Site visit: AuRico nears construction decision at Kemess

PRINCE GEORGE, B.C. — There’s a sense of momentum building at the historic Kemess open-pit, gold-copper mine site in north-central British Columbia. AuRico Metals (TSX: AMI; US-OTC: ARCTF) has hit numerous milestones this past year, and could make a decision to go forward with a new era of underground mining at the site within the next 18 months.

The property sits in a spruce-lined valley nestled between sub-alpine plateaus and rugged-incised peaks, west of B.C.’s Swannell Ranges.

AuRico president and CEO Chris Richter says during the 430 km, northbound flight to the property from Prince George that he often uses 40 km long Thutade Lake as a map marker to reference the project location within the Omineca Mining Division.

Kemess’ past operators have seen successes and failures. Northgate Minerals ran a profitable mine at the Kemess South (KS) open pit between 1998 and 2011, producing 3 million oz. gold and 750 million lb. copper in total.

When Northgate tried to permit an open-pit extension at the Kemess North calc-alkaline porphyry deposit in 2007, however, it was rejected after a federal review panel cited concerns over “significant adverse environmental, social and cultural effects.”

The main issues related to consultation with local First Nations and plans to dispose of tailings and waste rock in nearby Duncan Lake.

“In many ways, I think there was a failure in building relationships,” Richter says during a presentation at the Kemess site. “That was obviously a different time in the industry, and we recognized potential here that could be unlocked if approached the right way. So we’ve collaborated on a mine plan that’s really been supported by government and stakeholders.”

AuRico reimagined the project as an underground operation leveraging panel-cave mining and existing infrastructure, which includes a 300-person camp and 52,000-tonne-per-day plant facility.

The site is connected to the BC Hydro grid via 380 km power lines running to the town of Mackenzie, British Columbia.

Panel caving differs from block caving because it doesn’t need to develop its footprint before cave initiation.

The company filed a feasibility study on the Kemess Underground (KUG) project in July.

Probable reserves stand at 107 million tonnes grading 0.54 gram gold per tonne, 0.27% copper and 1.99 grams silver per tonne, or 1.9 million contained oz. gold, 630 million contained lb. copper and 6.9 million contained oz. silver. Indicated resources total 246 million tonnes at 0.42 gram gold, 0.22% copper and 1.75 grams silver.

AuRico intends to put new waste rock and tailings in the old KS pit.

“The project obviously had some issues with waste management in the past,” says chief operating officer John Fitzgerald — who served as director of mining at Northgate — while standing under the vaulted ceilings of Kemess’ mechanical bay.

“We’ve designed a mine plan that’s backed by First Nation communities, and the government has given us a green light,” he continues.

AuRico received approval from the Canadian Environmental Assessment Agency and British Columbia Environmental Assessment Office in March.

Furthermore, the Tsay Keh Dene, Kwadacha, and Takla Lake First Nations provided letters of support for the project. The company expects to have key permits in hand by the second quarter of 2018.

“We were obviously very happy to have our environmental approval in place before a change in government because it’s never a sure thing,” Richter says when asked about B.C.’s recently elected New Democratic Party government.

“But we regularly speak with the regulators and our First Nation partners, and the message we’re getting is that the new government remains friendly in terms of Kemess, and mining generally,” he continues.

AuRico figures it will need $524 million in preproduction expenses to restart the mine.

The cave operation is expected to produce 106,000 oz. gold and 47 million lb. copper annually over a 12-year mine life.

Underground infrastructure additions include four single-toggle jaw crushers, while ore would be moved to an overland conveyor for delivery to the process plant. The operation is expected to process 25,000 tonnes per day.

In addition, Fitzgerald explains, during a tour through the dimly lit Kemess mill facility, “minor mineralogical differences” in underground ores will need a finer grind.

AuRico assumes metallurgical recoveries of 91% for copper, 72% for gold and 65% for silver.

The land above the KUG deposit is visible during a picturesque helicopter flight 6.5 km north of the camp.

The orebody lies in a range between 200 metres and 550 metres below surface, beneath two north-facing alpine cirques marked by rust-coloured slopes. Fitzgerald points out the planned position of triple declines, and says that material would travel along  a 4.9 km surface conveyor to the process plant in the distance.

AuRico’s base case for KUG assumes long-term metal prices of US$1,250 per oz. gold and US$2.50 per lb. copper. The current study features a 12.6% after-tax internal rate of return (IRR) and a $289-million net present value (NPV) at a 5% discount rate.

The company estimates co-product all-in sustaining costs over the first five years of US$682 per oz. gold and US$1.36 per lb. copper.

“It’s clearly pretty rugged topography, to say the least, but we’ve really worked that into the way we’ve designed the declines and access for the underground. Plus we have a much lower ratio of waste to ore than a lot of underground operations,” Fitzgerald says.

“That’s allowed us to design a tailing management plan that takes advantage of what we have on-site. It’s really one of the benefits of panel-cave mining. I guess our challenge now revolves around how we can expand this project and incorporate future growth.”

AuRico is contemplating ways to include the nearby Kemess East deposit into its underground design. The expansion opportunity is underpinned by measured and indicated resources of 113 million tonnes grading 0.46 gram gold, 0.38% copper and 19.4 grams silver. The resource lies between 800 metres and 1,140 metres below surface.

The company unveiled a stand-alone preliminary economic assessment (PEA) on Kemess East in May, and intends to release a combined prefeasibility on both underground deposits next year to assess an integrated development.

The PEA assumes the KUG project is advanced ahead of Kemess East and will make use of pre-existing components, including an access corridor connecting KUG to the processing and water-treatment plants.

AuRico estimates developing Kemess East would require $327 million in preproduction capital and a five-year construction period.

Richter points out that the technical team has not assessed potential “economies of scale” or mine sequencing that could involve production overlap between the two deposits.

The stand-alone Kemess East mine plan has a 16.7% after-tax IRR and $670-million NPV at a 5% discount rate.

“We’re very comfortable with our offtake discussions and financing the project,” Richter says during the flight back to Prince George. “We’ve met with a number of parties in Asia and Europe, and we’re pretty confident that a good portion of the project capital will be available without a hedging requirement, or anything else, outside of an offtake arrangement. There’s obviously excess smelter capacity, and that gives us the confidence.”

AuRico also has a royalty portfolio that it expects will generate up to US$11 million in revenue this year.

Richter says the company could sell the royalties and has had “numerous inbound calls” on the subject.

The royalty portfolio includes a 1.5% net smelter return royalty (NSR) on Alamos Gold’s (TSX: AGI; NYSE: AGI) Young-Davidson gold mine in Ontario, and a 2% NSR on Kirkland Lake Gold’s (TSX: KLG) Fosterville gold mine in Australia.

AuRico shares have traded in a 52-week range of 82¢ to $1.43 per share, and last closed at $1.21. The company has 162 million shares outstanding for a $196-million market capitalization. It reported a $21-million cash balance at the end of June.