The mining newspaper for Alaska and Canada's North
The mining newspaper for Alaska and Canada's North
Tower Hill development team pursues opportunities to reduce US$1,474/oz 'all-in' gold mining costs; queues up potential partners
Building and operating a mine at the 20-million-ounce Livengood gold project would lose money at today's US$1,300-per-ounce gold price, according to the results of a feasibility study published July 23 by International Tower Hill Mines Ltd. In fact, the 100,000-ton-per-day mine outlined in the study does not break even until the gold price approaches US$1,500/oz.
International Tower Hill management, though, remains optimistic that developing the multimillion-ounce gold deposit which lies alongside a paved highway in the heart of Alaska's gold country will become economic.
"While the study results are not economically feasible in today's specific gold market, the Livengood project remains a very significant gold deposit in one of the most favorable geopolitical jurisdictions in the world; and we believe the project will be economically viable in an acceptable timeframe, when considering the timelines for permitting and development," explained International Tower Hill Mines CEO Don Ewigleben.
If the gold price returned to its 2011 peak of US$1,900 per ounce, the after-tax net present value (5.0 percent discount) for Livengood is projected to be US$1.1 billion, the internal rate of return would be 12 percent and the payback period would be 5.2 years, according to the feasibility study.
International Tower Hill is not resting the fate of the project solely on a rising gold price. The Livengood development team has identified multiple opportunities to improve the economics of the operation detailed in the feasibility study and is pursuing scenarios which would require less upfront capital to develop the mine as well as ways to reduce the operating costs.
With potential opportunities to increase the feasibility of mining the gold at Livengood left on the table, some are questioning the reasoning for releasing the feasibility study prior to pursuing these measures.
In response to one such query by an analyst, Ewigleben explained. "We have to be realistic about what we have done. We spent our shareholders' money completing a feasibility study that took us over a year; and it took us from the PEA and pre-feasibility stage using the same 100,000-ton-per-day case. That may not be the case that we are going to use going forward, but we felt it had to be mentioned to our shareholders so that they understand the setting that we are working with."
Tom Irwin, Tower Hill's vice president, Alaska, put it more succinctly, "We, as an industry, and certainly we, as a company, have to be honest."
Level of detail
The 100,000 tpd operation proposed in the feasibility study would make Livengood more than twice the size of Kinross Gold Corp.'s Fort Knox Mine, located about 45 miles (72 kilometers) to the southeast.
"This scenario was chosen to take advantage of the economies of scale and maximize the production of gold and value to the investor," explained Ewigleben.
Using a cutoff grade of 0.3 grams per metric ton, the Livengood project hosts a measured and indicated resource of 15.7 million ounces of gold; plus an inferred resource of 4.4 million ounces of gold.
At a US$1,500/oz gold price, roughly half of this gold reported to the reserves. The feasibility study includes proven reserves of 434 million metric tons averaging 0.69 g/t (9.6 million ounces) gold and probable reserves of 20 million metric tons averaging 0.70 g/t (454,000 ounces) gold.
Utilizing these reserves, the mine plan provides sufficient ore to support an operation that averages 577,600 ounces annually, or 8.1 million ounces over the 14-year mine-life anticipated in the feasibility study. During the first five years, the 100,000-metric-ton-per-day operation anticipated in the study would average 698,500 ounces of gold per year.
The initial capital expenditures to build a mine of this scale at Livengood are estimated to be US$2.8 billion, a 75 percent increase over the US$1.6 billion of capital expenditures anticipated in a 2011 preliminary economic assessment for a similar scale operation at the Interior Alaska project.
An additional US$667 million of sustaining capital would be needed over the life of the operation.
International Tower Hill management attributes the cost increases to the level of detail Samuel Engineering Inc. and AMEC Environment & Infrastructure Inc. presented in the feasibility study and additional infrastructure components not anticipated by the PEA.
"The main difference in these two projects is the idea of trust," Ewigleben explained. "We all know in this industry several companies have underestimated the cost of a project. We have made sure, to the best of our ability, that we have defined every potential cost and used those conservative numbers to avoid that trap."
In addition to the high level of detail, the feasibility study includes a couple of high-priced items not considered in the PEA.
"We need to line the tailings facility; that is a sizable cost, sizable amount of work," Irwin explained. "This company is credible, we understand the permit process up here, and we thought it would be foolish to proceed without lining the tailings facility."
The other expense not included in the PEA is a 440-worker camp. Though Livengood is only 70 paved road miles from Fairbanks, an excellent hub for skilled mining labor, the wintertime commute along the two-lane highway could become dangerous for workers and troublesome for the operation.
"We had no camp plans early on, and we are a company that believes in making sure we have shareholder value and employee safety," explained Irwin.
ITH goes all-in
In its pursuit of honesty, International Tower Hill Mines incorporated an all-inclusive metric for reporting the costs to mine an ounce of gold into the feasibility study.
"If we had continued on without allowing our shareholders to understand the leverage to gold price on this project, it would potentially be deceitful; we simply do not want that, we wanted transparency. That is also why we used the World Gold Council's 'all-in' accounting methodologies that all of the other miners are going to be using on a cost-per-ounce basis."
This "all-in costs" metric was developed by the World Gold Council to more accurately illustrate the costs to mine an ounce of gold. The all-in cost includes both capital and operating expenses when considering the per-gold-ounce mining costs of a project. Though this extra transparency is not required by law, a number of global gold miners are reporting it alongside the traditional cash costs.
The all-in costs to mine an ounce of gold at Livengood with the operation described in the feasibility study are estimated to be US$1,474. This includes US$987/oz of operating, royalty and smelting costs; US$416/oz to payback capital expenditures; US$43/oz for reclamation; and US$27/oz for taxes.
