Positive Feasibility For Banro’s Twangiza Project

Banro’s (BAA-T, BAA-X) wholly-owned Twangiza project in the Democratic Republic of the Congo will produce about 320,000 oz. gold per year at an average operating cash cost of US$274 per oz. for the first three years it is in production.

A feasibility study released Jan. 26 has demonstrated the proposed mine would average annual production of 319,962 oz. gold for the first three years and 261,965 oz. gold for the first five years of operation at an average operating cash cost of US$358 per oz.

During its estimated 15-year lifespan, and based on current reserves, the mine is forecast to produce 2.62 million oz. gold at an average total operating cash cost of US$429 per oz.

At a gold price of US$850 per oz. and a discount rate of 5%, the project’s post-tax net present value (NPV) has been calculated at US$342 million. At US$750 per oz. gold, the NPV drops to US$154 million.

The study projects total net cash flow after tax and after capital spending of US$593 million.

Twangiza lies in the province of South Kivu, about 41 km south-southwest of Bukavu, the provincial capital.

News of the feasibility study followed Banro’s announcement earlier this month that it had grown its resource at Twangiza by 49.7% to 5.6 million oz. gold. (Since exploration began in October 2005, Banro has drilled more than 330 diamond-drill holes.)

The new resource estimate puts measured and indicated resources (at a cutoff of 0.5 gram gold per tonne) at 107.5 million tonnes grading 1.6 grams gold per tonne.

Those figures surpass an estimate in the prefeasibility study released in July 2008 of 59.2 million tonnes grading 1.96 grams gold for total contained gold of 3.74 million oz.

“This is a very large and promising deposit, which is pretty close to surface,” Martin Jones, Banro’s vice-president of corporate development told The Northern Miner, adding that the whole project is suitable for an open-pit operation at a low strip ratio of 2.34, a contributing factor to Twangiza’s low operating costs.

The resource estimate incorporates all three deposits: Twangiza Main, which contains 85% of the total mineral resource; Twangiza North, which contains 13% of the total resource; and the Twangiza “Valley Fill” deposit, which contains 2% of the resource.

The Twangiza Main and Twangiza North deposits, both of which are open at depth, will be mined at the same time to provide throughput of 5 million tonnes of oxide ore to the processing plant in the initial years. (Transitional and fresh ore types will be stockpiled during this period and processed as soon as the oxide ore begins decreasing.)

The estimated operating cost of the open-pit mine at US$5.31 per tonne of ore is equivalent to US$1.59 per tonne of rock mined, based on an owner-operated mining option.

According to the feasibility, capital costs at the project will be around US$409.6 million, including a contingency of US$38.9 million.

In addition, a separate and standalone 30-megawatt hydroelectric scheme to supply power to the project will cost US$133.8 million (including a contingency of US$20.1 million) and is to be financed in whole or in part by a third party.

If Banro pays 50% of the bill, or US$66.9 million, to build the hydroelectric plant, its total capital expenditures will climb to US$476.5 million from US$409.6 million.

Assuming Banro does contribute 50% of the cost, the Toronto-based company will be able to pay back all of the project’s capital costs in 2.53 years after production starts, yielding an internal rate of return of 20.5%.

The project’s hydroelectric requirements would be met by a run-of- river hydroelectric scheme on the Ulindi River, about 35 km from the Twangiza site, and employ a 600-metre natural drop in the river over a stretch of about 8 km.

Although capital costs are higher for hydroelectric power than diesel generation, the operating costs are lower, (especially processing power costs), which will generate cost savings and a competitive advantage, Banro argues.

Not only does a hydroelectric facility offer value after the mine is closed, but it also gives Banro the potential of recouping some of its capital investment through carbon credits, although the benefits were not included in the feasibility study.

About 6 megawatts of back-up diesel power for essential processing plant equipment and for emergencies will still be required, however, and the cost for diesel facilities was incorporated in the project’s capital costs.

Banro will raise financing for the hydroelectric facility in a separate exercise and money raised will be housed in a Banro subsidiary that will supply power to the Twangiza mine over the course of its lifetime. The hydroelectric project will be developed separately but at the same time as the mine.

Funding for the power plant will be repaid on a kilowatt-hour rate over the first 10 years of the project. The hydro cost of US8.4¢ per kilowatt- hour compares well to the US54¢ per kilowatt-hour of diesel-generated power, according to Mike Prinsloo, Banro’s president and chief executive.

