Belo Sun improves economics at Volta Grande

Belo Sun Mining’s (TSX: BSX; US-OTC: VNNHF) Volta Grande gold project in Brazil’s Para state has garnered positive attention from analysts after a feasibility study cut the project’s costs, making it more attractive. 

“We really focused on looking at the conditions in the marketplace … we really adjusted the capital expenditures to the output of the mine,” Peter Tagliamonte, the company’s president and CEO, says in an interview.

The feasibility study envisions Volta Grande — comprising the Ouro Verde and Grota Seca deposits — as an open-pit mining operation, producing 205,000 oz. gold annually over a 17-year life, with start-up costs of US$298 million. In comparison, the 2014 preliminary economic assessment (PEA), which followed a 2013 prefeasibility study, pegged annual production at 167,000 oz. over 21 years, with initial costs at US$329 million. 

The 9% improvement in initial capex largely resulted in the firm’s decision to expand the mine. Volta Grande is set to deliver 10,000 tonnes per day (3.5 million tonnes a year) before doubling throughput to 20,000 tonnes per day (7 million tonnes a year) in year three. The PEA previously saw Volta Grande churning through 3 million tonnes a year for the first seven years, before doubling throughput in year nine.

Tagliamonte says the firm intends to fund the current expansion cost of US$63 million internally, using cash flow from the operation. The feasibility pegs sustaining costs over the life-of-mine at US$124 million, bringing the total capital requirement for Volta Grande to US$485 million, down from US$637 million.

Along with reining in total costs, Belo Sun has trimmed cash-operating costs by nearly US$100 to US$618 per oz. All-in sustaining costs are estimated at US$779 per oz.

The lower capital and operating costs — coupled with increased production and higher throughput — has improved economics. Using a US$1,200 per oz. gold price and a 5% discount rate, Volta Grande has a US$640-million net present value (NPV) and a 26% internal rate of return (IRR), both on an after-tax basis. This beats the PEA’s after-tax NPV and IRR of US$418 million and 16%, which was calculated at a higher gold price of US$1,300 per oz. Payback remains relatively the same at four years.

“Project economics have improved significantly since the PEA,” BMO analyst Brian Quast writes, adding that the greatest reduction in capex came from Belo Sun’s new plan to lease rather than buy mining equipment, which saves US$64 million. It also benefits from using a smaller plant and a depreciating Brazilian Real.

Operating costs in part dropped because the firm scrapped its plan to build a large on-site camp for employees. Belo Sun now expects its employees to commute to the mine from Altamira city, 60 km away, Quast writes.

Now with the feasibility study checked off and a construction permit anticipated by year-end, Belo Sun is exploring funding options, including attracting a joint-venture partner or equity investments in the company.

“What we are looking at is a construction start in the beginning of 2016. So the focus right now over the next 8 to 10 months is to have financing lined up,” Tagliamonte says.

Given the weak capital markets, BMO’s Quast says that “the most realistic option would be for Belo Sun to find a joint-venture partner, with a strong balance sheet to fund the initial capital for an interest in the project, or to simply sell itself outright.” 

But Tagliamonte, who has spent over a decade building and operating mines in Brazil, says the firm is not looking for a takeover and has enough cash for the next year, and will focus on attracting funds. “This is a cornerstone operation that has a large reserve and a large resource, so our focus is really to get the funding to build the mine … when you look at the feasibility study, we are producing over 270,000 oz.  gold for the first 12 years at a cash cost of US$590, so it is really going to allow the company to put a big cash reserve together.”

Assuming a US$1,200 per oz. gold price, Tagliamonte projects the mine will generate US$90 million in free cash flow a year, noting the break-even gold price for the mine is US$779 per oz.

Gold reserves at Volte Grande stand at 3.8 million contained oz. from 116 million tonnes grading 1.02 grams per tonne.

Belo Sun shares closed April 2 at 22¢, with a $58.5-million market capitalization. The firm has US$5 million in cash on hand and a US$400,000 monthly burn rate, Tagliamonte says.

To reflect the enhanced project parameters, Quast, who has no price target, has upgraded the stock to “outperform-speculative” from “market perform.” Dundee Capital Markets analyst Joseph Fazzini has bumped up his target to 40¢ per share from 35¢. He rates the stock as a “buy-speculative.”