Construction nearly complete at Yamana’s Mercedes mine

Construction at Yamana Gold‘s (YRI-T, AUY-N) Mercedes underground gold-silver mine in northern Mexico’s Sonora state is six months ahead of schedule, the company reports, with the first gold pour now scheduled before year-end. 

One of four new mines Yamana anticipates will start production over the next two years, Mercedes is expected to initially produce 120,000 gold-equivalent oz. per year, ramping up to 150,000 oz. by 2014. Commercial production is slated to begin around mid-2012. 

In a construction update included in Yamana’s second-quarter results, the company says the project is ahead of schedule but slightly above budget. Total project capital expenditures are now estimated at US$194 million, up from the US$168 million previously forecast. Yamana mainly attributes the increase to the strengthening of the Mexican peso, as well as budgeting an extra US$10 million for further exploring the Barrancas zone, a higher-grade area newly discovered at Mercedes. Operating cash costs for the mine are expected to be in the range of US$300-$360 per gold-equivalent oz.

Overall mine construction as of June 30 was about 85% complete. This includes completion of a tailings dam, near completion of a power line, and 90% advancement of the structural, mechanical and piping installation.

A low-sulphidization vein/stockwork system, Mercedes’ gold and silver mineralization is contained in four main zones: Mercedes, Barrancas, Klondike and Lupita. 

The project currently hosts 4.4 million tonnes in the probable category averaging 5.66 grams gold per tonne and 59.8 grams silver per tonne for a total of 794,000 oz. gold and 8.4 million oz. silver. It also hosts measured and indicated resources totalling 1.5 million tonnes grading 3.88 grams gold and 48.7 grams silver for another 188,000 oz. gold and 2.4 million oz. silver, as well as 3.44 million inferred tonnes of 4.23 grams gold and 32.1 grams silver totalling 468,000 oz. gold and 3.55 million oz. silver.

The company is looking to further increase these resources with about US$18.5 million in exploration spending this year, including at least US$10 million devoted exclusively to the high-grade Barrancas zone. The newly found Lagunas Norte vein in particular will see significant drilling, as it has already been defined along 130 metres of strike length and has not yet been included in Mercedes’ resource estimate. The total length of the Barrancas zone is 1.1 km, including Barrancas Centro, Lagunas and Lagunas Norte. 

Drilling continues with three core rigs on site completing a 45,000-metre program in 2011, which does not include the recently announced US$10-million Barrancas zone expansion program.

Yamana acquired the project in 2007 from Meridian Gold, which it took over as part of a blockbuster three-way hostile merger that included Northern Orion Resources. Yamana’s bid had to be raised three times before it gained the support of Meridian’s board, which finally agreed to $3.7 billion. 

Along with Mercedes, Yamana also obtained Meridian’s El Penon underground gold-silver mine in northern Chile, which produced 427,934 gold-equivalent oz. last year at cash costs of around US$428 per oz. A third property from Meridian, Jeronimo, also in Chile, is now at the feasibility stage.

Mercedes is the first part of Yamana’s plan to increase gold production by 60% over the next three years. The company also has three other construction projects expected to come on-line before 2014, all of which are located in Brazil and all of which will be fully funded from current operations. Yamana produced 1.04 million gold-equivalent oz. in 2010 and expects to produce roughly the same amount this year, between 1.04 million and 1.14 million gold-equivalent oz. 

Shares of the company have fared well compared with some other major gold miners over the past few months. They closed at $12.95 on Aug. 5, up from around $11 in June and around $12.25 in March.