Kaminak’s Coffee PEA is the start of something big

VANCOUVER — President and CEO Eira Thomas calls Kaminak Gold’s (TSXV: KAM; US-OTC: KMKGF) new preliminary economic assessment (PEA) of its Coffee gold project in the Yukon one more step in defining a “potential new gold district” highlighted by abundant, shallow, high-grade oxide gold mineral­ization.

The PEA models a $305-millin heap-leach gold mine located 130 km south of Dawson City that would operate at 5 million tonnes per year, and produce an average 167,000 oz. gold annually over 11 years at all-in sustaining costs of US$688 per oz.

“What underpins our strategy is that the deposits are completely open along strike and to depth. We opted not to start small and stretch the mine life out to fifteen or twenty years because we know we’re going to be adding resources sooner rather than later,” Thomas says during an interview at Kaminak’s Vancouver offices.

“We actually went into the process looking at different development options due to the mood of the market and emphasis on lower capital costs. So we started thinking smaller in scale, but quickly determined it wasn’t a small project, and we’d optimize the economics by going bigger. That doesn’t preclude us from going back and looking at smaller-scale opportunity if the market continues to be challenging,” she adds.

From a 59-million-tonne global oxide resource, Kaminak zeroed in on 53.4 million tonnes of oxide material grading 1.23 grams gold per tonne for 1.9 million recoverable oz., with a strip ratio of 4 to 1.

Kaminak’s director of mine development Fred Lightner says it was clear early on that the Coffee project would benefit from economies of scale, especially because $109 million would need to be spent to build infrastructure to support the mine, including a 250 km, all-season access road and a diesel power plant.

The benefit of the larger scale of operations shines through in the projected after-tax payback period of just two years.

According to the PEA, Coffee would produce 231,000 oz. gold in its first year of commercial operation, and project would generate total gross revenue of $2.4 billion and operating cash flow of $1.2 billion.

“The mine will actually start in the Latte deposit because it’s the closest to where we think the heap-leach facility will be located,” Lightner says. “It also has the lowest strip ratio, so it’s a good starting point for getting the mine up and going. Then we move into the Double Double deposit, which is much higher grade, but is also a higher strip ratio.

“So for the first two years we’re seeing significantly higher grades than average, which gives us that big flush of production in the early years. We knew that due to our location and capital costs, we’d need to generate enough revenue to get a strong payback.”

At US$1,250 per oz. gold Coffee would carry a $330-million after-tax net present value (NPV) at a
5% discount rate, and a 26%
internal rate of return (IRR). At a US$1,400 per oz. gold price, the NPV and IRR shoot up to $465 million and 33%.

Sustaining costs would total $146 million, while life-of-mine processing costs are pegged at $6.67 per tonne leached.

The base case assumes an owner-operated, open-pit mine with a three-stage crushing circuit, a valley fill heap-leach facility and a carbon adsorption gold-recovery plant to produce gold doré.

Much of the PEA is based on Kaminak busy year in 2013, when it completed 302 holes totalling 55,500 metres, and nailed down metallurgical test work.

 By the end of the year Kaminak had bumped Coffee’s global oxide resources to 8.6 million indicated tonnes grading 1.75 grams gold per tonne for 480,000 contained oz., and 50.4 million inferred tonnes averaging 1.28 grams gold for 2.1 million contained oz. The company also reported column-leach gold recoveries of between 90% and 92% on oxide material from its Latte and Supremo zones.

“Obviously managing risk is absolutely critical,” Thomas says. “For us capital couldn’t get out of control, it needed to be a project we could build ourselves.

“It was really a balancing act, and that’s how the PEA evolved to become a little larger than we initially anticipated. We believe it took us down the lowest-risk path, and our message is that we tried to put something on the table that is doable. We’re not reaching here, as we think it’s a conservative study that has a lot of room for optimization and improvement.”

What is particularly appealing about the project is Coffee’s extensive growth potential.

Vice-president of exploration Tim Smith has a budget of $3 million this year to chase more than 20 km of gold-in-soil anomalies outside of the resource area.

Smith says that if results are positive, he’ll likely ask the board for more exploration money. His team will target near-surface oxide ounces with an aim to extend Coffee’s mine life.

He reiterates that the PEA is just “a snapshot of the [project] economics at the present time, but it will continue to grow.”

Targets include the Cappucino zone, where a large 2-by-650 metre anomaly returned 26.5 grams gold-in-soils over 4.6 metres; the
Arabica gold-in-soil anomaly, located 1.2 km east of the Supremo T7 zone, where maiden drilling cut 11 metres of 3.4 grams gold in 2013; the Americano zone, where 10 widely spaced holes intersected gold mineralization in 2010; and the Espresso zone, which hosts an untested 2 km by 800 metre gold-in-soil anomaly, 1.5 km southeast of the Kona zone.

“We want to hit some of the peripheral targets defined by high-grade, gold-in-soil anomalies. For example, Cappuccino has returned the highest-grade soil samples ever at Coffee, and we’ll have the drill out there shortly,” Smith says. “We have big, broad and consistent geochemical anomalies to the north of the resource, with absolutely no drilling to date.”

He notes that large parts of the project are “under-drilled, considering the acreage.” For example at the Kona target Kaminak has drilled only 300 metres of strike on a soil anomaly that is 1 km long.

Kaminak shares rose 27%, or 18¢, on 1.6 million shares traded during the two days after the Coffee PEA was released, and they traded at 84¢ at press time.

The company reported working capital of $16.5 million at the end of March after closing an $11.5-million private placement, wherein it issued 14 million units at 82¢ per unit. Each unit consists of a share plus half a warrant, with a full warrant entitling the holder to buy another share for $1.20 within a year.

Kaminak has traded within a 52-week window of 46¢ to $1.05. With  93.4 million shares outstanding, it has an $80-million market capitalization.

“At this stage we think the way to [add value] is to build a team and build the mine, and use it as a foundation for growth,” Thomas says.

“That doesn’t mean we aren’t talking with other companies about the project. There is a high level of interest in Coffee, and I think that interest will increase now that we’ve released the PEA.

“We believe we have a whole new gold district. Each and every target represents potential discoveries that could contribute ounces into a feasibility study. This isn’t ten years down the road — we’re drilling targets we think could meaningfully impact economics today.&r
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