Cerro Casale’s financeability questioned

Vancouver – Arizona Star (AZS-V) and Bema Gold (BGO-T) are threatening to go to arbitration to get back Placer Dome’s (PDG-T) 51% stake in the Cerro Casale porphyry gold and copper project in Chile. The companies are alleging that Placer has not done its part to arrange financing for the development of the project estimated to cost $1.65 billion. Placer Dome had stated at the end of June that the project is not financeable.

Cerro Casale was discovered by Bema in 1995 and is located on the Aldebaran property in northern Chile, 30 km south of the Refugio mine. Bema owns a 24% carried interest in the Cerro Casale deposit and Arizona Star which is affiliated with Bema, owns 25%.

Part of the issue appears to concern hedging. Bema and Arizona Star received a certificate from Placer saying Cerro Casale can’t be financed under the existing shareholders accord. Placer had stated that at least one bank and other financial consultants said 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.

But Bema and Arizona Star say that Placer hasn’t looked at the possibility of arranging financing without parent hedging guarantees. As well, Bema and Arizona Star say they don’t mind backing the hedges.

The companies questioned the reasons behind the issuance of the certificate and gave Placer a notice of default under the shareholder’s agreement which says that Placer failed to use reasonable efforts to finance the project. They threatened that if Placer Dome doesn’t remedy its defaults within 30 days, they intend to pursue arbitration.

For its part, Placer Dome was required to arrange $1.3 billion in financing and bring the mine to production, to 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 ounces of gold and 6 billion pounds of copper and that a large scale open pit gold-copper mine would be technically feasible at Cerro Casale under certain parameters. Placer had another look at the economics of the project in light of rising metal prices last year and announced the results in early April 2004.

This study showed an increase in the capital cost from $1.43 billion to $1.65 billion. Around that time, Jay Taylor, Placer Dome’s Chief Executive, was quoted as saying that the project was a “large bet”‘ and that Placer would be “very cautious” about developing it.

According to the feasibility study, Cerro Casale could produce 975,000 ounces of gold and 130,000 tonnes of copper per year over an 18-year mine life. Cash production costs are estimated to US$111 per ounce of gold with total costs estimated at US$225 per ounce of gold (assuming credits for copper at US$0.95 per pound and a silver price of US$5.50 per ounce).

Placer Dome maintains it is still set on advancing the project further and in a prepared statement the company stated “Placer Dome 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 are also hoping that they can resolve their differences without resorting to arbitration but they will do what is in the best interest of their shareholders.

Obviously not sitting well with any of the partners is Chile’s submittal earlier this week of a proposal to congress of a 3% charge on mining companies’ sales to boost the government’s proceeds from copper deposits.