Arctic open-pit mine looks positive

A new preliminary economic assessment has stripped away the idea of underground mining as the only means to recover the copper, zinc, lead, silver and gold from the volcanogenic massive sulfide deposit at the Arctic deposit. Instead, the scoping study has encouraged NovaCopper Inc. to favor an open-pit mine scenario as it advances the Northwest Alaska project towards a pre-feasibility study.

"We think this (PEA) demonstrates that the open-pit is a viable alternative; and I think with further study as we work toward a feasibility study, we will hone in on that decision," NovaCopper President and CEO Rick Van Nieuwenhuyse explained during a July 30 presentation on the Arctic PEA.

At an 8.4:1 strip ratio, the amount of waste material that needs to be removed tacks on a substantial expense, but once the high-grade VMS mineralization is reached, the increased milling rate and mining simplicity helps offset the added mining costs.

The open-pit scenario produces a net present value for Arctic topping US$537 million and is likely to fit well with the potential future development of Bornite, a copper-rich carbonate-replacement deposit situated about 17 miles (27 kilometers) southwest of Arctic.

Arctic and Bornite are united under the Upper Kobuk Mineral Projects, a partnership between NovaCopper and NANA Corp., the Alaska Native regional corporation that represents the Inupiat people of Northwest Alaska.

The alliance provides NANA with the opportunity to benefit from the exploration and potential development of the Arctic deposit and VMS prospects across the 70-mile (110 kilometers) blanketed by NovaCopper's 90,624 acres of state, federal and patented mining claims.

In return, NovaCopper is afforded the opportunity to investigate Bornite and explore other prospects across a copper-cobalt belt that is hosted primarily on lands owned by NANA.

In early August, NANA and NovaCopper met at the Upper Kobuk Mineral Projects to discuss the best path to advance Arctic as a project and the Upper Kobuk as a district.

Open-pit scenario

The PEA for the Arctic VMS deposit is based on a conventional truck-and-shovel mine, feeding a 10,000-metric-ton-per-day mill that produces three concentrates - copper, zinc and lead.

An updated resource prepared for the open-pit scenario estimates Arctic has an indicated resource of 23.85 million metric tons averaging 3.26 percent (1.71 billion pounds) copper, 4.45 percent (2.34 billion lbs.) zinc, 0.76 percent (400 million lbs.) lead, 0.71 grams per metric ton (550,000 ounces) gold, and 53.2 g/t (40.8 million ounces) silver. Additionally, Arctic has an inferred resource of 3.63 million metric tons averaging 3.22 percent (239 million lbs.) copper, 3.84 percent (285 million lbs.) zinc, 0.58 percent (43.2 million lbs.) lead, 0.59 g/t (60,000 ounces) gold.

To get to this rich layer of VMS mineralization, roughly 300 million metric tons of waste material would be removed; including nearly 50 million metric tons of waste that would need to be mined prior to milling.

"We are looking at a series of flat ore-zones, they are polymetallic deposits, they are 100 to 200 meters below the surface," explained Van Nieuwenhuyse.

"At the very early stages of the mine-life you are dealing with a fairly narrow zone of mineralization and you really don't get into the guts of the deposit until about year-four," he added.

Mining costs are estimated at US$3.02 per metric ton of material mined, or US$28.40 per metric ton of ore fed into the mill.

When queried about the per-ton mining costs, Erin Workman, director technical services, said Red Dog and other northern latitude mines were used as a benchmark.

"Tetra Tech was our PEA consultant, and they looked a series of projects in Alaska that are in operation or studies that they have recently completed and produced in the last year, and combined them to come up with our aggregated result," she explained.

Due to the high strip ratio the operation is not expected to generate cash flow until the second year of operation.

"We have a slow ramp-up of ore-tonnes delivered to the mill in the early years due to the overall deposit geometry. This is something we certainly will be looking at to perhaps use larger equipment in the stripping of the waste to see if we can improve payback and IRR of the project," explained Van Nieuwenhuyse.

The mill is envisioned to be located at the upper end of the valley to the northwest of the Arctic deposit and a tailing pond would stretch out in the valley below the mill, pit and non-acid-generating waste stockpile. Potential acid-generating waste and tailings would be stored in the tailings facility.

This set-up provides the 90-ton trucks envisioned in the PEA with a downhill haul during the first eight years of operation; it is not until year nine that the material would need to be lifted out of a pit.

Based on preliminary metallurgical work, the mill is currently anticipated to recover 87.1 percent of the copper, 86.8 percent of the zinc, 74 percent of the lead, 80.4 percent of the silver and 64.7 percent of the gold. Most of the precious metals will report to the copper and lead concentrates.

