Rea Gold taking traditional route to production

A new crop of independent- minded juniors armed with flow- through funds changed all that, albeit with mixed results. But some industry experts and analysts now say the traditional route of joint venturing with a major has its merits if a reasonable deal can be negotiated.

A junior mining company for close to a decade, Rea Gold Corp. (TSE) is aiming for the best of both worlds. The company will make its initial production debut at minimal risk by having experienced mine operator Minnova Inc. (TSE) develop its first mining venture.

But even as the 500-ton-per-day Samatosum polymetallic mine near Adams Lake, B.C., begins its tune-up phase, Rea Gold is also busy transforming itself into an operating company to develop the recently-acquired Bissett gold mine project in Manitoba.

While it will be some months before a detailed feasibility study is completed for Bissett, the Samatosum mine is expected to begin commercial production by mid-summer, on schedule and within the budget estimate of $32.2 million.

Minnova will have a 70% interest in the new mine, with Rea Gold holding a 30% interest plus a 5% net smelter return. Reported reserves amount to 661,000 tons grading 32.08 oz silver, 1.2% copper, 3.5% zinc, 1.7% lead and 0.052 oz gold per ton.

A combined open pit/underground operation, the Samatosum mine is expected to produce five million oz of silver each year during the first several years of its five year mine life. Silver production will account for about 65-70% of revenues, with the remainder derived from copper, zinc, lead and gold values.

Although the mine is going into production during a low cycle for precious metals, revenue losses on the precious metal side are expected to be offset by improved base metal prices. In its first full year of production, Rea Gold is expecting cash flow to its own account of between $8-10 million (at current metal prices) after direct mining and milling costs.

“We’re very fortunate to have a very high grade deposit sitting at the surface that can be mined in its first years by low cost open pit methods,” said Larry Reaugh, president. “We estimate that our break-even point on the project is $2(US) an oz for silver.”

Fortunate in that its share of capital costs for Samatosum were raised before the 1987 market crash, Rea Gold began looking for new opportunities to boost production and secure a long term future in mining.

Early this year the company announced the acquisition of the Bissett gold mine from Cassiar Mining (TSE). Previously known as the San Antonio, Bissett is a former producer that turned out 1.36 million oz of gold from 4.9 m illion tons of ore from 1932 to 1968. A 500-ton-per-day mill was built on the property in 1982.

After completing its due diligence, Rea Gold and Cassiar renegotiated the deal several times before settling on a price of 2.3 million Rea Gold shares valued at $3.40 per share and a secured loan agreement of $3 million. If drawn, the funds would be convertible by Cassiar into common shares of Rea Gold, with the price to be determined at that time.

“We took a much more critical look than we might have if gold was $450 per ounce,” said Reaugh, “but as buyers we didn’t want to spend one dollar more than we should.”

Rea Gold’s review showed mineable ore reserves below the 26th level to be 1.2 million tons grading 0.22 oz gold per ton, and 301,400 tons grading 0.192 oz above the 26th level. Exploration potential for new reserves of both vein and stockwork types is viewed as excellent.

Rea Gold’s due diligence also revealed that capital costs would be about $18.8 million or 38% higher than originally expected, and operating costs $78.53 per ton, or 18% higher than predicted in an earlier feasibility study. Rea Gold’s critical evaluation of its own project is expected to continue through the summer.

“We’ll be mining Bissett on paper before we spend money to go underground,” said Reaugh, referring to the detailed feasibility that is now in progress under the direction of mining engineer Fred Sveinson, vice-president and chief operating officer.

With a high degree of confidence in the reserves, in the continuity of grade, and in the good ground conditions, Rea Gold sees plenty of upside potential at Bissett.

“But we also know what the problems are,” Reaugh said, referring to materials handling or the physical aspects of mining and handling the ore. The projected increases in capital costs are for shaft sinking, hoisting, preproduction development, with higher costs for underground mining representing most of the increase in operating costs.

“It looks like the best attack may be to sink an entirely new shaft,” said Reaugh. “While this will increase our capital costs somewhat, it will also bring down the operating costs.”

According to Sveinson, a number of other alternatives will be evaluated in the bid to reduce operating costs, a critical factor because of gold’s prolonged slump.

The company is also considering adding a cyanide circuit to enhance metallurgical recoveries. By the end of the summer, Rea Gold expects to have in place a detailed feasibility study and operating plan.

Sveinson said if the new shaft route is chosen, it would take between 2-2.5 years to sink and have the underground developed. “However there is ore in the upper levels and in other deposits in the immediate area, so it is possible our mill could be going sooner than that,” he added.

Rea Gold’s geological study of the Bissett deposit will encompass other mineral occurrences in the area. Officials hinted that joint ventures with other companies will likely be developed.

On the corporate side, Rea Gold has found itself positioned between two large shareholders. Cassiar Mining will have about 20% of its shares, assuming it exercises all the options associated with the Bissett mine transaction. Another large shareholder, D.C.C. Equities, had its interest diluted to about 15% by the Cassiar transaction.

While it’s rumored Ned Goodman’s D.C.C. Equities is looking to increase its position, Rea Gold appears to be more interested in developing an ongoing relationship with Cassiar Mining.

“We have common interests with Cassiar,” said Reaugh. “I think its a great relationship that could be expanded.”

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