Costs creep up for Chesapeake’s Metates project, but analyst remains optimistic

Chesapeake Gold (CKG-V) has completed a prefeasibility study (PFS) on its Metates gold-silver project in Mexico’s Durango state, showing it could annually produce 954,000 oz. gold equivalent and 143 million lb. zinc for 25 years. 

Building the 120,000-tonne-per-day open-pit operation could cost US$4.36 billion, including a contingency of US$631 million. Another US$584 million is expected in sustaining costs.

In a 2011 updated preliminary economic assessment (PEA), the initial capital was estimated at US$3.15 billion. The company says scoping changes made to the integrated tailings storage, solvent-extraction electrowinning (SX/EW) plant and optimizing the processing circuit account for US$600 million of the cost hike since the PEA.

Brian Szeto, an analyst at Stone-cap Securities, says the costs are slightly higher than anticipated. “I had been expecting US$4 billion in my valuation, so the US$4.36-billion price tag is only 9% higher than my expectations,” he writes in an email, noting that the other key economic parameters were fairly in-line with his valuation.

To make costs more manageable, Chesapeake plans to split the amount in two phases. It will spend an initial US$3 billion to build a 60,000-tonne-per-day operation, which will double to 120,000 tonnes per day in the second phase for another US$1.3 billon. Metates should reach the full production rate in its second operating year.

The study outlines better economics for the deposit than in the PEA, with a pre-tax internal rate of return (IRR) coming in at 20.5% using US$1,350 per oz. gold, compared to 16.8% at a US$900 gold price, Szeto says.

At an 8% discount rate, Metates has a US$2.36-billion after-tax, net present value and a 16.2% IRR. Payback occurs in roughly five years.

The study used metal prices of US$1,350 per oz. gold, US$25 per oz. silver, US$1 per lb. zinc and US$3 per lb. copper.

Szeto adds that there were no surprises in the company’s new flow sheet, showing that the ore would be processed at two different sites. At the project site, ore would be crushed and reduced to sulphide concentrate. From there, the concentrate would be transported through a slurry pipeline stretching 126 km to the Ranchito site, located at an 800-metre lower elevation southwest. This site is located near a large, limestone resource, as well as near power, water, transportation and labour.

At Ranchito, Chesapeake outlines that the sulphide concentrate would be treated in a pressure-oxidation plant, followed by cyanidation and the Merrill-Crowe process to recover gold-silver doré. The acidic solution from the process would be neutralized by limestone and lime extracted on-site, and disposed with the cyanide in a tailings storage. Zinc would also be extracted from the pressured oxidation solutions through SX/EW techniques to generate high-grade zinc ingots.

Gold, silver and zinc recoveries are pegged at 89%, 76% and 85%.

The study indicates that higher-grade material would be processed at the mill during the first six full production years — operating through years two to seven — with lower-grade material stockpiled and processed in the last six years of the mine’s life, from years 20 to 25.

Metates would produce 1.3 million oz. gold equivalent and 190 million lb. zinc each year during the first six full production years at total cash costs per gold-equivalent oz. of US$421, with life-of-mine costs averaging US$489 per oz., minus zinc and copper credits.

The study envisions sourcing power from an independently owned, natural gas-fired 520 MW capacity plant near the Ranchito site. The Mexican government has committed to build the gas pipeline. The junior says it is “confident” that a third party would be interested in building and operating the proposed power plant. 
The deposit hosts 18.5 million oz. gold, 526 million oz. silver and 4.2 billion lb. zinc grading 0.50 gram gold per tonne, 14.2 grams silver and 0.17% zinc.

Metates is located 160 km northwest of the city of Durango and 175 km north of Mazatlan. 

Chesapeake added 10¢ to close at $9.45 on the news, within a 52-week range of $7.46 to $13.99. Szeto of Stonecap has increased his price target to $24 from $23, while maintaining an “outperform” rating.

“We believe the completion of the project’s PFS represents an important derisking event for the Metates deposit and further enhances Chesapeake’s appeal as a potential takeout candidate,” he concludes.