Eldorado advances Tocantinzinho through prefeasibility

Vancouver – Eldorado Gold (ELD-T, EGO-N) predicts production from its newly acquired Tocantinzinho gold project in central Brazil will average 159,000 oz. per year over an 11-year mine life starting in late 2014, at cash operating costs totaling approximately US$559 per oz.

The company has released the results of a National Instrument 43-101-compliant technical report for the project based on a prefeasibility study completed by Golder Associates. Eldorado has designed Tocantinzinho as an open-pit mine with on-site milling of ore using gravity and floatation recovery. Cyanidation of the resulting concentrates will produce gold doré which will then be shipped off-site for further refining. Metallurgical recovery of gold is expected to be 90.1%.

The plan assumes a milling rate of 4.4 million tonnes per year, or roughly 12,500 tonnes per day, for total gold production of 1.78 million gold oz. over the life of the mine. Initial capital costs are estimated at US$383 million, which should not pose much of a problem for Eldorado given it had US$310 million in working capital as at Dec. 31 2010, amid a time of record gold production for the company and gold prices near all-time highs.

With an after-tax net present value of just $187 million at a 5% discount rate, however, and an 11.8% internal after-tax rate of return on investment, the project’s economics look less appealing than other key development projects being considered by fellow major gold miners.

For example, rival Goldcorp‘s (G-T, GG-N) newly acquired Cerro Negro project in Argentina is expected to produce 550,000 gold oz. per year starting in 2013 at average cash costs around US$60 per oz. (after silver byproduct credits) during its first five years of production. Capital costs come in around $750 million while proven and probable gold reserves already total more than 4.3 million oz.

Nevertheless, Cerro Negro’s vastly superior economics came with a hefty price tag: Goldcorp paid $3.6 billion in cash and shares to acquire it from Andean Resources in December 2010, outbidding Eldorado’s initial all-share offer of $3.3 billion.

In contrast, Eldorado paid just $122 million in shares to acquire Brazauro Resources and Tocantinzinho in mid-2010, after spending two years as a joint venture partner on the project.

The company says it may also qualify for a reduction in corporate income tax for major development projects in Brazil’s relatively mining-friendly Para State. That would mean a 75-per-cent reduction in income tax for the first 10 years of operations, which would increase the net present value of the proposed mine (at the same 5% discount rate) to US$269 million and boost the internal rate of return up to 14.4%. The company assumed a base-case gold price of $1,250 per oz. for the study.

Eldorado will also continue an exploration drilling program on the property throughout 2011, testing new geochemical and geophysical targets along trend and adjacent to the deposit. It describes Tocantinzinho as a granite-hosted intrusion-related deposit centred around a large garimpeiro showing in Brazil’s Tapajos district, well-known for the hundreds of thousands of alluvial gold miners which arrived there in large swarms during the 1970s and 80s. Gold at Tocantinzinho is disseminated and is associated with sulphides, including pyrite, chalcopyrite, galena and sphalerite.

An updated resource estimate for the project in March 2011 defined measured and indicated mineral resources of 70.2 million tonnes grading 1.06 grams gold per tonne, for 2.39 million contained gold oz. That reduces to 1.97 million contained oz. when classified as proven and probable reserves, or 49 million tonnes grading 1.25 grams gold.

For a single open-pit mining operation using owner-operated truck and shovel combinations, Eldorado will also have to build 60 km of new roads and a 200-km high-tension power line to provide power to the site.  

The company is currently preparing an environmental impact assessment as part of Brazil’s permitting process and further engineering studies are underway. Eldorado expects to complete a feasibility study for the project in December 2011, enabling a construction decision by year-end. A positive decision would be followed by a 2.5-year engineering and construction period, with initial production beginning in late 2014.

Shares of the company closed down 2¢ to $15.96 on 3.15 million shares traded after the May 5 announcement.