Two transactions, one with Quebec government-owned
In one deal, McWatters will buy out Soquem’s 40% interest in the Sigma-Lamaque mine and mill complex, bringing its own holding in the property to 100%. The Crown corporation gets $22 million in cash and $12 million worth of McWatters shares on closing, and a further $2 million two years later.
Sigma-Lamaque, which recently resumed production after a 20-month shutdown, is putting about 3,600 tonnes per day through its mill, with production scheduled to ramp up to 4,000 tonnes per day this year. The mine should pour between 105,000 and 110,000 oz. gold in 2003 if all goes according to plan. Annual production in future years is tagged at 150,000 oz.
Sigma, with reserves of 10.4 million tonnes grading 2.7 grams gold per tonne, is scheduled to produce a total of 856,000 oz. gold between now and the end of 2008. Between the start-up in November and the end of January, Sigma had put 133,000 tonnes from the pit through the mill, and the mill head grade of 2.18 grams per tonne matched closely with the mined area’s projected grade of 2.13 grams. Another 30,000 tonnes of lower-grade material (running 0.3 gram per tonne) was also milled in the same period.
The second deal sees Barrick sell the mothballed East Malartic mill, about 20 km west of Val d’Or, and a land package that includes the properties immediately around the mill and elsewhere along the Cadillac-Larder Lake break.
Noting that building a mill of comparable size would cost between $25 million and $30 million, Claire Derome, McWatters’s president, said the mill purchase deal was “too good for McWatters to pass.”
McWatters plans to use the mill, which previously processed ore from Barrick’s Bousquet mine, to treat material from its advanced East Amphi gold project.
Current feasibility work at East Amphi indicates annual production of 45,000 oz. gold at a cash cost of US$227 per oz.; this would bring McWatters’s annual production to 200,000 oz. The feasibility study, by consulting firm SNC Lavalin, put capital costs to develop East Amphi at $13.5 million and concluded the project had an after-tax internal rate of return just over 33% at a gold price of US$315. Production could be under way six months after construction begins.
East Amphi has reserves of 1.4 million tonnes grading 4.2 grams gold per tonne, but the feasibility study concluded that more reserves could probably be blocked out once the first operating level of the mine is developed. East Amphi would be entirely an underground operation, with access by a decline; while McWatters did take about 20,000 oz. out of a small pit, most of the East Amphi deposit is under thick overburden.
The East Malartic mill will not require much conversion to handle East Amphi ore; Derome estimates the cost at around $2 million. McWatters would run the mill at about 1,500 tonnes per day.
Barrick gets a variable net smelter return in exchange, amounting to 2% at gold prices below US$350 per oz. and 3% at prices above US$350. The prime benefit in the deal for Barrick is that McWatters assumes environmental and closure liabilities for East Malartic. The major is paying $1.2 million into a reclamation trust for the property, and will subscribe for $5.8 million in McWatters shares. Because McWatters will be reopening the mill, it will not incur the closure costs Barrick would have in shutting down East Malartic.
East Malartic’s current approvals cover a large tailings disposal area, which McWatters believes is sufficient for all potential production from East Amphi. In addition, the East Amphi mineralization is acid-consuming, and will help to neutralize acid-generating wastes already in the tailings pond at East Malartic. Derome said she expected that would also limit the reclamation costs McWatters was taking on with the mill purchase.
For McWatters, the purchase frees the Kiena mill, near Val d’Or, for a resumption of production at the Kiena gold mine, where mining has been suspended since the third quarter of 2002.
McWatters has outlined an indicated resource at Kiena of 2.9 million tonnes grading 4.3 grams gold per tonne, at a cutoff grade of 2 grams per tonne and with a minimum mining width of 2 metres. The resource is near existing workings in the Kiena deposit’s hangingwall.
The two new hanging wall zones conform to the shape of the deposit’s main S-50 zone. The first, the P zone, has been traced between the 170-metre and 330-metre levels of the mine and is 10 to 30 metres into the S-50 hanging wall. The second, the R zone, is 100 to 120 metres from the S-50 zone and is known to extend from the 170-metre level to the 480-metre level. The mineralized zones average 3.8 metres thick.
Drilling continues on the lake ice near Kiena, where McWatters is testing a 1,200-metre strike length of the S-50, P and R zones. The 10 holes drilled so far (totalling 3,275 metres of drilling) have all intersected one or more of the zones.
Some assay results are back from three holes, indicating grades mainly in the 3- to 5-gram range over core lengths of 1 to 6 metres. One hole cut a 0.5-metre interval in the S-50 zone grading 73.4 grams gold per tonne.
Another 17 holes are planned, for a total of 9,000 metres in the program.
The properties that come with the East Malartic mill purchase are those formerly held by Lac Minerals in the Abitibi area. They come with a huge database, said Derome, and give McWatters a “dominant land position with excellent exploration potential.”
The 62 sq. km contributed by Barrick, which includes former producers like Canadian Malartic and Barnat, brings McWatters’s land position along the Cadillac break to about 200 sq. km, running along the break between Malartic and Val d’Or.
The two transactions are being financed by a $35-million share issue, which will cover the cash requirements for the Soquem buy-out and provide McWatters with some working capital for exploration at the East Amphi and Kiena properties and for initial underground development at East Amphi. The company has filed a preliminary prospectus for the offering, and Barrick’s subscription for $5.8 million in shares will be part of it.
The East Malartic sale is to close by the end of March. There is no closing date settled for the Sigma buyout, which is at the letter-of-intent stage and conditional on financing.
McWatters recorded a loss of $3.1 million and mine operating earnings of $100,000 on revenues of $600,000 in the three months ended Dec. 31, during which the company produced only 77 oz. gold. For the nine months ended Dec. 31, McWatters posted a net loss of $3 million on revenues of $11.1 million, from 21,632 oz. production out of Kiena.
Kiena’s cash production cost was US$233 per oz. over the nine-month period and McWatters realized an average US$311 per oz. in sales.
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