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The mining newspaper for Alaska and Canada's North
Gas pipeline pushes anticipated Donlin capital costs to US$7B; NovaGold considers copper company to gain value from Galore, Ambler
Preliminary estimates released by NovaGold Resources Inc. in early September plants an anticipated US$7 billion price tag on building the facilities needed to mine the 38-million-ounce Donlin Creek gold deposit. That is about US$2.5 billion more than was calculated for a feasibility study completed in 2009.
Though the preliminary capital costs seem staggering, both NovaGold and its equal partner in Donlin Gold, Barrick Gold Corp., seem confident the feasibility study currently underway will outline a project with positive economics.
"The updated study is expected later this year and we anticipate permitting will commence shortly after that," Barrick Regional President, North America Greg Lang said a day after the estimated costs were announced.
"The fact that Barrick has expressed its desire to proceed with the permitting process to advance the project is a major plus for our company and our shareholders. We are proud to be a partner of Barrick, a company with a solid operating track record and financial strength," said NovaGold President and CEO Rick Van Nieuwenhuyse. "We look forward to developing Donlin Gold into one of the largest and best gold mines in the world."
The preliminary cost to develop Donlin Gold comes just two months after a C$5.15 billion cost estimate for construction at Galore Creek, an enormous copper-gold project owned equally by NovaGold and Teck Resources Ltd.
$1 billion pipeline
After mulling over the 2009 development plan for Donlin Gold, Barrick and NovaGold decided to take the project back to the drawing board. This time around the assessment is considering the economics of powering the operation with natural gas, as opposed to the original plan which required diesel to generate the vast quantities of electricity needed.
"The cost of producing a kilowatt of power on-site with gas versus diesel is half," Van Nieuwenhuyse explained. "This is a huge mine; it will be consuming 85 megawatts of power, which is enough power for a city of 120,000 people."
In addition to lowering the cost of producing power, the delivery of fuel via a pipeline is logistically simpler and more reliable than the original plan of barging diesel to the remote site.
According to preliminary estimates, it will cost US$1 billion to build the natural gas pipeline from Cook Inlet inland to the proposed mine site located 500 kilometers (300 miles) to the northwest. The outstanding US$6 billion of capital costs are for mine-development at the Kuskokwim-area project.
Lang told investors Sept. 12 that the increased costs for mine development at Donlin Gold are attributed to a general rise in the prices of things like labor, steel and concrete. He also said guidance for gold produced at the operation has not changed, indicating that the size of the operating parameters will be similar to those considered in the 2009 study.
The earlier feasibility study forecasts a US$440 per ounce operating cost but it is too early to know how much labor and other costs will offset the lower price of generating electricity with natural gas.
More gold, higher prices
While the cost of putting the mine into operation has climbed by nearly 56 percent, the gold price has doubled from the US$890 per ounce average that Barrick and NovaGold used to complete the original Donlin Gold feasibility study.
"Since April 2009 the price of gold has more than doubled, yet capital costs have increased in line with the industry trends," said Van Nieuwenhuyse. "From that standpoint, the increase in the projected capital cost represents a fraction of the increase in the intrinsic value of the gold endowment at Donlin Gold, without regard to the potential expansion of the resource that Barrick referenced. The addition of the gas pipeline is especially good news, as we believe this will add long-term benefits to the project."
According to the 2009 feasibility study, Donlin Gold would produce about 26.2 million ounces of gold, or an average of about 1.25 million ounces per year, over a 21-year mine life. Since that time the reserves at the deposit have increased by 15 percent, from 29.3 million ounces to 33.6 million ounces.
Extrapolated out over the estimated 30 million ounces of gold that would be recovered from current reserves, the capital costs would be in the range of US$235 per ounce of gold recovered.
In addition to reserves, Donlin has about 8.7 million ounces of gold in resources and the pit is open at depth, to the east and along a 5,000-meter strike to the north.
"In addition to the already significant resources, the exploration potential is high. Several areas have already been identified, with the potential to extend the mine-life. There are almost 40 million ounces identified here and the deposit is open to the north and the east - and is only limited by the current drilling," Lang said.
During a Sept. 15 investor presentation in Vale, Colo., Van Nieuwenhuyse touted this exploration upside.
"I am an absolute believer that it will be a 100-million-ounce (gold) district before it is all said and done," the NovaGold CEO said.
He added, "The vision I have for Donlin Gold is: You will double the throughput from 55,000 to 110,000 (metric tons), and you will be producing well over 2 million ounces of gold annually for 50 years."
Enhancing Galore
Donlin Gold is not the only multibillion-dollar project NovaGold is advancing toward development. According to a July prefeasibility study for Galore Creek, capital costs for construction at this northern British Columbia copper-gold project is anticipated to be US$5.16 billion.
The project envisioned in the PFS is forecast to produce 6.2 billion pounds of copper, 4 million ounces of gold and 65.8 million ounces of silver over about an 18-year mine life with cash costs averaging US80 cents per pound of copper at base price case assumptions of US$2.65 per pound copper, US$1,100 per ounce gold and US$18.50 per ounce silver and a foreign exchange rate of 1.11 CAD/USD.
