New Armenian legislation is a plus for Lydian

Lydian International (TSX: LYD; US-OTC: LYDIF) says new mine ramp gradients will help it save up to $100 million in operating costs, and trim total cash costs to US$600 per oz. from US$642 per oz. at its Amulsar gold project in southern Armenia.

The increase in the mine ramp gradients for haul roads from 7% to 10% brings the country’s mining regulations into better alignment with international standards, Lydian says, and the company believes that the ruling will change its mine design and improve project economics.

Under the new rules, Lydian anticipates that the strip ratio of waste-to-ore in its 2014 feasibility study will fall from 2.8:1 to 2.5:1. This would reduce waste-rock mining by up to 30 million tonnes — more than a 10% decrease — as well as reduce haul distances, management says. There is also potential for a reduced equipment fleet, and the possibility of a minor increase in ore mined and gold ounces recovered by deepening the project’s three open pits. Lydian has already engaged AMC to redesign the pits based on the legislation.

Douglas Tobler, Lydian’s chief financial officer, says in an interview that the previous 7% rule was one of the legacies of Armenia’s history as part of the former Soviet Union, and is yet another sign that Armenia is keen to develop its mining sector.

“They’re very much at the early stage of mining activities in the country,” Tobler says, “and they’re trying to work their way through all of that stuff.”

Tobler notes that the International Finance Corp. has helped the Armenian government set up its mining law, which was updated at the beginning of 2012.

“From a mining code perspective, Armenia operates very much like other countries I’ve worked in,” he says, when asked to compare how Armenia stacks up with other jurisdictions.

In terms of its tax code, Tobler describes Armenia as “not the best, but not the worst.”

The country has put in place a two-layer royalty structure. It has a 4% royalty based on gross revenue and a 12.5% royalty on earnings before interest and taxes. On top of that is a corporate tax rate levied at 20%. Companies also get deductions for the royalties as they move through the calculation process with the net effect of a 35% tax rate, he explains.

“By the time you get to the bottom line on a combined royalty and tax rate, they kind of fall right into the middle of the pack,” he continues.

As far as permitting is concerned, despite some hiccups about the site of the company’s proposed heap-leach facility in 2013, Lydian has been “very pleased,” with the process and outcome, Tobler says.

Lydian submitted its application for a mining right in July 2014 and received approval in November the same year. Public hearings took place between August and September, a technical expert review was completed from August to October and the technical safety program was approved in August. In October, the Ministry of Nature Protection approved Lydian’s environmental impact assessment.

The approvals cover project infrastructure, including crushers, conveyors and a heap-leach facility; all three open pits; the footprint within which the operating activities will take place; and the nature and duration of mining operations.

On the infrastructure front, the project — just 115 km southwest of the capital of Yerevan in the country’s central north–south corridor — has access to electricity, natural gas, water and fiber optics, which brings high-speed internet and Wi-Fi right into the camp. “As a small country, infrastructure there is by definition very close,” Tobler says.

The 2014 feasibility study envisioned gold production averaging over 200,000 oz. per year over a 10.4-year mine life. Initial capital costs were estimated at US$426 million, with a 20.2% after-tax internal rate of return and a US$306-million net present value (NPV), based on a 5% discount rate and US$1,250 per oz. gold price. The processing facility will process 10 million tonnes per year and the company expects to generate more than US$570 million in after-tax cash flow in the first five years.

Amulsur’s measured and indicated resources stand at 122.4 million tonnes grading 0.77 gram gold per tonne for 3 million contained oz. gold and 3.5 grams silver per tonne for 13.9 million contained oz. silver. Inferred resources add 106.2 million tonnes averaging 0.59 gram gold for 2 million contained oz. gold and 2.6 grams silver for 8 million contained oz. silver.

Shareholders include Sprott, IFC, European Bank for Reconstruction and Development, Franklin, Van Eck Gold Fund, Invesco, Fidelity and RBC.

Tobler says construction will start in earnest once the company secures financing, which he hopes will be before year-end. Lydian is also undertaking a value-engineering exercise to see whether it can cut the capex down from the estimated US$426 million.

The company is in dialogue with a number of international financial institutions including the IFC and the EBRD, and is also talking to commercial banks and vendor financing services, financing companies and several private equity groups that could provide various forms of financing.

“Once we understand the debt-financing side of the package, we can go out and raise the balance of the equity,” Tobler says. “Nothing is easy in the current market, but given the level of interest we have seen from lenders and some of the private equity groups that are expressing interest, it is a manageable task.”

Tobler adds that Amulsar is “definitely a good project,” and that “if a project is going to get built in this environment, this should probably be in the top five.”

“If you were to go around and look at projects at our stage — with a feasibility study completed and approaching construction, and in terms of the quality of the resource, the potential expansion of the resource, and with something that [with the legislative changes] is now looking like total cash costs in the range of US$600 per oz. — there are not many projects like that out there.”

Tara Hassan of Haywood Securities describes the Amulsar project as “uniquely positioned,” as it is “one of only a handful of larger scale, heap-leach projects globally set to become a producer in the mid-term.”

She writes in a research note that “we believe the project’s attractive economics and resource upside will attract the required financing, addressing one of the final hurdles.”

Andrew Kaip of BMO Capital Markets notes that according to his research analysis, “changing the life-of-mine strip ratio increases the Lydian 10% nominal NPV at spot prices by several percent,” and writes in a comment to clients that “the overall impact of the changes could be more significant, once full details of the changes on an annual basis are released in 45 days.”

At press time, Lydian was trading at 51¢ per share within a 52-week range of 41.5¢ to $1.38 per share.

The company has 188 million shares, fully diluted.