Cerro Casale on shaky ground

Vancouver — Arizona Star Resource (AZS-V) and Bema Gold (BGO-T) are threatening to go to arbitration to gain Placer Dome‘s (PDG-T) 51% stake in the Cerro Casale porphyry gold and copper project in northern Chile. The companies allege Placer Dome has not done enough to arrange financing for development, which is estimated at $1.65 billion.

Placer Dome, for its part, says the project is not financeable.

Bema discovered Cerro Casale in 1995 and today owns a 24% carried interest. Arizona Star, an affiliate of Bema, owns 25%.

The project lies 30 km south of the Refugio gold mine, equally owned by Bema and Kinross Gold (K-T).

Bema and Arizona Star received a certificate from Placer saying Cerro Casale can not be financed under the existing shareholders’ accord. Placer said at least one bank and other financial consultants had stated the mine can be financed at current metals prices if production is hedged but that the current shareholders agreement does not allow for the parent companies to back those hedges.

However, Bema and Arizona Star say Placer has not looked at the possibility of arranging financing without parent hedging guarantees. As well, Bema and Arizona Star are willing to back the hedges.

The companies questioned the reasons behind the issuance of the certificate and gave Placer a notice of default under the shareholders’ agreement, which says Placer failed to use reasonable efforts to finance the project. They say that if Placer Dome does not remedy its defaults within 30 days, they will pursue arbitration.

For its part, Placer Dome was required to arrange $1.3 billion in financing to bring the mine to production and thereby retain the 51% interest it earned when it delivered the bankable feasibility study in February 2000.

The feasibility study confirmed proven and probable reserves of 23 million oz. gold and 6 billion lbs. copper and that a large open-pit gold-copper mine would be technically feasible at Cerro Casale. Placer re-examined the economics of the project in light of rising metal prices last year and projected an increase in the capital cost to $1.65 billion from $1.43 billion. Placer Dome CEO Jay Taylor was quoted as saying the project was a “large bet” and that Placer would be “cautious” about development.

According to the feasibility, Cerro Casale is capable of producing 975,000 oz. gold and 130,000 tonnes copper per year over a mine life of 18 years. Cash production costs are pegged at US$111 per oz. gold with total costs estimated at US$225 per oz. gold (assuming a copper credit of US95 per lb. and a silver price of US$5.50 per oz.).

Placer Dome says it is set on advancing the project further and that “it believes it has fully discharged its obligations under the shareholder agreement with the Bema Group and that the default notice has no merit.”

Bema and Arizona Star say they hope the issue can be resolved without resorting to arbitration but that they will do whatever is in the best interest of their shareholders.