Over the 12-year mine-life contemplated in the PEA, Arctic's annual payable production is projected to be 125 million pounds of copper, 152 million lbs of zinc, 24 million lbs of lead, 29,000 ounces of gold and 2.5 million oz of silver. This comes to a total of 1.5 million lbs of copper, 1.8 million lbs. of zinc, 289,000 lbs of lead, 30.5 million oz of silver and 349,000 oz of gold.

Copper accounts for 60 percent of the net revenues, zinc and lead account for 25 percent, silver and gold make up the remaining 15 percent.

"We think there is significant value in these precious metal streams," mentioned Van Nieuwenhuyse.

Positive economics

The initial capital expenditures to develop a mine at Arctic are estimated to run US$717.7 million. Adding in sustaining capital of US$164.4 million, the total estimated capital expenditures over the 12-year mine life are anticipated to total US$882.1 million.

The base case scenario for the PEA utilizes long-term metal prices of US$2.90/lb for copper, US85 cents/lb for zinc, US90 cents/lb for lead, US$22.70/oz for silver and US$1,300/oz for gold.

Based on these pricing assumptions, it the C1 cash costs of producing a pound of copper at Arctic is estimated to run C62 cents. This includes on-site mining and processing costs, road tolls, transport, royalties and is net of by-product credits. When the capital costs are included, the all-in cost to mine a pound of copper at Arctic is US$1.26.

The PEA estimates the open-pit mine scenario would produce an after-tax net present value (8.0 percent discount) of US$537.2 million; an after-tax internal rate of return of 17.9 percent; and an after-tax payback of 5.0 years.

"The results of the PEA show that the Arctic deposit has positive economics even in today's low metal price environment. The project has excellent margins with annual average payable production of about 125 million pounds of copper at an average cash cost of US62 cents per pound of copper net of by-product credits. On that basis, once in production as contemplated by the PEA, Arctic would be in the lowest quartile among copper producers in terms of cash costs," said Van Nieuwenhuyse.

The PEA was prepared on a 100 percent ownership basis.

Under the agreement between NovaCopper and NANA, the Native corporation has the right, following a construction decision, to elect to purchase a 16 percent to 25 percent direct interest in the project or receive a 15 percent net proceeds royalty. Whether NANA chooses direct ownership or NPR, it receives an additional 1 percent net smelter royalty in exchange for a surface use agreement.

"While the economics of the project are positive, I believe that some of the project parameters, such as metallurgical recoveries, capital and operating costs, can be improved, and we will continue to focus on these aspects going forward," explains Van Nieuwenhuyse.

Bornite synergies

Aside from further refining the project parameters, one of the most advantageous blue-sky prospects for the economics of mining the Arctic deposit may it the fact that it may not be the largest of the copper-rich Upper Kobuk Minerals Projects to be developed. Bornite, an exploration-stage project located 16 miles (26 kilometers) southwest of Arctic, may bolster the economics of developing the VMS deposit.

"Right now we have not incorporated any potential synergies with Bornite. We do think that is one of the upsides that we will be taking a look at as time goes forward," explained Van Nieuwenhuyse.

Bornite has two copper-rich zones, Ruby Creek and South Reef, separated by a major northeast-trending fault known as Iron Mountain.

Ruby Creek is a near-surface zone with an indicated resource of 6.8 million metric tons averaging 1.19 percent (179 million lbs) copper and an inferred resource of 47.7 million metric tons averaging 0.84 percent (883 million lbs) copper. South Reef, a richer but deeper zone, has an inferred resource of 43.1 million metric tons averaging 2.54 percent (2.4 billion lbs) copper.

NovaCopper's 2013 exploration program focused on expanding and upgrading these adjacent copper-rich zones.

"We just finished up drilling on-site - this year's drilling was all focused on Bornite," Van Nieuwenhuyse explained.

With assay results from the drill program still pending, the NovaCopper CEO was restrained from talking too much about the exploration potential for Bornite. One comment, though, indicates that the company hasn't found the boundaries of the deposits.

"We are still finding more and more copper at Bornite, so we are still trying to size and scale the system there," said Van Nieuwenhuyse.

If Bornite follows Arctic toward development, it may enhance the prospect of putting more equipment to work stripping the waste rock off the VMS deposit.

"We are going to look at an opportunity to increase the mining of the waste rock material (at Arctic) to remove it quicker. It also may include stockpiling in those early years," said Van Nieuwenhuyse.

If the extra trucks, shovels and other equipment needed to speed up the removal of the waste rock at Arctic could be utilized to mine the Ruby Creek zone at Bornite, then the economics of both operations could be enhanced through this cooperation.

