McWatters to restart Sigma-Lamaque mill

Having suspended operations at its Kiena underground mine in Val d’Or, Que., McWatters Mining (MWA-T) is looking to regain its gold-producing status by reopening the nearby and newly expanded Sigma-Lamaque open-pit operation, which has been idle since February 2001.

McWatters stopped production at Kiena, its only producing asset, in late September.

During the third quarter, Kiena produced 9,511 oz. gold at a cash operating cost of US$258 per oz. and a total production cost of US$287 per oz. During the comparable period of 2001 (prior to a major corporate restructuring in the first quarter of 2002), the mine yielded 18,332 oz. gold at a cash cost of US$223 per oz. and a total production cost of US$270 per oz.

In the 6-month period ended Sept. 30, 2002, Kiena produced a better-than-anticipated 21,555 oz. gold at a cash cost of US$233 per oz. and a total cost of US$270 per oz.

Still, the figures are well off Kiena’s solid numbers for the previous two years: in 2001, production totalled 81,631 oz. gold at a cash cost of US$202 per oz.; in 2000, the total was 86,610 oz. at US$227 per oz.

McWatters realized an average of US$319 per oz. for its gold sales during the recent quarter, and US$310 per oz. for the six months ended Sept. 30.

Owing to the dwindling production, McWatters posted a net loss of $573,000 (nil per share) on revenue of $4.7 million for the recent quarter, compared with a (restated) loss of $1.9 million (2 per share) on revenue of $8.2 million a year earlier.

For the six months ended Sept. 30, 2002, McWatters squeaked out a profit of $89,000 on revenue of $10.5 million.

McWatters hopes to resume mining at Kiena, and toward that end recently spent $450,000 on a 5,000-metre, 38-hole drilling program in the hangingwall, between the surface pillar and the 330-metre level. Initial results are said to indicate the presence of significant mineralization 10-100 metres above the main deposit.

The drilling was the first phase of a $1.8-million program partly funded by $650,000 in financial assistance from Quebec’s Ministry of Natural Resources.

McWatters will add the results to a feasibility study of its nearby East Amphi project being completed by SNC-Lavalin (SNC-T).

Situated 15 km west of Kiena, East Amphi has probable reserves of 1.1 million tonnes grading 5.07 grams gold per tonne, or 183,400 contained ounces, according to a 1999 estimate. There’s an additional indicated resource of 1.8 million tonnes grading 6.43 grams gold, or 383,100 oz.

According to an internal feasibility study of East Amphi, a $7-million underground operation would be capable of producing up to 60,000 oz. per year at a total production cost of US$225 per oz. Ore could be trucked to Kiena or Sigma for processing.

In 1999, McWatters briefly exploited a small open pit at East Amphi’s B1 zone, to provide feed for the Sigma mill, as well as technical data. Over eight months, the pit yielded 125,042 tonnes grading 5.53 grams gold, resulting in 22,230 oz. gold.

East Amphi is subject to two net smelter return royalties: 1% to privately held Lac Properties and 1.5% to zinc miner Breakwater Resources (BWR-T).

Looking ahead, a $34-million development and expansion program at McWatters’ Sigma-Lamaque complex is on budget and on schedule for the resumption of commercial production in the first quarter of 2003.

The mine will exploit in-pit reserves of 10.4 million tonnes grading 2.7 grams gold per tonne, using a cutoff grade of 0.9 gram gold. A further 10.5 million tonnes of 2.46-gram material lie in the resource category.

McWatters is boosting Sigma’s daily milling capacity to 5,000 from 3,000 tonnes of ore, which will equate to a production capacity of 150,000 oz. per year over the next six years at a cash cost of US$165 per oz. and a total cost of US$212 per oz.

During the recent quarter, preparation work at the site, including the removal of overburden and waste material, advanced at a daily rate of 40,000 tonnes. To date, 3.8 million tonnes of material have been moved.

Construction of buildings is completed, and a primary crusher and storage system are being installed. The mill is expected to start up in the coming weeks, now that carbon-in-pulp and leaching circuits are nearly complete.

Following a bail-out by the provincial government earlier this year, McWatters’ stake in Sigma-Lamaque was reduced to 60% from 100%, though the company retains operatorship. Quebec government-owned Soquem acquired the remaining 40%.

The two partners have already hedged 110,000 oz. of production from the restarted Sigma-Lamaque operations. The program includes put options at C$450 per oz., for 25% of forecast production. These are matched with variable-term obligations to sell at C$540 per oz., also for 25% of forecast production. Under these variable terms, delivery obligations are zero at C$540 per oz. and gradually increase to 25% of forecast production when average monthly gold prices reach or exceed C$590 per oz.

The resumption of mining at Sigma-Lamaque, combined with an improving gold market, gives McWatters confidence that by 2003 it will have “a solid and profitable base of operations that will enable it to develop other projects.”

The company’s share price has improved over the past year, rising to 16.5 currently from around 5 in January. In early 1998, shares traded above $1.50.

Key to McWatters’ restructuring was a $10.7-million rights offering of gold-linked convertible debentures, completed in May 2002. The debentures trade on the Toronto Stock Exchange under the symbol mwa.db and, after Jan. 1, 2005, are redeemable into shares at 13. The interest rate varies with the gold price and is dependent on whether the interest is paid in cash or shares.

As a result of the bail-out and restructuring, the number of outstanding McWatters shares swelled to 205.6 million at the end of the third quarter, compared with 79.6 million a year earlier. Fully diluted, McWatters would have 304 million shares outstanding.