Patience required for Joanna gold mine development, Aurizon says

Cashed-up gold producer Aurizon Mines (ARZ-T, AZK-X) has taken a step back from the development threshold on its Joanna gold property 20 km east of Rouyn-Noranda, Que. The company made the decision following a lukewarm feasibility study on a potential open-pit operation at its Hosco deposit, which saw capital expenditure (capex) and average cash costs on the rise.

The feasibility study was prepared using Hosco’s in-pit mineral reserves — at a cut-off of 0.5 gram gold per tonne — which total 41.1 million tonnes grading 1.26 grams gold for 1.66 million contained oz. gold. The mine plan specified an 8,500-tonne-per-day throughput rate at an average strip ratio of 4.49 to 1 during a 13-year mine life. Since Hosco’s material is partially refractory, selecting an oxidation method before cyanidation of a flotation concentrate is required to improve gold recoveries.

Aurizon’s economics clocked in with a US$112-million net present value and 6.5% after-tax internal rate of return (IRR), assuming a US$422-million capex and 5% discount rate. According to president and CEO George Paspalas the company is looking for a double-digit IRR on the project and is hoping to decrease average cash costs from US$700 per oz. gold to the US$600-per-oz. level it realizes at its Casa ­Berardi gold mine in northern Quebec.

“We didn’t find anything contrary, I mean we knew we had a big increase in resource, and we knew the grade would be relatively consistent. We expected the capex to go up because we changed to a lower-risk process flow sheet,” Paspalas explained in a conference call. “We made a conscious decision to minimize the risk on this project by fully containing the facility at Joanna, and not trying to do some synergy sharing with Casa Berardi.”

To achieve its goals, Aurizon will focus on expanding exploration efforts at its Heva deposit, where drilling has indicated potential for higher-grade gold and non-refractory ores that could improve processing economics. If Aurizon finds enough non-refractory material at Heva it could entertain a staged-development strategy to improve Joanna’s rate of return. The company will spend US$4.2 million on more exploration drilling at Heva, as well as its Hosco West extension.

“Those costs per ounce are the reason why we’re assessing the best way to spend the capital. The opportunity we have on the Joanna property is that we have the Hosco pit, which has a fair bit of upside to gold price, but we also have the opportunity to have non-refractory ore on the property, and if we can implement that it would be at a lower cost,” Paspalas said. “We’re looking at these potentials for alternative development strategies at Heva that may, at the end of the day, reduce the average costs for the entire property over the mine life.”

Initial data at Heva has indicated potential for grades between 1.6 and 1.8 grams gold, with metallurgical test work confirming recoveries through conventional cyanidation at rates exceeding 93%. Heva has an inferred resource totalling 9 million tonnes grading 1.8 grams gold for 511,000 contained oz. gold.

Aurizon has assayed 36 holes at Heva so far this year, with highlights including 9 metres grading 7 grams gold from 248 metres depth in hole 11-970, and 22 metres carrying 3.5 grams gold from 200 metres in hole 11-981. The company has completed 58 holes totalling 16,348 metres to date on the program targeting the Heva zone area and western extension of the Hosco deposit between surface and depths of 200 metres, corresponding to a 2.5-km strike length along the Cadillac fault.

“The exploration success will drive the timeline, but our intentions here are to follow up on early stage drilling at Heva and understand whether there are sufficient ounces to justify a start-up project in its own right,” Paspalas commented. “The object is to identify a potential staged development alternative with improved economics at Joanna.”

Aurizon briefly moved above its 200-day moving average of $5.43 during trading on June 5, but shares fell 6.2% on June 6 following release of the Hosco feasibility study. The company closed down 34¢ at $5.15 on 1.2 million shares traded. Aurizon remains in an enviable liquidity position with US$200 million in cash and  equivalents, following a record first quarter that saw net profits jump 238% to US$8.4 million.

“When it comes to Hosco there is a chance we could self fund a fair chunk of the development through cash flows and cash-on-hand. We’d like to keep some dry powder there because we do remain active in the mergers and acquisitions space,” Paspalas explained. “If we find a really nice acquisition we probably won’t be the only people there, and having some cash on the table can make you the preferred bidder. Having the capability to self fund a big portion of a major project is good for us, and it’s good for our shareholders in the sense we can look at non-dilutive financing options.”

BMO Capital Markets analyst Andrew Kaip viewed the decision to delay development at Joanna as a net-neutral event for Aurizon, and maintained a “market perform” rating on the stock and a $6 target price. According to Kaip the initial capex and operating costs were largely in-line with BMO Research expectations.

“The decision to delay Joanna development to incorporate ­additional reserve potential at the Hosco and adjacent Heva deposits is prudent, given the potential to improve upon the current marginal project economics,” he writes in a June 6 research ­comment.