects his view that Newmont is “a key recommendation amongst our senior gold stocks.”

Newmont’s shares trade at US$33.32 apiece.