Aldridge de-risks Yenipazar in Turkey

A nation at the crossroads of Europe and Asia measuring about 800 by 1,600 km is punching above its weight as an emerging mining jurisdiction, with operating mines owned by Inmet Mining (IMN-T), Eldorado Gold (ELD-T, EGO-N) and Alacer Gold (ASR-T).

Inmet is producing copper and zinc at its Cayeli mine; Eldorado is churning out gold from its two producing mines Kisladag and Efemcukuru; and Alacer is turning out the yellow metal from its Copler mine.

Aldridge Minerals (AGM-V) aims to join the club with its Yenipazar gold and polymetallic volcanogenic massive sulphide deposit, 220 km southeast of Ankara in central Turkey.

A positive feasibility study released in late April brings the Toronto-based junior one step closer to making that happen. The study envisions a conventional, 12-year open-pit mine that will produce doré, copper-gold concentrate, lead-silver concentrate and zinc concentrate, and yield an after-tax internal rate of return (IRR) of 22.5% and an after-tax net present value (NPV), at a 7% discount rate, of US$323 million.

Both the post-tax IRR and NPV calculations include a 1.6% net profit royalty payable to the government of Turkey and a 6% net profit interest payable to Alacer Gold until generating US$165 million in revenue, after which the net profit interest will increase to 10%.

Pre-production capital expenditure (capex) is expected to come in at US$382 million with another US$58 million needed in sustaining capital, nearly half of which will go to buying more mining equipment in later years.

Major assumptions in the feasibility study are based on metal prices of US$1,450 per oz. gold, US$28 per oz. silver, US$3 per lb. copper, US95¢ per lb. lead and US90¢ per lb. zinc.

Because of the deposit’s shallow nature and the relatively flat terrain — as well as good surrounding infrastructure that includes paved roads, a railroad and easy access to the national power grid — life-of-mine operating costs are estimated at US$29.15 per tonne.

The concentrates will be trucked 75 km on a four-lane highway within a few minutes of the project to a railhead in Himmetdede, where they will be transported 500 km south to the Port of Iskenderun on the Mediterranean Sea.

Power won’t be an issue because the project can connect to the national grid with the construction of a 17 km power line.
“All the capex is going to build the project, not develop infrastructure,” Mario Caron, the company’s president and CEO, noted in a telephone interview after a morning conference call to analysts and investors.

The feasibility study outlined a 4.3-to-1 strip ratio and a nominal mill throughput of 2.5 million tonnes. The process plant is based on conventional crushing and grinding, followed by a gravity circuit where most of the gold and silver will be recovered. The sequential flotation of copper, lead and zinc will follow the gravity circuit.

Over its lifetime Yenipazar is expected to produce 696,482 oz. gold, 21.2 million oz. silver, 120.1 million lb. copper, 368 million lb. lead and 563.8 million lb. zinc. Revenues by metal are divided between gold, 35%; silver, 21%; zinc, 19%; copper, 13%; and lead, 12%.

The deposit hosts three mineralization types: oxide, 11%; copper-enriched, 9%; and sulphide, 80%. The oxide zone will yield three payable metals: gold, silver and lead; and the copper-enriched and sulphide zones will produce five payable metals: gold, silver, copper, lead and zinc.

Metallurgical test work has demonstrated total recoveries of 88% gold, 84% silver, 72% copper, 72% lead and 56% zinc.

Caron notes that the Turkish government has introduced a number of investment incentives that include reduced corporate income taxes, exemptions from VAT and customs duties and support for interest payments that attract mining companies.

Under the incentive program, Aldridge expects to receive income tax savings equal to 40% of the depreciable capital cost required to build Yenipazar, and management estimates about 90% of the total capital costs are depreciable. The income tax savings could come from a corporate income tax rate reduction from 20% to 4%. By Aldridge’s calculations, for example, for every $100 million of allowable capital cost, the corporate income tax savings would be $40 million.

“This has a significant impact on the after-tax value of the project,” he explained on the conference call. “We have been here since 2004 and couldn’t be more pleased with Turkey as a jurisdiction to do business.”

In June 2012, Turkey enhanced its incentive program for strategic projects, which include mining, and has been promoting it more aggressively this year, Caron said in the telephone interview after the conference call.

Exemptions from VAT and customs duties also have a positive effect on cash flow, the company’s chief financial officer Jim O’Neill says. “Instead of paying your VAT on equipment at 18% and getting it back three months into the following year, you get the exemption right upfront, so you don’t have to pay it during the construction process,” he says.

“The Street doesn’t fully appreciate [these exemptions and incentives], unfortunately,” Caron adds.

Caron says that Turkey weathered the financial crisis well and is a vibrant country and economy. “It’s the sixteenth-largest economy in the world, and they want to become the tenth-largest economy by 2023,” he contends. “They’ve targeted the resource sector as an area to help them reach that goal.”

At the same time, Turkish authorities are trying to address the depopulation of more remote parts of the country and reverse some of the migration flow from rural to urban centres, and he says the incentive scheme is part of that strategy. “The closer you are to Istanbul and Ankara, the less incentives are offered, and the farther away you are, the more incentives,” he explains. “The idea is to help create good employment opportunities and stop the rural to urban migration.”

Caron also points out that there is a lot of contracting and engineering expertise available for mining companies in Turkey. “You can develop a project essentially with a mainly local contracting capability and people,” he says. “The need for expats will be limited and of short duration.

Aldridge expects to submit its environmental impact assessment (EIA) to Turkish authorities early this third quarter, and receive approval “definitely before the end of 2013 . . . probably sometime at the end of the third quarter, or the beginning of the fourth quarter.”

Construction permits will also be required, as well as a mining permit. Caron and his team expect to receive approval of the EIA in August or September, and construction and mining permits roughly three months later.

“Clearly we have a lot of work ahead of us, but we’re on the right track,” he says.

Aldridge is exploring financing options, he adds, including debt, equity, metal streaming and concentrate off-take agreements, and will make a decision before year-end. The company is also undertaking trade-off studies on the virtues of leasing mining equipment, as opposed to buying it and hiring contractors versus owner-operated mining.

In terms of land acquisition (the company expects it will have to purchase about 600 different plots of land from as many as 1,000 different landowners), Caron says it should not pose a problem.

“We’re fairly optimistic — we’ve been in the area for over ten years, and we have good relationships with landowners and neighbouring properties, and we would have not been able to drill over 600 holes on this property if we didn’t have an excellent relationship with the stakeholders.”

Caron told analysts and investors on the c
onference call that he isn’t considering bringing a joint-venture partner to help develop the project at the moment.

The company has zero debt and $15 million in cash, and has set aside $1.5 million for exploration in 2013 around Yenipazar that could cover between 10,000 and 11,000 metres of drilling.

At press time Aldridge was trading at 31¢ per share, within a 52-week range of 28¢ to 71¢, for a $16-million market cap.