Sutton, Barrick review mine plans at Bulyanhulu

Barrick Gold‘s (ABX-T) proposed takeover of Sutton Resources (STT-T) has forced a change in management at the latter’s Bulyanhulu gold project in Tanzania.

The current project manager, Placer Dome Technical Services (a division of Barrick’s rival, Placer Dome [PDG-T]), will hand over the reins to Kilborn Engineering Pacific.

“This is a mine Barrick would like to build itself,” said Randall Oliphant, Barrick’s new president, when the Sutton acquisition was announced in mid-February.

Offering 0.463 of a Barrick share for one Sutton share, Barrick’s bid values the Vancouver-based junior at $525 million, or $13.25 per share, based on the major’s Feb. 16 closing price of $28.60. The deal is expected to close in late March, conditional on Barrick’s snapping up at least 75% of Sutton’s shares.

In acquiring Bulyanhulu, Barrick is having to decide whether to continue with Sutton’s 85% ownership, with the Tanzanian government holding the remainder, or boost its interest to 100% under new mining laws enacted last year. Although the first option carries with it certain tax advantages, the major appears to be leaning toward whole ownership.

“We’ve analyzed both alternatives and economically they’re about equivalent,” said Oliphant. “But we’d be most interested in owning 100%, and that’s the direction we’ll probably take.

“Bulyanhulu has lots of potential, and our approach will be very similar to what we did with Arequipa Resources [taken over by Barrick in 1996] — that is, when we get on the ground, to be as aggressive as we can, to drill lots and convert as much as possible from resource to reserve as fast as possible. As far as the timing of that conversion, that will be a function of the drilling results, but by the time production starts in late 2000, we expect to have a lot more in reserves than what’s there today.”

A 1998 feasibility study by Kilborn Engineering Pacific concluded that Bulyanhulu’s Reef 1 structure had a reserve of 10 million tonnes grading 11.65 grams gold per tonne, equivalent to 3.8 million recoverable ounces. With the recent addition of 2.9 million tonnes grading 11 grams gold to the Reef 1 West resource, the property’s total reserves and resources now exceed 21.4 million tonnes averaging 12.8 grams gold, or 8.8 million contained ounces.

Under Sutton’s original plan, underground mining would be carried out at the daily rate of 2,500 tonnes, producing between 300,000 and 385,000 oz. gold annually, plus byproduct silver and copper. At a total cash cost of US$163 per oz. gold, the deposit would be mined using a decline for the first two years, while a 950-metre shaft is sunk. A sinking hoist has already been purchased and is stored on site.

Taking into account only the 10-million tonne reserve base, the mine life was pegged at 11.5 years. However, a larger resource makes a 20-year mine life more likely.

In developing its mining plan, Sutton made allowances for the ramping up of production rates both as the workforce became better trained and as the nearby Reef 2 structure came on-stream. Toward this end, the mill buildings and the foundations were designed to accommodate additional grinding equipment with minimum disruption.

Once Barrick’s acquisition is complete, the major will complement its drilling campaign with further studies into the possibility of boosting production.

For its part, in what will likely be its final year-end results, Sutton has announced a net loss of US$2.7 million on revenue (primarily interest income) of US$2.9 million for the year ended Dec. 31, 1998. This compares with a net loss of US$9.2 million on revenue of US$1.3 million in the previous year.

Sutton attributes much of its 1998 loss to unrealized foreign-exchange losses of US$3.19 million caused by the junior’s maintenance of a high level of Canadian dollars.

During 1998, Sutton’s general and administrative expenses dropped to US$1.63 million from the US$2.4 million racked up in 1997 when the company was defending itself against litigation and a related proxy solicitation.

Last year, Sutton spent US$44.7 million on its mineral assets, up from US$19 million in 1997, bringing the total net investment in its mineral assets to US$77.6 million as of Dec. 31, 1998. As well, Sutton’s working capital stood at US$34.7 million at year-end.

Major activities that were substantially completed at Bulyanhulu in 1998 include a bankable feasibility study, a US$5-million upgrade of a 75-km access road, a 400-person camp, site earthworks, and a 50-km water pipeline right-of-way to Lake Victoria. Sutton has already purchased the pipe and pumping equipment, and intends to move 600 gallons of water per minute into mine-site reservoirs and provide about 15 offtake points for use by the local community.

The project has already received an environmental clearance permit that is consistent with World Bank standards, and an application for a mining permit is ready to be submitted.

Commenting on how quickly Barrick could expect the Bulyanhulu mining permit to be granted, Sutton President Michael Kenyon said, “The ministry of mines [in Tanzania] is thrilled to have seen the news of this transaction, so Barrick is obviously pushing on an open door, and it will be opened quickly.”

He added that Tanzania is now reaping the rewards of having implemented fair and attractive mining legislation. “It is remarkable what they have accomplished in such a short period.”