Lupin looks to longer life despite poor market

When Echo Bay Mines (ECO-T) closed the Lupin mine in Nunavut in early 1998, few were taken by surprise. After all, the remote underground operation — difficult to reach and getting deeper every year — seemed to have had its day: it had produced for 15 years, much longer than anticipated; gold was stagnating under US$300 per oz.; and cash costs were becoming untenable.

But even as Echo Bay laid off 500 employees, the company remained optimistic that, given better market conditions, Lupin could regain its former glory. While the mine lay dormant, the company recalculated reserves to reflect changes in the U.S.-Canada exchange rate and conducted an in-house study that identified several cost-cutting measures. All that was missing was a higher gold price.

It was a long wait. Gold remained stubbornly below US$300 per oz. for almost two years. When the price finally surged to US$339 in October 1999, in response to new limits on gold sales by Europe’s central banks, Echo Bay jumped at the chance to ship supplies back up the winter road from Yellowknife, N.W.T., to Lupin, in time for a spring startup.

“We allowed ourselves a drop-dead decision date at the end of November . . . to allow sufficient time to order our fuel and supplies and have them delivered,” says Mine Manager William Danyluk.

Unfortunately, by the time Lupin was ready to pour, five months later, the gold price had fizzled again. Echo Bay was facing the same dismal market conditions that had forced it to close the mine in the first place. There was just one major difference: costs. By reducing the workforce (employees now number 320-325, including contractors), ignoring lower-grade ore, cutting the number of flights to the site, hiring contractors for certain jobs, reducing the length of the workday and lowering the amount of cement in the pastefill, Lupin was able to slash operating costs by $12-13 million annually.

As a result, the rejuvenated mine not only survived a moribund market but also boosted Echo Bay’s bottom line. Last year, Lupin contributed to a 40% increase in gold production that propelled the company to a profit of US$3.2 million, compared with a loss of US$51 million in 1999. Lupin also reported that, for the first time its history, the long-hole-stoping operation ran a full year without one lost-time accident.

Expanded winze

But while other costs were falling, trucking ore from the lower stopes to the 1,110-metre level was becoming uneconomic. To address this problem, the company expanded the mine’s hoisting facilities. The $9.2-million winze expansion allowed ore to be skipped from a loading pocket on the 1,300-metre level to the 1,110-metre level. From there, it is skipped directly to the surface through the main shaft. The winze extends from the 1,050-metre level, where the hoistroom is, to the shaft bottom at the 1,340-metre level. Since commissioning in April, the installation has been virtually trouble-free.

The orebody is co-operating by remaining consistent from surface to depth. It is expected to yield 145,000-150,000 oz. in 2001, up from 117,729 oz. in 2000. Miners have driven the decline to the 1,440-metre level and are expected to reach the 1,460-metre level by year-end. Drill intersections extend as deep as 1,535 metres. The drilling “confirms mineralization to that depth,” says Kanyluk, “and there is no indication the orebody does not continue further.”

Last April, Lupin sent its 3-millionth ounce through the presses; given that the date was Friday the 13th, the mine seemed to be symbolically defying the various challenges it was facing.

But the picture is not all rosy. Gold is stuck below US$300 per oz., so far unmoved by the war on terrorism and the ensuing economic uncertainty. Grades are 10% lower than planned and, because the company is mining more tons at lower grades, cash operating costs are higher: US$228 per oz. for the year to date, compared with US$213 in 2000. Echo Bay itself slipped into the red in the second quarter, when it received an average of only US$298 per oz. for its gold, compared with US$322 per oz. in the second quarter of 2000.

Provided Lupin can maintain a large enough margin between the cost of production and the price Echo Bay receives for its gold, the mine should have a few good years ahead of it. Proven and probable reserves at the end of 2000 stood at 1.9 million tons grading 0.268 oz. gold per ton, or 518,000 contained ounces. Other mineralization includes 808,000 tons averaging 0.332 oz. per ton, equivalent to 268,000 additional ounces. Danyluk expects to replace most of the proven and probable reserves by year-end.

The mineralization is stratabound, confined to a sulphide-rich, folded and metamorphosed iron formation. Regional deformation of the orebody and associated quartzites and fine-grained sediments has resulted in steeply dipping strata and tight folds. The orebody is Z-shaped and comprises three zones: the West and Centre zones, which dip steeply to the east at 75-90, and the East zone, which dips at 75-90 to the west. The total strike length of the three zones is 900 metres.

Open at depth

“There is still excellent exploration potential,” says Danyluk. “Our main mining zones to date comprise only about one-third of the overall strike length. The orebody is still open at depth, and we started mining last year in one small zone that is outside the main Lupin orebody. We hope to locate other zones like this one.”

Echo Bay is currently drilling the south nose closure of the mineralized structure at the 890-metre level. The company expects to double its 2001 exploration budget to $1 million next year.

At a higher gold price, the nearby Ulu deposit, purchased from BHP Minerals in 1995, would be an additional source of ore. Drilling and underground development at Ulu indicate a geological resource of 1.5 million tons grading 0.374 oz. per ton. Echo Bay has received all the permits needed to mine Ulu at the daily rate of 600 tons. Prefeasibility results indicate ore can be mined and trucked 171 km to the Lupin mill at costs equivalent to, or lower than, those at Lupin.

Also working in Lupin’s favour is the construction of two new diamond mines, Ekati and Diavik, in the immediate neighbourhood. When the operators of these mines become joint-venture partners on the winter road from Yellowknife, Lupin’s transportation costs should drop significantly.

Under the current plan, Lupin has six years of life remaining. With a little help from the market, a thumbs-up for Ulu and continued exploration success, the mine that launched Echo Bay into the ranks of the senior gold producers in the early ’80s should make a smooth transition from adolescence to adulthood.