Belo Sun drops on Volta Grande’s prefeasibility study

Shares of Belo Sun Mining (BSX-T) fell after the company released a prefeasibility study on its 100%-owned Volta Grande gold project in Para State, Brazil,  after markets closed on May 6.

The study, prepared by AMEC Americas, envisions a 19,500-tonne-per-day open-pit operation producing 313,100 oz. gold a year over a 10-year mine life.

Building the mine could cost US$749 million, while sustaining capital is estimated at US$196 million.

Total operating costs — assuming 7 million tonnes are processed each year — are estimated at US$30.38 per tonne, or US$681.90 per gold oz. produced.  

The study is based on a December 2012 resource estimate, and excludes inferred resources that mostly come from the project’s South Block.

In the estimate, measured-and-indicated resources from the project’s Ouro Verda and Grota Seca deposits total 4.1 million oz. gold from 73.7 million tonnes at 1.73 grams gold. Roughly 60% of these resources were converted into reserves in the study. 

Volta Grande hosts 2.8 million oz. gold in reserves from 59.2 million tonnes grading 1.48 grams gold, using a gold price of US$910 per oz., a mining dilution factor of 16% at a zero grade and a cut-off grade of 0.35 gram gold.

BMO Nesbitt Burns analyst John Hayes describes the study’s results as “negative,” and downgraded the stock to “market perform” from “outperform.”

He says that while capital costs are in-line, the reserve and mine plan differ from his estimates, especially regarding the lower-than-expected resource-to-reserve conversion.

Hayes, who had estimated a conversion rate of up to 100%, says that more resources could have been upgraded into reserves if a higher gold price — instead of US$910 per oz. — was used for the pit shell.

But he points out that the company’s management said a higher gold price would have not improved the project’s economics, because it would have increased the ore-to-waste ratio, along with other variables.

Volta Grande’s economics look positive, with a US$474.2-million after-tax net present value and a 15.2% after-tax internal rate of return using a 5% discount rate and US$1,450 per oz. gold price.

Hayes concedes that the 94% gold recoveries surpassed his forecast of 90%. The strip ratio of 6.88 to 1 is 15% above his projection.

The BMO analyst adds that the open-pit diluted reserve grade of 1.48 grams falls below his 1.58-gram estimate, and 14% below the measured-and-indicated resource grade.

But he says the reserve grade could improve after the company finishes a resource model at a lower cut-off grade to “better reflect the actual grade of material included in the dilution estimate.”

This is one of the avenues the company is exploring to optimize the project as part of the feasibility study, which is expected in the fourth quarter. 

It is also contemplating whether to include the higher-grade South Block resource in the mine plan after the resource classification is upgraded.

While additional drilling has grown the December 2012 measured-and-indicated resource by 16% to 4.7 million oz., as reported in April 2013, the company anticipates another boost in the upcoming resource estimate this July.

The company will be ready to make a construction decision by year-end.

And if all goes as planned, Volta Grande could be in production as early as 2016.

On the study results Belo Sun closed May 7 down 22% at 69¢, on 4.5 million shares traded.