Projected costs rise for Gabriel’s Rosia Montana

Investors in Gabriel Resources (GBU-T) received a rude shock in late February as the company announced a US$181-million rise in projected costs for its 80%-owned Rosia Montana gold project in Romania.

Initial capital costs are now pegged at US$437 million, compared with the US$253 million outlined more than a year ago in a feasibility study, while anticipated sustaining costs have fallen US$3 million, to US$123 million.

The US$437 million consists of: US$146 million for a processing plant and infrastructure; US$78 million for a tailings dam (up from US$25 million); US$63 million for resettlement costs; US$53 million for mining equipment and a mining fleet; US$47 million in “owners’ costs”; US$18 million for environmental costs; and US$32 million for project management.

The total includes US$43 million in contingency funds.

“When I first came here, I was surprised at how low the costs were,” says Gabriel President Robin Hickson, who joined the company in July 2002. “I was expecting to see numbers north of US$500 million when you included the village relocation. Obviously, what helps us here is the well-established infrastructure, which is unusual, and it’s a very simple metallurgy. So even with some US$60 million for the village relocation, it keeps us, in my judgment, in the low end of the capital-cost range.”

In 2001, SNC Lavalin completed two supposedly “definitive” feasibility studies at Rosia Montana, based on a 100% project basis: one for a large-scale, 20-million-tonne-per-year open-pit mine, and a second for an 8-million-tonne-per-year operation which Gabriel could possibly finance on its own.

In February 2002, SNC followed up with a revised study that optimized the mining rate at 13 million tonnes per year to produce 504,000 oz. gold annually for 16.2 years.

The second and latest revision, released in late February 2003 after several months of delay, is based on additional “basic engineering” studies that represent about 25% of the detailed engineering that will ultimately be required.

The newest plan envisages mining at a throughput rate of 13.3 million tonnes per year, which would produce an average of 533,000 oz. gold annually over a mine life of 16.4 years. An average of 679,000 oz. gold per year would be poured during the first five years, when head grades would be higher.

The updated mining plan calls for the Cirnic pit to be exploited first, followed by mining of the Cetate pit and backfilling of Cirnic.

The revised stripping ratio has jumped to 1.2-to-1 from 0.9-to-1, owing to the calculation of a slightly flatter slope in the projected pit walls.

Mining operations would cease after year 14, and a stockpile of 32 million tonnes of lower-grade ore would be processed over the next three years.

The Rosia Montana mine would exploit a proven and probable reserve of 218 million tonnes grading 1.52 grams gold per tonne and 7.5 grams silver per tonne, equivalent to 10.6 million contained ounces gold and 52.3 million oz. silver.

The reserve figure is based on a cutoff grade that varies from 0.62 to 0.94 gram gold, and assumes gold and silver prices of US$300 and US$4.50 per oz., respectively.

Tucson, Ariz.-based Independent Mining Consultants calculated the reserve, making use of new data gleaned from last year’s 247-hole, 21,000-metre campaign of infill drilling, which brought the total number of holes drilled into the deposit to more than 700.

There is considerable potential for augmenting reserves: more than 100 million additional tonnes lie in the resource category and could be upgraded; the main Rosia Montana deposits remain open in three directions and at depth; and further gold mineralization is known to exist on Gabriel’s Bucium property, southeast of, and contiguous with, Rosia Montana.

Improved recoveries

SGS-Lakefield Research of Lakefield, Ont., carried out additional metallurgical tests on gravity-circuit design, and improved gold and silver recovery by producing and regrinding a sulphide gravity concentrate. As a result, gold recoveries have increased fractionally to 82.3%, while silver recoveries have risen more than 6%, to 58.1%.

As well, a cyanide-destruction circuit using the SO2/Air process was added to the plant design to ensure environmental protection.

During 2002, Gabriel completed further geotechnical work at the project site, including the drilling of 100 holes and the digging of 70 test pits, to aid in the design of the tailings dam, plant, waste dumps and open pits.

The work showed that more than twice the volume of material previously expected must now be removed in order to reach bedrock competent enough to serve as the foundation of the tailings-dam wall. This one change has added US$53 million to the initial capital costs — the biggest increase among a dozen items that are now more expensive that originally forecast.

“Obviously, we didn’t know where the bedrock was until we got the geotechnical data back,” says Hickson. “We were a little surprised [and] it’s something we would rather not have, but we’ve got a good handle on the dam’s design now.”

Overall, the estimate for total production costs has risen US$64, to US$221 per oz., net of silver credits, over the life of the mine. Much of the rise is attributed to higher power and reagent costs.

On-site operating costs, including mining, processing, cyanide destruction, tailings and administrative costs, are expected to average US$7.18 per tonne in the first five years and US$6.48 per tonne over the life of the mine.

Gabriel is considering the option of using contract mining, even though doing so would result in higher sustaining costs.

Resettlement

Resettlement of the town of Rosia Montana is well under way, with some 20% of all local property-owners having entered into purchase agreements with Gabriel. “In the community, people are coming to us more rapidly than we thought,” says Hickson, “so we may actually sign up all the people [for relocation] before the end of construction.”

With the relocation efforts being accelerated, some US$38 million in sustaining costs relating to the resettlement have now been included in initial capital costs.

“There’s nothing really stopping us here,” says Hickson, referring to the arrangement of land deals. “It’s even picking up a little.” He adds that support for the project from the local community and the Romanian government (which owns the remaining 20% of the project) is strong.

Gabriel has improved its resettlement and relocation plan in compliance with guidelines of the World Bank Group and its International Finance Corporation arm.

The resettlement consists of three phases: the first is designed to cover all properties required for construction of the mine; the second covers all properties that will be affected in the first seven years of mining; and the third covers properties that will be affected during the rest of the mine’s life.

Gabriel has completed most of its key archeological investigations and obtained discharge certificates to begin construction.

The company has agreed to preserve, in situ, a circular funerary structure identified last year. It is not near the areas required for mining and processing.

Gabriel has issued an international tender for an engineering, procurement and construction management contract, and intends to submit an environmental impact assessment to the Romanian government in the third quarter.

Mine construction is expected to begin in the third quarter of 2004, with initial gold production anticipated in the second half of 2006 (the startup date has been pushed back by about 18 months).

“We have the right characterization of the capital and operating costs, and we now have a good handle on the schedule,” says Hickson. “I feel confident we can [build] this facility within this budget and that we’ll achieve the projected operating costs.”

Gabriel has spent about C$50 million on the project since acquiring it in the late 1990s, including US$17 million on exploration. Also, the company has been in discussions with four banks to provide debt financing.

When a
sked about the possibility of obtaining financial assistance from different levels of European governments, as Rio Narcea Gold Mines did in Spain, Hickson says “help is always welcome, but we don’t want people to be interfering with our ability to meet our schedule.”

At US$300-per-oz. gold, the project could spin off US$500 million annually in free cash flow, and US$650 million annually with gold at US$350 per oz. “The engine is very strong at the front end,” says Hickson, “so we’re unchanged in our view of how much debt this project could support.”

Gabriel’s current cash position is US$30 million, and the company expects to spend US$65 million this year on capital expenditures.

Following the news of the rise in costs, Gabriel shares tumbled from the $4 range to trade at $2.85 per share at presstime, giving the company a market capitalization of C$330 million, based on its 114.7 million outstanding shares.