Construction of the process plant and other infrastructure is forecast to take between 24 and 30 months. Development of the hydroelectric project has an expected timeline of about 28 months.

In terms of government charges, a mining convention on the Twangiza project gives Banro a tax holiday for the first 10 years of production. A 5% administrative tax for imports of plant, machinery and consumables was included in the mine’s projected capital and operating costs.

Gold mineralization is hosted in sediments (mudstones and siltstones) that have been intruded by a series of feldspar porphyry sills along the hinge of a major anticlinal structure.

Metallurgical test work on the oxide, transitional (non-refractory) and fresh rock (non-refractory sulphide) ore categories suggest that the oxide sediments and porphyry, transitional and fresh rock feldspar porphyry host rock are all non-refractory, while some of the transitional and fresh rock sedimentary ores are of a refractory nature or contain some refractory material.

“The highest gold production from the open pits and the lowest cost production occur in the early years, because of the higher throughput of the oxide ore and the low strip ratio,” Prinsloo noted in a prepared statement.

“Our objective is to add additional oxide and porphyry transitional ounces to maximize and uplift the production profile over the first seven years of production life, to a production profile in excess of 300,000 ounces, with as much oxide as possible from the neighbouring deposits.”

The four neighbouring targets are within trucking distance of the proposed Twangiza plant site: Luhwindja (adjacent to Twangiza North), Kaziba, Mufwa and Tshondo.

Banro intends to refresh and optimize this feasibility study and to begin discussions with potential strategic partners and project finance lenders, including both multilateral agencies and commercial banks.

Because East Africa lacks gold-refining capability, the company will likely have its dor treated at South Africa’s Rand Refinery. Banro estimates that the cost of collection and transportation from the mine, as well as insurance and refining the dor, will be charged at US$5 per oz.

In mid-day trading in Toronto on Jan. 27, the morning after news of the feasibility study was released, Banro’s shares were trading up 80¢ apiece, or 48.9%, at C$2.45 per share. In New York, Banro’s shares on the NYSE Alternext U. S. jumped 68¢, or 50.37%, to US$2.03 per share.

Like most other mining companies caught in the economic downdraft, Banro has watched its share price drop precipitously over the last year. But the humanitarian disaster unfolding in the DRC hasn’t helped matters.

Intense fighting between the forces of rebel general Laurent Nkunda and Congolese army soldiers and their allied militia has caused 250,000 people to flee their homes since late Augu
st. Since the civil war broke out in 1998, more than 5 million people, mostly civilians, have been killed. (At presstime, Nkunda had been arrested in Rwanda, a former ally of the rebel leader.)

Banro’s Twangiza project is about 250 km south of the fighting. “If you were to visit our sites you’d be astounded at how peaceful they are, even now,” Jones said. “It’s a terrible humanitarian disaster but it should be understood that it’s a localized conflict within a small geographic area in a country the size of Western Europe. The issues that are being fought over are endemic to North Kivu and have limited impact on people in the rest of the Congo.”

Jones describes the conflict area as stretching 70 km in length and occurring within two thin bands of just a few kilometres. “There’s very little transportation infrastructure between where the fighting is and where Bukavu is, and we’re about 45 km south of Bukavu, the capital of South Kivu,” Jones says, adding it’s a conflict “that is unlikely to spread.”

The government’s treatment of foreign mining companies is another matter that weighs on Banro’s share price. Management is still waiting to meet with the government to discuss the issue of non-payment of surface taxes on the company’s four exploitation claims. Last year, the country’s minister of mines said the taxes were a concern.

“We’ve already presented our case and we believe they understand that under the mining convention we have with the central government, our exploitation permits are exempt from surface taxes,” Jones explains.

Banro’s properties in the DRC are not among those the government is reviewing, he adds. A government edict in late 2007 ordered a review of all mining contracts in the country and a renegotiation of some 60 contracts is now under way.

“We’re not part of this review of mining contracts that is going on in the Congo because we have no mining contracts with any of the state-owned companies,” Jones explained.

Banro is developing four wholly owned gold projects, about 200 km apart, along the Twangiza-Namoya gold belt in the DRC’s South Kivu and Maniema provinces.