Opening new gold mines mean greater costs

Opening new gold mines will almost always take longer than expected and, because more time means greater cost, companies planning to start new mines should be prepared for those costs says Canamax Resources’ (TSE) Presid ent John Hansuld.

“Most junior companies are underfinanced in this regard,” said Hansuld in a luncheon speech sponsored by the Toronto branch of the Canadian Institute of Mining and Metallurgy. “They can’t withstand this `run-in’ phase.”

Canamax has opened four gold mines in the past 14 months and “all four took longer to develop and live up to predictions, that is the feasibility study, than we thought,” he said.

Experience at those four mines has taught him certain lessons, Hansuld said. For instance, he said, “mining can only proceed so fast regardless of money.” Pre-production development takes time so that enough mining faces are operating to supply mill feed. That, in turn, requires that mine and mill capacities are compatible.

“Oversizing, in my view, is perhaps the biggest failing in mining. More good deposits are ruined by oversizing mills than any other single cause.”

He said the most frustrating and financially sensitive period is during the mill run-in when material is first put through the mill and optimum operating levels are determined.

“Filling the cracks and crevices (of the mill equipment) sometimes takes several thousand ounces (of gold),” he said describing the process. “Everyone starts to panic because there’s no gold coming out.”

Finally, he said, there’s always the unexpected. At Canamax’s Bell Creek mine in Timmins, Ont., a fire delayed construction for about six months and at its Ketza River mine in the Yukon Territory, record levels of rainfall filled tailings disposal ponds to capacity prematurely.

Because of all these factors, companies opening new mines need adequate funding to survive and to “cushion delays.” And he added that additional funding beyond that determined in the feasibility study is not always due to capital costs over-runs. Often they are revenue shortfalls because production didn’t attain the predicted levels at the appointed time or changes to the scope of the project add to costs.

Hansuld also cautioned banks to take care with their due diligence studies before offering what he called “fashionable” gold loans.

“Gold loans are a good tool, but they’re not for everyone, not if you’re starting your first mine.” He recognized the difficulty in raising equity financing for projects in today’s market, but said banks were doing smaller companies “no favor” by offering loans on the security of future production when often those companies had no current production at all.

Hansuld also said that, in general, joint ventures complicate the decision making process and add to time. “Joint ventures are fantastic if you don’t find anything, but when it comes to operations they’re not very good.”