Sulliden outlines a smaller project in Peru

While a feasibility study for ­Sulliden Gold’s (SUE-T) ­Shahuindo project in northern Peru envisions a somewhat smaller and slightly more expensive gold operation than previously thought, the project’s economics are still promising, analysts say.

The study, prepared by Kappes, Cassiday & Associates, proposes Sulliden could build a 10,000-tonne-per-day operation for US$132 million. It estimates another $48 million would be needed to sustain the mine over its 10-year life. Shahuindo is located 80 km from the city of Cajamarca.

Once up and running, Shahuindo should produce 84,500 oz. gold and 167,200 oz. silver a year. Total cash costs net of silver credits are pegged at US$552 per oz. gold.

National Bank Financial analyst Steve Parsons says he had anticipated Shahuindo would deliver more ounces at lower capital and operating costs than outlined in this latest feasibility study. He had expected annual production at 95,000 oz. gold and 145,000 oz. silver, or 95,800 equivalent oz. gold, and total cash costs at US$490 per oz. gold after silver credits. He had predicted Shahuindo would have cost around US$115 million to build.

“In response to modestly higher-than-expected capital expenditures and operating expenditures for the Shahuindo start-up scenario and the related net asset value implications, we are lowering our target price to $2 from $2.15,” he writes in a note, maintaining his “sector outperform” rating.

Gary Baschuk, an analyst at ­Raymond James, shares similar cost and size concerns, and revised his target from $2.90 to $2, following the study’s release on Sept. 26.

Commenting on the project’s initial throughput of 10,000 tonnes per day, the company says the study used only 40% of Shahuindo’s gold ounces from the total oxide resource, and adds that there’s room for expansion.

Shahuindo’s existing resource “could support a significantly higher mining rate and production profile,” Sulliden states, noting it opted to start off with a smaller mine to keep the capital costs down.

Haywood Securities analyst Kerry Smith, despite remarking that the project would require more capital than the US$100 million previously suggested, reiterated his $2.30 target and “sector outperform” rating.

Smith points out that the study indicates the project has a higher life-of-mine average gold grade and recovery than he had assumed. Shahuindo has an average grade of 0.84 gram per tonne and gold recovery of 85.8%, compared to Smith’s estimate of 0.7 gram per tonne and 81% recovery.

Even with the modest changes in production and higher start-up cost, the analysts agree that the project’s economics are still appealing.

On an after-tax basis, Shahuindo has a net present value of US$248.6 million and an internal rate of return of 37.8% using a 5% discount rate, and US$1,415 per oz. gold and US$27 per oz. silver prices.

Sulliden anticipates recouping its initial investment in a little over two years.

With the feasibility study ticked off its checklist, Sulliden is working on project financing and wrapping up its environmental and social-impact assessment report as part of Shahuindo’s permitting process. The report should be ready to submit to the Peruvian Ministry of Energy and Mines before year-end.

Sulliden plans to start mine construction in early 2013, and estimates production could kickoff in late 2013, or by September 2014.

On the feasibility news, Sulliden dropped 4% to close Sept. 26 at $1.17 in Toronto.