Metates looks good to Chesapeake

Chesapeake Gold’s (CKG-V) preliminary economic assessment (PEA) of its 100%-owned Metates gold-silver project in Mexico’s Durango state, forecasts a mine life of 27 years with a total life-of-mine production of 14.8 million oz. gold, 391 million oz. silver and 2.44 billion lb. zinc.

The large tonnage open-pit operation, 175 km northwest of Mazatlan, would use conventional mining and milling to produce a sulphide concentrate, followed by pressure oxidation. Chesapeake will firm up the numbers in a prefeasibility study over the next year.

At base case prices of US$900 per oz. gold, US$14 per oz. silver and US$1 per lb. zinc, the mine would yield a pretax internal rate of return of 13% and a net present value of US$1.2 billion at an 8% discount rate, including zinc recovery.

Initial capital costs have been estimated at US$3.2 billion including US$493 million in contingency costs and working capital.

The payback period would be 5.7 years and the mine would yield a cumulative life-of-mine net cash flow of US$11 billion.

Metates has a measured and indicated resource of 936.1 million tonnes grading 0.57 gram gold per tonne (contained gold of 17.8 million oz.), 15.5 grams silver per tonne (467 million oz. silver), and 0.16% zinc (3.4 million lb. contained zinc). In the inferred category, there are 135.3 million tonnes grading 0.60 gram gold, 14.3 grams silver and 0.12% zinc.

The PEA was based on a production rate of 90,000 tonnes per day processed by a crushing and grinding system using high-pressure grinding to feed a sulphide flotation plant.

The bulk-sulphide rougher flotation concentrate, representing about 11% of the original weight of the ore, would be transported 140 km downhill by a slurry pipeline.

A new process could be used to produce high-quality zinc metal sulphide from the pressure oxidation solutions, and the sulphides would be shipped to a smelter for final processing.

A dedicated coal-fired power plant would provide the electrical power and the cost of building it is included in the PEA’s initial capital cost estimate.

Overall, gold and silver recoveries are estimated at 84.7% with zinc recovery estimated at 85%.

Chesapeake plans to advance the project towards prefeasibility at a cost of US$3 million. The prefeasibility study should take about 12-15 months.

Potential exists to expand the gold resource because the deposit remains open along trend in both strike directions. As such, a significant tonnage of material within the existing pit design that has not been drill-tested is classed as waste rock.

Chesapeake has $12 million in cash and equivalents.

John Kaiser, a mining analyst and founder of the Bottom Fish Report, has a speculative buy on the stock in a research note published on April 28. “The PEA is capital cost intensive and makes it clear that with a US$3.2 billion price tag, Metates is a big company mine development story,” he wrote.

Kaiser recommends the stock as a good absolute speculative value buy at $8.78 per share with a $10 buy limit and a 12-24 month target price in the $20-$30 range “on the premise that closer scrutiny of the technical report when it is filed in late May will not cause the PEA cost assumptions to fall apart, and that Chesapeake has done its homework with regard to the permittability of the proposed mining scenario.”

At presstime Chesapeake’s shares were trading at $8.10, within a 52-week range of $3.76-$10. The company has 38.31 million shares outstanding.

Chesapeake acquired the project in 2007, when it merged with American Gold Capital Corp. Kaiser believes that a realistic time-line for the start up of production would be 5-6 years, but that “a buyout could occur in the next 12-24 months.”