Higher oil price latest test for huge Colomac gold project

Cynics say the rising price of oil will make it uneconomic, skeptics are waiting for it to operate through an arctic winter before passing judgment. Even its critics, however, say building the Colomac gold mine, 137 miles north of here, is a remarkable accomplishment. It took just one year, despite the harsh climate of Canada’s far north, for NorthWest Gold (AMEX) to construct what is the largest gold milling operation in Canada and one of the largest open pit gold mines. Now, 17 months after construction began, Colomac is officially open and nearing its target production rate of 10,000 tons of ore per day.

With an average ore grade of 0.055 oz. gold per ton, however, the company is well aware that it will take considerable operating acumen to make this mine meet and sustain its projected output of 200,000 oz. gold annually and be profitable.

“Colomac is considered to be a high-risk project due to its location and low grade,” said President John Kearney in a June 1 report to NorthWest shareholders. But he points out that Colomac uses conventional milling technology and open pit mining methods.

The company has extensive experience with low-grade, open pit operations, and the technology for operating in northern climates has been proven in many parts of the world.

The mining operation is already moving 30,000 tons of rock daily, including about 2.6 tons of waste for every ton of ore. Over the 8- year life of the mine, the waste-to- ore ratio should work out to just over 3.2-to-1. The mill is averaging about 8,000 tons per day but has handled as much as 11,000 tons per day during the startup phase, says Ken Hill, NorthWest’s chief operating officer.

First gold was poured May 29. In July, 7,800 oz. were produced with full production scheduled to be reached in the fourth quarter of 1990.

While some doubt whether Colomac will be profitable, the project has its share of supporters. Apart from investors and banks that have put up the $200 million to build the mine, the government of the Northwest Territories has supported the project from its beginning. It is of major economic benefit for the Northwest Territories, which also sees the agreement with the Dogrib Tribal Council establishing minimum levels of local native employment at the mine as a model for other commercial ventures.

So far, it has cost NorthWest, 100% owner of the mine, $166 million to build Colomac, about 7% over budget. NorthWest, 52% owned by Northgate Exploration (TSE), is looking at financing alternatives to raise another $35 million to cover final costs and working capital.

A bank consortium provided $90 million through a non-recourse project loan while $51 million in equity has been invested by Northgate and other investors. NorthWest has contributed a $25-million equity investment.

Construction of the mine depended on gaining access to the site from Yellowknife along a 190-mile winter road over a chain of frozen lakes and rivers. Otherwise, the site is only accessible by air. During the 3-month period in early 1989 when the ice was thick enough to support the road, 1,246 truck loads of material averaging 24 tons per load were hauled in carrying the bulk of materials that were needed for construction.

“Conditions initially were quite harsh,” says Darcy Truefyn, PCL Industrial Contractor’s project manager. “The terrain was rough, accommodation was somewhat primitive and insects were plentiful.”

While the cold winters — sometimes reaching -50 degrees C — made construction a particular challenge, it is not expected to hinder mining and milling operations unduly. For example, heat-loss studies show the insulated leach tanks will retain sufficient heat to facilitate gold recoveries of at least 95% throughout the year.

The area is considered semi-arid, so snowfall shouldn’t hamper mining operations, either.

The pit for the deposit’s main zone, Zone 2, will ultimately measure 3,200×1,000 ft. at surface and be 770 ft. deep. The rock types are extremely competent, allowing the mine plan to incorporate a steep overall pit slope of 60 degrees . Zone 2 will be mined over the first five years of the operations, then zones 2.5 and 3.

Milling also uses well-known technology including semi-autogenous grinding, cyanide leaching and carbon-in-pulp gold recovery. About 90% of the gold is free milling, allowing up to 25% to be recovered by gravity concentration.

Perhaps the biggest question mark facing Colomac is the cost of power. With six diesel generators, the mine operates the largest power plant in the Northwest Territories — sufficient to support the city of Yellowknife and its population of 13,000.

The power plant consumes about 24,000 U.S. gallons a day. The company says that represents about 70% of the total daily fuel consumptions on site putting the total annual fuel consumption rate for the mine at 12.5 million U.S. gallons.

The operation, therefore, is particularly sensitive to fluctuations in the price of oil. Kearney says fuel accounts for one-quarter of operating costs. However, while oil prices have almost doubled this summer since Iraq invaded Kuwait, the rising price of gold has offset that increase.

Colomac’s cash operating costs are estimated at $13.50-17.50 per ton, depending on stripping ratio. That works out to about US$260 per oz. of gold produced over the life of the mine. According to one analyst, non-cash items bring the total cost to about US$350. The subsequent increase in oil prices has probably brought that figure much closer to US$400. At the time of the mine opening, Aug. 23, gold was trading at about US$410.

But Colomac means more to NorthWest and its parent than instant profits. It promises to put the company among the ranks of major gold producers. Northgate has been struggling to reach that level of distinction since it sold its Chibougamau, Que., gold-copper mines to Western Mining of Australia for $260 million in 1987.

“While Colomac will not be immensely profitable at a gold price of US$360 per oz.,” said Kearney earlier this year, “it will generate a positive cash flow and has substantial leverage to higher gold prices.

“The company is confident that Colomac will establish NorthWest as a major North American gold producer.”