NAP builds new mine over bones of old

Thunder Bay, Ont. — Lac des les, Canada’s only primary platinum group metal (PGM) mine, has been transformed from the proverbial sow’s ear into a silk purse by record prices for palladium and by an exploration effort that boosted reserves enough to justify a major expansion. But high prices have also triggered concerns that a search for cheaper substitutes may erode, in the years ahead, the newfound profitability of mine owner North American Palladium (PDL-T).

More than 85% of the mine’s revenues come from palladium, which is mainly used in the manufacture of autocatalysts to reduce smog-generating emissions. Keith Minty, who became president of North American Palladium (NAP) in 1998, told a group visiting the mine that he expects market fundamentals to remain strong. While demand declined last year for the first time in 14 years, it is still exceeding supply by about half a million ounces. Indeed, demand and supply uncertainties have kept prices at stratospheric levels so far this year (above US$1,000 per oz. at presstime).

“Clean air legislation is expanding to developing countries and beyond automotive sources,” Minty said. “Palladium is still the most efficient metal for manufacture of catalysts. Automobile manufacturers say they would like to engineer it out but can’t find an alternative. [Environmental Protection Agency] approval would be required for any substitute, and there would be expensive assembly-line retooling costs.”

On the supply side, Minty expects the Russians to continue their cagey chess game with respect to “optimizing” the value of their PGM stockpiles. The country is the largest supplier of PGMs, having provided 67% of the world total in 1999, whereas South Africa provided 23%.

The unpredictable Russian market has prompted several automotive companies to strike deals with the owners of North America’s only two primary PGM producers: the Stillwater mine in Montana, and Lac des les, near the Lake Superior town of Thunder Bay.

Minty won’t name the automotive company that has agreed to buy all of NAP’s palladium production for at least five years, with an automatic extension each year subject to mutual consent. “It does have a [Standard & Poor’s] rating of A or better,” he said.

The agreement provides NAP with a US$325-per-oz. floor price on all production and a US$550-per-oz. ceiling price on half of production. “We had to put in a floor in order to obtain funds for our expansion,” Minty explained, “but it’s still substantially higher than the cash cost of US$160 per oz. that we expect after the expansion is completed.”

This is no ordinary expansion. A new mine is literally being created over the bones of an old one, which, until recently, had an unenviable reputation for producing more red ink and headaches than PGMs and profits.

Rocky start

Although early exploration in the Lac des les region focused mostly on base metals, a new target came to light in the 1960s, when a prospecting syndicate found PGMs associated with low-grade, copper-nickel mineralization. A junior company drilled what is now the Roby zone but, over time, was unable to keep the project in good standing. Local prospector Knut Kuhner noticed the expired claims by chance while visiting the local mining recorder’s office in 1974. He rushed to re-stake the ground, which was vended to Toronto mining promoter Patrick Sheridan that year.

Sheridan’s Boston Bay Mines drilled 42 holes before Texas Gulf Minerals optioned the ground and drilled 80 more. But results weren’t good enough to overcome low prices, so the project was returned to Sheridan, who revived it again in 1985 through a new company, Madeleine Mines. Lac des les was even placed into production briefly, before permitting problems forced its closure.

In 1991, Sheridan lost control of Madeleine to Kaiser-Francis Oil, which subsequently renamed it North American Palladium. Lac des les resumed production in 1993 as an open-pit operation feeding a conventional flotation mill, but its new owner was soon overwhelmed with technical problems and a legal dispute with Sheridan. The dispute was settled in 1994 when Sheridan received cash, stock and a reserved net interest of 3%, increasing to 5% after the year 2000.

Lac des les, meanwhile, lost $1.2 million in 1993, $3 million in ’94, $2.4 million in ’95 and $28.7 million in ’96.

Minty took over in early 1988, just before the debt-ridden company reported a massive loss of $70.2 million for 1997. “The mandate was either to make it work or shut it down,” he recalled.