The Livengood development team is now tasked with finding ways to reduce the estimated all-in costs and improve the feasibility of the mine project.
Tower Hill believes that mill throughput and production schedule optimization studies may provide opportunities to reduce project capital costs. A lower mill throughput may offer an opportunity to enhance mill head grades in early years by a more aggressive stockpile management strategy than is assumed in the feasibility study.
The on-site mine operating costs of US$933/oz, or US$7.5 billion over the proposed 14-year life of the mine, is a key area in which the company sees an opportunity to lower costs.
"There are multiple places we believe we can save money, but I will tell you that we will concentrate strongly on our operating activities because some of the areas that were identified as opportunities seemed to move the dial the most," Ewigleben said.
Expensive power
Finding ways to lower the presumed electrical costs is one area to directly dial back the operating expenditure side of the all-in metric.
"If we can reduce our power costs, we can reduce the significant op-ex related to mining 100,000 tons per day," explained Ewigleben.
Electricity rates in Interior Alaska are notoriously high compared to other parts of the United States or even the more populous south-central region of Alaska.
As an example, Kinross Gold spent roughly US$40 million, or about US$110,000 per day, in 2012 to power its Fort Knox Mine, situated about 26 miles (42 kilometers) north of Fairbanks.
"When I am paying 78 percent more for the same unit cost of power than my sister mine in Washington and 68 percent more than they are in Nevada, I struggle with that," Fort Knox General Manager Dan Snodgress grumbled during a presentation at the 2012 Alaska Miners Association annual convention. "If this mine was located near Anchorage, near Southcentral, versus the Interior of Alaska, the cost differential of power is substantial."
Snodgress said lowering power costs in the Fairbanks region is not only important to the bottom line at Fort Knox but is imperative to developing new mines, such as Livengood, in this gold-rich region of Alaska.
"Mining in the Interior is expensive and if we are going to develop new mines, we are going to have to figure out how we reduce the power rate," he told the mining community.
To get this high-priced electricity to Livengood, International Tower Hill would need to build 50 miles of transmission line from the existing grid north of Fairbanks to the mine site. The feasibility study includes capital expenditures of US$129 million to build the 50 miles (80 kilometers) of transmission line needed to link the Livengood project to the existing power grid north of Fairbanks.
Snodgress at Fort Knox suggests trucking liquefied natural gas down from the North Slope to fuel Interior Alaska power plants as one way to reduce power costs.
Senate Bill 23, which received unanimous approval in the Senate and House in April, aims to do just that by authorizing the Alaska Industrial Development and Export Authority to provide up to US$275 million in financing for a natural gas liquefaction plant on the North Slope and a liquefied natural gas distribution system in the Fairbanks region.
SB 23 is part of a comprehensive financial package relating to Alaska Gov. Sean Parnell's Interior Energy Plan.
"For too long, Interior and rural Alaskans have been suffering from skyrocketing energy costs," Gov. Parnell said. "I am pleased the Legislature worked quickly to address this issue and provide the necessary framework to reduce energy costs for Alaskans."
In current scenarios, trucks delivering LNG from Alaska's North Slope would skirt the Livengood project on their way to Fairbanks.
Preserving cash
Additional drilling to convert a larger portion of the in-pit resource into reserves would bring down the all-in costs by spreading the capital expenditures over more ounces of gold. There is also substantial potential to expand the near-pit resource at depth and to the southwest with additional drilling; and multiple exploration targets have been identified across the 48-square-mile (125 square kilometers) Livengood land package.
When an investor asked if International Tower Hill plans to complete additional exploration, Ewigleben replied, "We must conserve our existing cash. In this present price-environment, one of the most important aspects here is preserving the asset, and we have been in a cash-containment mode since the beginning of the year to try and do just that. Unfortunately, that means we will not be doing any further exploration drilling."
"When you have 20 million ounces (gold), this is about finding the most optimized program for getting it out of the ground, economically," he added.
Tower Hill plans to continue to advance Livengood within the limitations of its on-hand working capital, while safeguarding the asset for development in the future. As of June 30, the company had about US$19.9 million, enough cash to last until 2015.
International Tower Hill will focus this cash on optimizing the feasibility study and continuing the five years of environmental baseline studies completed at Livengood.
"We will continue to review opportunities that were identified in the feasibility study for cost reduction, while we preserve our cash and, most importantly, while we preserve the asset. We will do this while we wait for an inevitable better economic environment for gold," Ewigleben explained.
Potential partners
While the results of the feasibility study may have turned away some investors, the 20 million ounces of gold at Livengood continues to attract the attention of potential partners. The company said multiple large and mid-tier mining companies will be reviewing the final feasibility study for Livengood under confidentiality agreements.
"While this does not create a robust project right now, we strongly believe in the potential of the project when, and we do believe it is when, gold prices increase to levels we experienced in the last three years. We are not the only ones with this belief; and we have been speaking with various potential joint venture projects and strategic alliance investors regarding participation and funding for further development of the Livengood project," touted Ewigleben.
The International Tower Hill CEO said the feasibility study was completed to a level that would stand up to the scrutiny of the strong technical teams of the mining companies eyeing the Livengood project.
"The quality of the people doing our work, the outsiders we used, are definitely A-team feasibility study people because we wanted to attract larger miners to look at this project," he said.
Confident that one of these larger miners will decide to take advantage of the leverage to gold price that the 20-million-ounce Livengood project offers, Ewigleben concluded the feasibility study presentation with, "The future is very bright for the Livengood project. It is gold-price dependent, but we wouldn't be in this business if we didn't think the gold price will return to prices that we have seen in recent times and bring this project forward."
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.
Reader Comments(0)