Water And Gold - Key Elements In Andean Projects

Includes: ABX, KGC, XRA
by: Lawrence Williams


Kinross Gold's Maricunga water supply problems are perhaps less relevant to Barrick and Exeter's nearby Cerro Casale and Caspiche deposits than initially thought.

Exeter's Caspiche project has been scaled down in size to a more readily financeable project, but it will probably need to seek a partner, or to sell outright to proceed.

Barrick has Cerro Casale very much on the back burner, but is nonetheless believed to be looking at scaled down development options for possible future consideration.

Around a month ago, I published an article here looking at the potential problems that Kinross Gold's (NYSE:KGC) Maricunga mine could be facing with regard to the water supply on which the mine's operations depend - See: Kinross Maricunga Gold Mine Water Problem Has Broader Implications. And we also commented on the possible implications this may have on two other mining projects located close by - Exeter Resource (NYSEMKT:XRA)'s Caspiche gold/copper porphyry deposit and Barrick Gold (NYSE:ABX)'s similar Cerro Casale project - both located within around 30 km from Kinross's Maricunga operation.

Talking to Exeter's CEO, Wendell Zerb, and Co-Chairman, Bryce Roxburgh, at last week's well-attended European Gold Forum in Zurich, this is perhaps not the case as both Caspiche and Cerro Casale are looking at sourcing water for their operations from a different location - in an area where the water table is replenished each year by snow melt although around 150 km away, and at a higher elevation to the north east of Maricunga. However, the distance over which the water would have to be pipelined would add significantly to project capital cost in both instances.

Kinross was also at the European Gold Forum and its presentation by CEO Paul Rollinson made no mention of the Maricunga problem, which relates to extracting water from what in Chilean desert terms is called a 'wetland' although it would be difficult for anyone in a less arid climate to recognize it as such. There is a relatively near surface water table, which Kinross pumps from and this has been depleted quite substantially according to the environmental watchdogs. But how much Kinross has contributed to this, and how much is due to a prolonged drought in the region is probably unproveable and will probably mean Kinross will manage to prevent premature mine closure by the authorities as this goes through the various tribunals and courts.

But Maricunga is really not that significant for Kinross going forward. It only has a 2-year mining life ahead of it, and perhaps will continue extracting gold from its leach pads until 2020. It is also one of Kinross's highest cost producers, although as a long established operation remains a significant contributor to the company's bottom line. As far as production is concerned, its 200,000 ounce annual gold output, now beginning to dwindle, will be more than replaced, and at a much lower cost, by expansion at Tasiast in Mauritania, West Africa, which was the main focus of Rollinson's presentation at the European Gold Forum.

See the Kinross presentation at the European Gold Forum.

As to the other projects mentioned in the article related to above, Barrick has been scaling down its Cerro Casale project, but it's still a long way from a production decision and does not really feature even in the company's medium-term plans. It will need a further kick up in the gold price and more readily available finance to proceed.

Exeter's similarly sized Caspiche project may actually be better placed. As a junior, Exeter has been hugely scaling down its potential mining project there. It is now looking at mining a significantly sized (1.7 million gold equivalent ounce) high grade (in relative terms) heap leachable oxide cap which brings down potential capital costs enormously and could bring in sufficient cash flow for a phased expansion to mine and process the big gold/copper sulfides part of the deposit at a later date.

The currently preferred development scenario (one of three costed options) looks at an initial capital cost of a little above $370 million to mine the oxide cap as a heap leachable gold operation at a mining rate of 60,000 tonnes/day, but then from year 6 transitioning to a 27,000 tonnes/day gold/copper sulfide operation with additional significant capital costs (which Exeter reckons could be financed mostly out of accumulated cash flow) for the then-necessary milling facility.

For the latest information on Exeter's Caspiche project and the three options being considered for its development, see the Caspiche Project Overview.

One doubts whether Exeter would be able to raise sufficient capital for any such project development option for Caspiche on its own in the current financial climate. It will be looking for a partner to develop the project, or to sell it outright to, as it continues to de-risk it. However as a junior, it is not short of cash ($21 million in the bank) and can bide its time waiting for a significant gold price pick-up. As Zerb pointed out in his presentation, major gold deposits of this type are very rare so the chances are that it will eventually be developed as the industry needs to replenish output as other operations fade away. But 'eventually' could yet be a long time away.

As for Barrick's very similarly-sized Cerro Casale project, this appears to be very much on the back burner as the world's largest gold miner seeks to cut capital costs and debt as it gets its house in order. The much bigger Pascua Lama project, on which it may already have spent $6 billion or more, but is also currently on the back burner, would probably be the priority were Barrick to go ahead with a major new high capital cost Andean development.

Even so, we understand that Barrick has continued to look at its own options for, at some stage, developing Cerro Casale as a smaller project than initially envisaged. But any development decision almost certainly will not be made until sometime in the future - perhaps in the next decade. A timescale, which may well apply to Exeter as well although it does appear to be sitting on a slightly more readily financeable initial operation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.