Focus shifts

As a first step, Minty assembled a team to review the reserve and resource, as well as the regional potential. The decision to spend $1 million on exploration could not have been easy given the mine’s dismal track record, but it was necessary given gaps in the information needed to determine the project’s overall potential.

Exploration Manager Moe Lavigne began by compiling and digitizing all existing data, which showed that potential existed beyond the known deposit. The focus then shifted beyond the limits of the higher-grade orebody to a broader halo of lower-grade mineralization that would be the key to any future bulk-mining operation.

The program also helped NAP tie up other prospective ground in the region. Since early 1998, the company has tripled its holdings to more than 15,000 ha. Several of the acquired properties are underlain by rocks similar to those hosting the Lac des les deposit.

A scoping study initiated that summer confirmed the potential to transform the struggling mine into a lower-grade but larger-tonnage operation, with the caveat that more drilling take place to fill gaps in drill data. The positive study was followed by a decision to proceed to a full feasibility study for an expanded operation.

Meanwhile, operating improvements took place. New equipment was added to the open-pit fleet, and modifications were made to the mill circuit, resulting in a 8.3% increase in palladium recoveries and a 44% boost in production, within a 6-month period, over previous levels. By late 1998, onerous hedging programs had run their course. Despite a $17.5-million loss that year, Lac des les was at least positioned to benefit from strengthening palladium prices.

Exploration continues

Lac des les is one of numerous mafic-to-ultramafic intrusions known to have PGM mineralization in northwestern Ontario. Lavigne says it doesn’t have an economic analogue anywhere in the world, though some similarities to PGM deposits in Finland and to a small deposit in Alaska have been noted.

Exploration has its challenges. Bushveld-type techniques do not work, and the rocks hosting mineralization often don’t seem especially attractive on the surface. “Our main technique is to sample as much bedrock as tightly spaced as possible and to sample everything without question before drilling,” Lavigne said.

Most of the work within the 30-sq.-km Lac des les intrusive complex has focused on the Mine Complex gabbroic intrusion. The Roby and Twilight zones are the only two defined areas of mineralization within the intrusion, though some limited work has taken place on the nearby Baker zone.

Most of reserves are within the Roby breccia zone, which measures 918 metres long, 815 metres wide and 650 metres deep. It remains open to the west, southeast and at depth. It has two types of mineralization separated by a zone of sheared and mineralized pyroxenite, which hosts a third type of mineralization.

North of the shear zone, the North Roby zone is hosted by vari-textured gabbro and gabbronorite that strike northeast.

“We call it the “no-see-’em zone,” because it has no sulphides,” Lavigne said. “Geophysics is next to useless, and all you see on surface is a boring-looking gabbro. We have to strip the surface and do systematic sampling so as not to miss anything.”

Southwest of the shear zone, the main Roby zone is hosted by a heterolithic gabbro breccia that typically has 2-5% sulphides. Grades diminish with distance from the pyroxenite contact, which contains higher-grade shear ore of more intense talc alteration. This pyroxenite sliver forms the high-grade portion of the deposit, though high-grade pods of mineralization are also found in the lower-grade envelope.

NAP’s 1999 program was mostly focused on expanding and upgrading reserves and resources within the Roby zone.

“We had three drills in the pit that year,” Lavigne said, “which speaks to the gaps in the data.”

The company planned to drill 90,000 metres, but results were so encouraging it ended up completing 150,000 metres at a cost of about $6 million. One of the highlights was the discovery of the Twilight zone, just east of Roby.

Expansion

AGRA Simons, which had been retained to perform the feasibility study, concluded in May 2000 that the proposed expansion would be technically feasible and economically viable. It recommended construction of a 15,000-tonne-per-day mill, significantly larger than the 2,400-tonne-per-day mill currently in operation.