Ambler road

One of the biggest synergies for the Upper Kobuk Mineral Projects is the shared infrastructure. While these copper-rich deposits have been known for decades, they have remained un-mined primarily because they are isolated in Alaska's Arctic. Multiple projects in this remote region would help ensure the repayment of building a 211-mile- (340 kilometers) long road, extending west from the Dalton Highway to the project area.

In recent years, the State of Alaska has invested nearly US$10 million towards defining an optimal corridor to the Ambler Mining District; establishing a right-of-way; and beginning the environmental and permitting work to build the road to Ambler. The 2014 state budget includes another US$8.5 million to continue this work.

Unlike previous funding for the Ambler Mining District Road, where the funds were appropriated to the Department of Transportation, this year's budget is designated for the Alaska Industrial Development and Export Authority, a state-owned agency that provides various means of financing and investment to promote economic growth and diversification in Alaska.

In April, NovaCopper and AIDEA entered into a memorandum of understanding that formalizes the roles of each party as they relate to permitting the Ambler Mining District Industrial Access Road and developing one or more mines at the Upper Kobuk Mineral Projects.

"The completion of the MOU with NovaCopper is beneficial, not just for NovaCopper, but for all Alaskans because the development of the Ambler mining district is expected to produce significant economic benefits for the state and, most importantly, for the communities of Northwest Alaska," said AIDEA Executive Director Ted Leonard.

The MOU also allows AIDEA to investigate various ways to fund the construction and maintenance of the Ambler Road.

"The next step is the commencement of the permitting process for the Ambler Mining District Industrial Access Road, which we expect will be initiated before year's end," Van Nieuwenhuyse said upon signing the MOU.

The working assumption in the Arctic open-pit PEA study is that AIDEA would arrange financing in the form of a public-private partnership to construct and maintain the road to Ambler. AIDEA would charge a toll to multiple mining and industrial users (including NovaCopper's Arctic Project) in order to pay back the costs of financing the road to Ambler.

AIDEA formed a similar public-private partnership with Teck Resources Ltd. to build the Delong Mountain Transportation System, a 52-mile- (84 kilometers) long road, storage and port facilities used to ship zinc and lead concentrates from the Red Dog Mine in Northwest Alaska to world markets.

Although the capital costs of the road have not been finalized, discussions with AIDEA have provided NovaCopper with a sense of the costs for using the road.

The amount paid in tolls by any user of the road to the Ambler mining district will be affected by the cost of the road, its financing structure, and the number of mines that would use the road to ship concentrates to a port in Alaska. For the purposes of this PEA study it has been assumed that a toll would be paid based on a US$150-million 30-year bond at a 5 percent interest rate, which would result in the Arctic open pit project paying approximately US$9.7 million each year for its 12-year mine life. The toll payments are assumed in the PEA to commence when the project has reached commercial production.

"AIDEA is the lead proponent for the permitting, financing and construction of an industrial access road to the Ambler mining district and the completion of this PEA provides further impetus for AIDEA to move forward on the permitting and construction of the Ambler access road," said Van Nieuwenhuyse.

North Slope LNG

The Ambler access road is not the only AIDEA project that could benefit the economics of Arctic and other Upper Kobuk Mineral Projects. A liquefied natural gas facility currently under review by the development agency could provide the project with less expensive fuel.

The LNG facility is part of the Interior Energy Project, a plan introduced by Alaska Gov. Sean Parnell to lower the notoriously high heating and electricity costs in the Fairbanks region of Interior Alaska. Senate Bill 23, which provides AIDEA the ability to finance up to US$275 million of the project, received unanimous approval in both the Senate and House in April.

Open-pit mining of the Arctic deposit is projected to require 15 megawatts of peak load power. The PEA assumes five 3.6 MW diesel generators will provide this electricity. Onsite power costs using diesel are estimated to be US32.2 cents/kWh, assuming a diesel price of US$4.47 per gallon.

"Nearly half of our costs are related to power generation and the base case assumes that we will deliver diesel fuel to site from Fairbanks. We think there is a real upside here, because AIDEA is also working on construction of an LNG (liquefied natural gas) plant on the North Slope and if they actually complete that we are looking at buying LNG and converting that to gas. We think that will be lower costs and lower emissions," Van Nieuwenhuyse explained.

Taking the proposed road to Ambler, the 450 miles to deliver North Slope LNG to the Arctic project would be a slightly shorter trip than trucking gas to Fairbanks.

AIDEA is targeting the delivery of LNG to Fairbanks by the fall of 2015, making the fuel source a viable contender to be included in the feasibility study for the Arctic project, which is expected to be complete by 2016.

Author Bio

Shane Lasley, Publisher

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.

• Email: [email protected]
• Phone: (907) 726-1095
• https://www.linkedin.com/in/shane-lasley-ab073b12/