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BMO: Miners may revisit dormant ‘mega-projects’

VANCOUVER — The previous five years have broadly seen large-cap miners shelve — and often write-down — ambitious, greenfield development projects that carry significant price tags and heightened risk profiles.

The market instead demanded strong operating margins and light balance sheets, which were typically characterized by free cash flow generation and low debt positions.

The last eighteen months have marked a shift in sentiment for metal producers, however, as commodity prices have strengthened and risk capital markets entered the nascent stages of recovery.

Furthermore, analysts are now speculating that precious metals companies could soon revisit these so-called “mega-projects” to underpin long-term production stability in the face of falling discovery rates.

On Oct. 12, BMO Capital Markets released a research update on large-scale development opportunities defined by criteria that includes: greater than US$1 billion in initial capital; in excess of a 15-year mine life based on current reserves; plant throughput greater than 30,000 tonnes per year; and gold equivalent production greater than 400,000 oz. annually.

“The move away from advancement of ‘mega-projects’ was also a consequence of a number of cost overruns, in part related to industry-wide inflationary pressures during this time frame,” BMO analysts note. “With balance sheets largely repaired, the sector generating free cash, and a more constructive outlook on precious metal prices, it is therefore no coincidence that that we are seeing the early signs of reemergence.”

BMO Research identified seven mega-projects in its coverage space that match the majority of the criteria, which have potential to produce in excess of 1.3 million oz. gold equivalent annually over an average mine life of 30 years.

The report assumes a long-term gold price of US$1,200 per oz.

Blackwater project, Canada, New Gold

An aerial view of New Gold's Blackwater gold project in British Columbia. Credit: New Gold

An aerial view of New Gold’s Blackwater gold project in British Columbia. Credit: New Gold.

New Gold (TSX: NGD; NYSE-MKT: NGD) acquired the Blackwater project in early 2011 via the $513-million deal for Richfield Ventures. The property hosts large-scale gold-silver mineralization within an intermediate sulphidation, epithermal system that occurs within two kilometres of clustered porphyry intrusive centres. Blackwater lies around 160 km southwest of Prince George, British Columbia.

The company invested roughly US$4 million in the project through the first half of 2017, which was largely focused on its federal and provincial environmental assessment (EA) technical review.

BMO Research models nearly US$2 billion in initial development capital for Blackwater, which would produce 452,000 oz. gold equivalent annually over a 16.8 year mine life.

BMO calculates that the 60,000-tonnes-per-day project currently carries a 3.1% internal rate of return (IRR) based on a feasibility study (FS) released in 2014. Blackwater hosts proven and probable reserves of 344 million tonnes grading 0.74 grams gold per tonne and 5.5 grams silver per tonne for 8.2 million oz. contained gold and 60.8 million oz. contained silver.

Cerro Casale/Caspiche project, Chile, Goldcorp and Barrick Gold

Looking north at the Caspiche gold-copper project in Chile, which Goldcorp is buying. Credit: Exeter Resource.

Looking north at the Caspiche gold-copper project in Chile, which Goldcorp is buying. Credit: Exeter Resource.

In late March, majors Goldcorp (TSX: G; NYSE: GG) and Barrick Gold (TSX: ABX; NYSE: ABX) announced a 50-50 joint venture arrangement to advance the Cerro Casale and Caspiche gold deposits within the Maricunga gold belt in northern Chile.

Goldcorp is required to spend at least US$60 million over the next two years, and at least US$80 million in each successive two-year period until a US$260-million project payment obligation is satisfied.

BMO Research estimates initial capital expenditures for the twin gold-copper deposits, which lie around 12 km apart, of US$6.1 billion. The conceptual operation would produce 684,000 oz. gold equivalent over a 36 year mine life.

Goldcorp reports that Cerro Casale hosts around 1.2 billion proven and probable tonnes of 0.6 gram gold and 0.22% copper, while Caspiche has measured and indicated resources of 1.4 billion tonnes at 0.51 gram gold and 0.19% copper.

“The joint venture with Barrick has the potential to allow us to consolidate infrastructure to reduce capital and operating costs, reduce the environmental footprint and provide increased returns compared to two standalone projects,” Goldcorp president and CEO David Garofalo commented on the arrangement.

BMO Research said the combined Cerro Casale/Caspiche carries an 8.8% IRR based on internal estimates.

Donlin projectU.S.A., Barrick Gold and NovaGold Resources

An undated photo of the camp at NovaGold Resources' Donlin Gold project in Alaska, now a joint venture with Barrick Gold. Credit: NovaGold Resources.

An undated photo of the camp at NovaGold Resources’ Donlin Gold project in Alaska, now a joint venture with Barrick Gold. Credit: NovaGold Resources.

Barrick and NovaGold Resources (TSX: NG; NYSE-AM: NG) finalized a joint venture to advance the large-scale Donlin gold property in southwestern Alaska way back in 2007.

The project hosts proven and probable reserves of 505 million tonnes grading 2.09 grams gold for 33.8 million contained oz. The deposits are hosted primarily in igneous rocks and are associated with an extensive late Cretaceous hydrothermal system. Gold occurs in broad disseminated sulphide zones in rhyodacite and in vein networks.

The companies approved an US$8-million budget this year for geotechnical drill programs, and anticipate the U.S. Army Corps of Engineers will file a final environmental impact statement (EIS) in 2018.

BMO Research estimates US$5.2 billion in capital expenditures to develop the project, which could produce 1.2 million oz. gold equivalent annually over a 26 year mine life. Current analysts estimates peg Donlin’s IRR at 6%, though BMO notes it has “not considered a staged approach given the large infrastructure requirements and lack of details.”

The most recent development plan at Donlin is a feasibility study (FS) released in 2011 that models an open-pit, truck-and-shovel operation with a 53,500-tonnes-per-day processing facility.

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MARKET SUMMARY

INDICES

Name Last Change
DOW 23358.20 0.43%
S&P 500 2578.85 0.26%
NASDAQ 6782.79 0.15%
TSX 15998.57 0.40%
TSX-V 799.35 0.00%

Resource Commodities

Name Last Change
Gold 1292.66 0.12%
Silver 17.23 0.46%
Copper 3.06 0.62%
Platinum 952.00 1.56%
Oil 56.55 2.49%
Natural Gas 3.10 1.42%
Uranium 24.25 N/A
Zinc 1.45 0.00%

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