Metallica breaks ground at Cerro San Pedro (February 27, 2004)

Projected costs at the Cerro San Pedro heap-leach gold-silver project in central Mexico are expected to fall following the elimination of Glamis Gold‘s (GLG-T) net smelter return royalty.

Project owner Metallica Resources (MR-T) has agreed to pay Glamis US$7.25 million, which includes US$5 million still owed as part of its acquisition of Glamis’s half-stake in the project in early 2003.

Glamis’s royalty covers all production from the project and varies from 0.5% to 2%, increasing in US$25 increments over a range of gold prices from US$325 to US$400 per oz.

With the royalty and debt gone, Metallica has updated Cerro San Pedro’s economics. Unchanged are reserves of 61.1 million tonnes grading 0.59 gram gold and 24 grams silver per tonne. The estimate is based on a gold price of US$325 per oz. and a silver price of US$4.62 per oz.

At a gold price of US$375 per oz. and a silver price of US$5.77 per oz., operating cash costs are projected to be US$159 per oz., with total cash costs coming in at US$10 per oz. higher, owing to a 1.95% gross revenue royalty still held by Newmont Mining (NEM-N). The net present value (at a 5% discount) comes to US$56.5 million, with an internal rate of return of 36.9%.

When the gold price climbs to US$425 per oz., and silver, to US$6.54, operating costs dip to US$141, total cash costs settle at US$152 per oz., the net present value jumps to US$81.6 million, and the internal rate of return hits 50.1%.

The proposed heap-leach operation is expected to produce 90,500 oz. gold and 2.1 million oz. silver annually over a lifespan of eight years. Operating costs were originally pegged at US$160 per oz. gold; total costs, at US$215 per oz.

Metallica recently began construction at Cerro San Pedro, and plans to begin leaching operations in September 2004; the recovery plant is slated for completion in October, followed by the first gold pour in November. Construction of the mine and processing facility carries an estimated price tag of US$28.2 million. Another US$98 million is required to fund contract mining.

Washington Group International (WGII-Q) will provide site development services and contract mining for the project. The Industrial Co. of Colorado will handle procurement and construction management.