Study Finds Smaller Is Better For Alamos Gold

When Alamos Gold (AGI-T, AGIGF-O) first pondered building a 1,000-tonne-per-day mill that would process high-grade material from both the main Estrella pit at its Mulatos gold mine in Mexico, and material from the Escondida deposit, 500 metres northeast, Wardrop Engineering concluded that it would not generate sufficient returns.

So Alamos went back to the drawing board and commissioned a study by KD Engineering on a smaller 500-tonne-per-day mill that would process only highgrade ore from Escondida.

For the purposes of that study, Escondida ore with grades in excess of 3.4 grams gold per tonne was considered milling ore. Using that cutoff, the high-grade portion of the Escondida deposit represented reserves of 289,000 tonnes of milling ore grading 10.54 grams gold.

But the company believes the actual grade of the Escondida highgrade zone will be higher than the reserve grade, based on bulk samples, internal testing and sampling issues associated with coarse native gold or the “nugget” effect. Indeed, a bulk-sampling program in 2007 calculated a mean grade of 25.48 grams gold per tonne in a sample size about 50 times that of the drill samples. What’s more, recent discoveries near the Escondida area seem to suggest there will be opportunities to increase the tonnage of high-grade ore available to mine and process.

Based solely on proven and probable reserves of milling ore, however, KD Engineering confirmed that the development and processing of Escondida’s highgrade zone is economically robust, and that 90% or more of the coarse, high-grade Escondida ore is recoverable through crushing, grinding and gravity milling.

As a result, the report recommended building a 500-tonne-per-day mill, leaching the mill tailings, and found that processing highgrade Escondida ore using a gravity circuit would be profitable.

The report also pegged gravity recovery at 90%, rising to 99.4% with gravity plus leach recovery, when ground to 88 microns.

Initial capital costs were pegged at US$17.5 million, including a 20% contingency, and operating costs of US$12.08 per tonne of ore, or US$39.62 per oz. gold.

In addition to processing potentially higher-grade ore than the reserve grade, it may be possible to add to the currently estimated two-year mine life of Escondida. Discoveries of a southwestern extension to the Escondida high-grade zone and the new northeast Escondida high-grade zone should provide additional ore for mill processing, the company says.

Other projects on the same property, such as San Carlos, 2-3 km northeast of Escondida, show evidence of high-grade ore with similar characteristics to the high-grade Escondida ore.

As a standalone project, the economic benefit of the mill would be robust, assuming a gold price of US$700 per oz., the company said. Factoring in the company’s 5% net smelter return royalty, and applying the national tax rate of 28%, the project could yield an after-tax internal rate of return (IRR) of 101% and a net present value (NPV) at a 5% discount rate of US$22.6 million. After-tax NPV at 5% using a gold price of US$900 per oz. would be about US$34.5 million with an after-tax IRR of 150%.

Alamos has already acquired some of the mill components it needs and construction is scheduled to begin in 2010. The first mill production is forecast to be in the fourth quarter of 2011.

In addition to the capital cost of the mill and related equipment, the mine plan calls for the prestripping and removal of 27 million tonnes of waste. Prestripping work is expected to begin in the third quarter of this year and to be completed by the third quarter of 2011.

In early June, Alamos Gold said it was increasing its 2009 exploration budget for the Mulatos district by 43% to $10 million. With the bigger budget, Alamos plans to drill at least 65,000 metres in 2009 within the Mulatos district, which is nearly double the 36,800 metres (in 203 holes) that it drilled last year. So far this year, Alamos has drilled over 34,500 metres in more than 200 drill holes.

Alamos recently completed 3,700 metres of reverse-circulation infill drilling over 22 holes within the Mulatos pit to acquire additional data for the block model and delineate the low-recovery sulphide zone present beneath the pit.

Hole AM045, an infill hole in the northwest corner of the Mulatos pit, contained a 141.8-metre interval grading 7.81 grams gold per tonne, including a 33.5-metre interval grading 23.19 grams gold. The lower portion of the interval is beneath the floor of the optimized Mulatos pit.

In addition, drilling at Escondida for 2009 is nearly completed and has discovered a new highgrade zone to the northeast and a southwest extension of the highgrade Escondida zone. These zones are not fully accounted for in the company’s 2008 reserve and resource statement, but are expected to be incorporated into the company’s 2009 reserve and resource statement as part of the Mulatos pit area. The newly discovered high-grade zone is 100 metres northeast of the faulted limit of the main Escondida zone and overlain by 125 to 150 metres of cover.

Drilling has fully delineated this zone and the drill-indicated dimensions have increased to 70 metres along strike, 50 metres in width, and up to 15 metres in thickness. Although this new zone is deeper than the highgrade Escondida zone, it is expected to increase the life of the milling operation.

The southwest extension is at a depth of 70 to 80 metres and drilling has indicated a localized extension of the high-grade Escondida zone. Drill-indicated dimensions are 30 metres along strike, 30 metres in width, and up to 8 metres thick. This extension is shallower than the high-grade Escondida zone and is expected to add to the mine life of the zone.

At Cerro Pelon, meanwhile, definition and infill drilling on 25- metre centres was expected to be complete by the middle of June. The 2009 core drilling program has delineated a continuous oxidized zone of gold-bearing vuggy silica that is 250 metres long, 30 to 80 metres wide, and 70 to 150 metres thick, and that typically grades between 2 and 3 grams gold per tonne.

A resource estimate for Cerro Pelon is expected during the second half of 2009 and the majority of resources are expected to be classified within the measured and indicated categories.

At presstime, Alamos Gold was trading at about $9.35 per share, in a 52-week trading range of $3.50- 10.12.

The Toronto-headquartered company has 107.3 million shares outstanding.