"The key thing about Galore is the low cash costs of producing a pound of copper," Van Nieuwenhuyse points out Sept. 15.
Using July prices of US$4.44 per pound copper, US$1,613 per ounce gold and US$40.34 per ounce silver and foreign exchange rate of 0.949 CAD/USD, the average cash costs drop to about US42 cents per pound of copper.
The PFS configuration moves the 95,000-metric-ton-per-day mill to a valley adjacent to the Galore Creek Valley that hosts the deposit thereby increasing flexibility to enable open-pit mine expansion, higher mill throughput and additional exploration.
To accommodate the increased scale and scope of the operation outlined in the PFS, NovaGold and Teck Resources Ltd. are advancing an enhanced plan for Galore Creek that includes increasing the size of the copper-gold-silver reserves.
"In completing the prefeasibility study we recognized that is about 200 million tons of ore that wasn't coming into the mine-plan," Van Nieuwenhuyse explained.
The enhanced plan envisions upgrading these resources to reserves by expanding the pit to encompass resources located in the adjacent Bountiful zone.
Currently, Bountiful contains an intermingled assortment of inferred, measured and indicated resources.
Galore Creek Mining Co., a partnership held equally by Teck and NovaGold, approved a C$30.5-million budget to carry out further work at Galore Creek during the second half of 2011. Plans include infill drilling to convert inferred mineral resources to measured and indicated categories, geotechnical drilling on the tunnel alignment and geotechnical drilling in pit-expansion areas.
The enhanced plan also considers the addition of a second semi-autogenous grinding mill in the fifth or sixth year of operations to keep the operation processing at the 95,000-metric-ton-per-day rate as harder rock types are expected to be encountered as the pit deepens.
The enhanced plan also will re-evaluate two other areas of the prefeasibility study: the use of a pipeline to transport concentrate to the highway; and alternative port facilities. Both issues are important elements for the project description and scope for permitting.
If put into production as contemplated in the PFS enhanced plan, the Galore Creek mine is projected to become both the largest copper mine and the largest silver mine in Canada.
"The results of the prefeasibility study clearly indicate that Galore Creek is a very valuable asset," said Van Nieuwenhuyse. "The project's scale, long life, low operating costs and exploration upside make Galore Creek a significant value driver for the company."
NovaCopper?
Looking ahead at needing some US$6 billion to fund its 50 percent share of the capital costs to get Donlin Gold and Galore Creek in production, NovaGold is investigating how it can squeeze the most value out of its three primary assets.
The answer may lie in spinning its two copper projects - Galore Creek and Ambler - into a new company.
"NovaGold has substantial and very valuable copper assets," said Van Nieuwenhuyse. "In the current supply-demand and commodity price environment, these copper assets, comprised of the company's 50 percent share of Galore Creek and the wholly-owned Ambler project are not in my view fully reflected in NovaGold's current market capitalization of about US$2.2 billion."
Ambler blankets some 68 kilometers (42 miles) of a belt of precious metals-enriched volcanogenic massive sulfide mineralization that stretches along the southern slope of the Brooks Range.
Arctic - the crown jewel of a number of VMS deposits identified across this extensive land package - currently has an indicated resource of 16.8 million metric tons averaging 4.1 percent copper, 6 percent zinc. The deposit has an additional 12.1million metric tons averaging 3.5 percent copper and 4.9 percent zinc in the inferred resource category.
The potential of building a mine at the Arctic deposit is underscored by a preliminary economic assessment prepared for NovaGold in April.
The study envisions a 4,000-metric-ton-per-day-mine producing some 1.7 billion pounds of copper, 2 billion pounds of zinc, 291 million pounds of lead, 266,000 ounces of gold and 22 million ounces of silver over a 25-year mine-life.
Using long-term metal prices of US$2.50 per pound copper, US$1.05 per pound zinc, US$1.00 per pound lead, US$1,100 per ounce gold and US$20 per ounce silver, the calculation produces a pre-tax net present value (at an 8 percent discount) of US$718 million with an internal rate of return of 30 percent; and a post-tax NPV (8 percent) of US$505 million with an IRR of 25 percent.
"Management believes the recently completed economic analyses of Galore Creek and Ambler clearly demonstrate that NovaGold's copper assets are considerably undervalued having regard to their size, favorable geopolitical location, projected long life and low operating cost," Van Nieuwenhuyse said.
Moving these projects into a copper subsidiary is one option being considered to bridge this valuation gap.
Such a company would produce some 228 million pounds of copper at a weighted average of US83 cents per pound, assuming development of the projects based on the Galore Creek PFS and the Ambler PEA.
NovaGold is consulting the financial expertise of J.P. Morgan Securities LLC and RBC Capital Markets to identify and explore various alternatives of maximizing the greatest value from these assets.
"We are effectively looking at our whole copper portfolio and deciding what is the best way to maximize that value for our shareholders," Van Nieuwenhuyse told Mining News.
Over his more than 16 years of covering mining and mineral exploration, Shane has become renowned for his ability to report on the sector in a way that is technically sound enough to inform industry insiders while being easy to understand by a wider audience.
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