Continental Gold beats the odds in Colombia

Toronto-based explorer Continental Gold (TSX: CNL; US-OTC: CGOOF) is closer to developing a commercial-scale underground gold-silver mine in northwestern Colombia, with at least one analyst cheering on the progress.

Highlights from a maiden preliminary economic assessment (PEA) on the Buritica gold-silver project in Antioquia — where the company runs a small underground operation — indicate that it is viable to build a long-life, low-cost underground mine. 

The study envisions Buritica as an 18-year operation, producing an average of 265,000 oz. gold and 394,000 oz. silver, with total by-product cash costs of US$431 per oz. gold. 

Those cash costs would drop during the first five years, when Continental expects to churn out more gold and silver. During that time, production should average 314,000 oz. gold and 507,000 oz. silver a year, at total by-product cash costs of US$389 per oz.

“The results were in line with expectations and were positive,” Continental CEO Ari Sussman says.

The mine is set to start commercial production at a rate of 2,000 tonnes per day, before expanding to 3,500 tonnes per day in the third year. Sussman says that once the operation begins, the small-scale mine that ekes out several thousand ounces of gold annually will be shut down.

Start-up costs are estimated at US$390 million, including a 16% contingency. Continental anticipates it would need another US$347 million to sustain the operation. These sustaining costs include an estimated US$30 million for the throughput expansion, as well as underground development and equipment replacement. This brings total costs to US$737 million.

The 623 sq. km project is in the Middle Cauca belt, a two-hour drive from Medellin. It is a high-grade base metal-gold carbonate-vein deposit, tested down to 1,500 vertical metres and open at depth.

“The key thing is that it’s a large — by the way, getting larger— high-grade underground vein system, with a relatively modest capex and a robust internal rate of return (IRR) using US$1,200 gold. There are not a lot of projects like that now,” Sussman says.

Buritica has a 31.5% after-tax IRR and US$1.1-billion net present value (NPV) at a 5% discount rate. Payback of the initial investment should occur under three years.

The project’s economics appear favourable even at a lower gold price of US$1,000 per oz., with a 24% after-tax IRR and US$700-million NPV. The NPV falls to US$370 million if a higher 10% discount rate  is applied at the lower gold price.

BMO analyst Brain Quast describes the study as “slightly positive.” He writes that “this is the first PEA on the project, which provides an initial estimate of operational and cost parameters. While the estimates will likely change over time, the initial results are in the ballpark of BMO Research’s estimates. Hence, the PEA is a meaningful de-risking event in the project’s development timeline.” Quast has a $5 target and “outperform speculative” rating on the stock.

Sussman, however, expects no major capital increases in the following economic studies for two reasons. First, he says that M3 Engineering & Technology Corp., the engineering firm that did the PEA, delivered  a PEA for Tahoe Resources’ (TSX: THO; NYSE: TAHO) Escobal silver mine in Guatemala, with a capex for the mine that didn’t change much before development. “So we have comfort in the engineering firm and their experience in Latin America,” he says. 

Second, the PEA uses conservative estimates, particularly when calculating the mining dilution.

 “We have a vein system and we model our veins discretely, meaning that anything that falls outside of a hard boundary of a vein is given a value of [zero] and deemed worthless.”

The mining dilution is 58%, but the company believes it could improve in future studies. It says recent underground channel sampling at the Veta Sur deposit — one of the two main vein systems — uncovered broader mineralization between the veins than in the PEA.

An updated May 2014 resource estimate shows that the Veta Sur and Yaragua deposits host a combined 8.4 million measured and indicated tonnes grading 10.4 grams gold per tonne and 31 grams silver per tonne, for 2.8 million oz. gold and 8.43 million oz. silver. Inferred resources stand at 16.7 million tonnes grading 7.8 grams gold, 24 grams silver for 4.2 million oz. gold, and 13.1 million oz. silver. It also has a lot of zinc. 

The resource estimate includes 207,000 metres of drilling and underground sampling, and a 3-gram-gold cut-off grade. 

The PEA envisions the underground operation using long-hole stoping, waste backfill, a conventional cyanidation processing plant and dry-stacked filtered tailings to produce gold-silver doré. 

Metallurgical test work to date indicate average gold and silver recoveries of 95% and 57%, respectively, on a combined basis for the two deposits.

Continental has seven drills turning on Buritica with the main goal of upgrading the inferred resource to measured and indicated.

An updated resource estimate — including another 60,000 metres of drilling and underground sampling — is due in the second quarter of 2015, followed by a revised PEA in the third quarter.

Around that time, Continental anticipates receiving an environmental permit, which is the key permit outstanding before construction can start. The junior got a 30-year mining licence for Buritica last March.

While it’s still early days, Sussman estimates construction could begin in 2016 — after a feasibility study and financing — with production anticipated in the first half of 2018.

With US$67 million in its treasury, Sussman says the firm has enough cash for two years. 

“The largest challenge for Continental Gold or any other gold company is financing in this current environment. You know the money is just tighter. But thankfully we are not looking to finance the mine until 2016, so a lot could change between now and then.”