Study Improves Mine Despite Higher Capex

Sector expert Adrian Day examines the feasibility study for this company's Mexico-based project.

In this bulletin, we look at the recently released feasibility study on Almaden Minerals Ltd.'s (AMM:TSX; AAU:NYSE) Ixtaca project. Separately, our somewhat aggressive sell limit for Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT) has not been hit, so we will publish another bulletin specifically on this company. The deadline for tendering shares at various brokerage firms with which we are familiar are Dec 26, 27 or 28, so we shall provide our final advice prior to those dates. We also plan another bulletin with brief updates of many more companies, including good candidates to pick up in the year-end tax-loss sell-off.

Almaden Minerals (0.58) has released its feasibility study (FS) on the Ixtaca project in Pueblo State, Mexico, prior to year-end as promised. Initial capex is significantly higher than in the prefeasibility study (PFS), while the economics over the life of the mine have actually improved. It is a very strong study.

The study indicates an 11-year life for the conventional open-pit mine, with an average of 90,000 ounces of gold and 6.2 million ounces of silver per year. The after-tax NPV is $310 million, with an IRR of 42%.

A FS is produced by outside consultants, and includes competitive bids on many items, normally conducted with far more vigor than a PFS or preliminary economic assessment. Because of this, a FS usually shows higher costs and reduced economics from the PFS. Other than the initial capex—on which, see below—the full study did not depart in many respects from the PFS, a credit to the Almaden team for the quality of the work they had already done.

Why has the initial capital increased so much? 
The capex is up over 50% to $174 million (from $117 million), still a reasonable number with a pay back of less than two years. The increase is due to a reworking of the mine plan and two significant additional items of capital. First, the ore-sorting equipment, which the company had already discussed, adds approximately $15 million up front, but will increase the recoveries and life-of-mine (LOM) economics.

Second, the company has opted to use dry stack tailings, which adds another $15 million up front. Though the risk from conventional tailings ponds is extremely low, dry stack tailings remove that risk and more practically remove some potential obstacles to permitting and non-governmental organizations (NGO) opposition. Over the LOM, dry stacks tailing could be modestly cheaper, while the mine footprint and water usage are both reduced. (The plan includes a water storage reservoir to capture water during the short rainy season—the local area is currently without any water storage facility—and this will benefit both the mine and the community.)

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