Once the $208-million expansion is completed, and starting in 2002, annual production will average 250,000 oz. palladium, 23,440 oz. platinum and 18,000 oz. gold, plus copper and nickel. Cash costs, including byproduct credits and royalties, are estimated to be US$160 per oz. palladium.

Palladium resources have since climbed to 6.4 million oz., up from 5 million oz. in 1999 and 1.3 million in 1998. The overall resource now stands at 122 million tonnes grading 1.63 grams, based on more than 150,000 metres of drilling. Minable reserves still stand at 72 million tonnes averaging 1.76 grams palladium, based on a life-of-mine cutoff grade of 0.85 gram palladium at a price of US$320 per oz. Current reserves provide for a mine life of at least 11 years.

However, NAP expects soon to release updated reserves and resources incorporating the results of considerable drilling done since completion of the feasibility study. Exploration is ongoing, with $6.5 million budgeted for this year. The expectation of higher numbers has already prompted speculation of another major expansion. Minty views this as premature.

“We won’t decide that now,” he says. “First, we have to run the [expanded] mill for a year and prove we are successful.”

Operations

Lac des les is a relatively simple open-pit/truck-and-shovel operation. New equipment has been added to augment the existing fleet in preparation for expansion.

The expansion will have two phases. Mining of higher-grade ore in the first phase is already under way, along with prestripping in the second phase. The pit features high walls at 55%, and NAP intends to maintain this steep angle through the expansion because of the competency of the rock.

The feasibility study envisioned an open pit measuring 1 km by 750 metres, to a depth of 425 metres. However, this doesn’t take into account results of more recent drilling, which have encountered mineralization to a depth of 650 metres. The waste-to-ore stripping ratio is expected to be 2.16-to-1 over the expanded life of the mine.

The ore at Lac des les is tenacious (the work index averages 18) and abrasive. Wear and tear on equipment calls for frequent replacement of shovel teeth, tires and the like.

On the processing side, the new plant under construction is more sophisticated than the old one, which has one rod mill, three ball mills and a bank of flotation cells. Even so, availability is now above 93%, compared with 82.85% in 1997, thanks to an improved maintenance program and the stockpiling of critical parts.

The new plant, which is about 80% completed, is expected to be operational in April of this year. It is sized at 15,000 tonnes per day, though the front-end crushing circuit can accommodate 30,000 tonnes.

Ore will be ground to 74 microns in a conventional Semi-autogenous-grinding mill/ball-mill/pebble-crusher circuit, considerably finer than the 150 microns achieved in the old mill. The ground ore will feed a flotation circuit that comprises rougher/scavengers, three stages of cleaning, and regrind mills. Recoveries are expected to improve to 81.7% (up from 72-77%, depending on ore type), owing to the finer grind and longer retention times (one hour compared with 17 minutes).

Lac des les produces a single concentrate that is shipped to Sudbury for processing, and then to Europe for refining. The mine has minimal environment impact, producing no air emissions. Tailings are benign, talc and silica being the main products, and because the end product has environmental benefits, NAP proudly bills itself as the producer of “metals for clean air.”

On the financial front, NAP reported net income of $37 million for the first nine months of 2000, compared to a net loss of $5.2 million for 1999. Palladium production was 74,487 oz., compared with 46,507 oz. a year earlier, while total cash costs were US$252 per oz. (after byproduct credits).

The balance sheet has been restructured with a $235-million equity issue. About $134 million was used for debt repayment, while $75 million was directed to the expansion program. A US$90-million term loan was negotiated to complete the project financing.

While Lac des les is well-positioned to produce profits for shareholders, the expanded mine will employ 250, up from the previous level of 130, and generate $785 million of total expenditures on labour, goods and services to Ontario.

“Half that will be spent locally,” Minty said. “This project is an economic boon for Thunder Bay and surrounding areas.”

NAP is part of the TSE 300 composite index in the gold and precious metals sub-group. It has 49.9 million shares outstanding, 57% of which are held by Kaiser-Francis Oil.