New Gold Inc. (NYSEMKT:NGD)
Blackwater Project Update
September 20, 2012 7:30 am ET
Randall Oliphant – Executive Chairman
Paul Hosford – Feasibility Study Director
Robert Gallagher – President and Chief Executive Officer
Mark Petersen – Vice President, Exploration
Peter Marshall – Project Director
Brian Penny – Executive Vice President and Chief Financial Officer
Steven Butler – Canaccord Genuity Inc.
Julie, we are ready to go. Good morning, everyone. I know most of you are early risers because you are up to greet the dawn and let everybody know what's happening in the world overnight, but we particularly enjoy and appreciate you spending time with us this morning. This is a remarkably exciting day for our company where we unveil our new flagship property Blackwater. And to those of you who are joining us on the web, thank you very much for being with us. I'll walk through the slides and hopefully you can follow along.
As your custom, we have a lot of cautionary language in what we discover with PEA is we've been able to add another page or two to them which are all available in your book and also available on our website. What we hope to do this morning is, introduce this project to you more fully than we ever have before. As you can tell, we've got a huge number of people involved in this project and I wanted them all to be available to answer any questions that you might have.
Blackwater has become the priority for us where we just completed the starting up of New Afton which is doing remarkably well and I think all of the team who put together that project both being able to bring it on speed a month earlier than what we had told you we would do and also within 7% or 8% of its budget set about four years ago really deserves a lot of congratulations to the group. And we are glad that so many members of that will be deployed on Blackwater. In addition to that, we’ve got a bunch of new members of the team who have a lot of experience both in DC and in developing new projects. I will introduce you to all of them in a few moments.
I will give you some overview of this project in terms of the economics of it and then we’ll dig down more deeply and Paul Hosford will lead that discussion although others will certainly participate in that. Bob will tell you where we are going from here in terms of the permitting, the feasibility study and overall timetable for the project. Of course this project is based on drilling that we done up to the middle of May of this year.
We have since drilled another 100,000 meters. We’ve done a lot of work at Capoose. So what’s before you today is pretty dated information in terms of the 10 million ounces that we’ve incorporated into this project or 8 million recovered ounces. And so we believe that we can continue to improve the economics of this project and Mark will tell you some of the programs that he has got going. And then I’ll come back again at the end and show you how this fits into New Gold’s overall portfolio.
But for us, as I mentioned earlier, this is our new flagship property. It’s everything that we had hoped to have as a company, it’s an asset of world class scale, we think it has very robust economics which will only improve as we go forward. It’s in a great jurisdiction where we have experienced permitting mines, building mines, First Nations relationships, operational and development teams. We’ve got the excitement of not only this new discovery which is already 10 million ounces but it has tremendous potential beyond what we see today and we believe that we can continue to increase the value of this asset as we move forward in the coming months and years.
In terms of the team that we’ve got with us today, I think you all know Bob Gallagher well, our President and Chief Executive Officer who has a lot of experience both in building and operating mines. Brian Penny, our CFO, is the one who has arranged all the financial aspects of this and we believe that we can fund this project with our internal cash flow, so we don’t have to look to the capital markets for additional money.
Ernie Mast, you may not have met before, is our Vice President of Operations. We are remarkably excited to have Ernie as part of the team. And for those of you have followed Cobre Panama, Ernie was the person in charge of that massive project which I think was $6.2 billion and will bring a lot to this project.
Mark Petersen, our Head of Exploration, who again I think you know well. Mark was the impetus for us getting involved in Blackwater and saw the potential of it, and it’s gone beyond any expectations that we had. Our Project Director is Peter Marshall, who is with us today. You can see from Peter’s credentials but was very involved in the permitting of Mount Milligan which is very nearby our project and has been successful in overseeing a lot of similar type projects to Blackwater.
Paul Hosford leads the Feasibility Study, again, a very experienced person that I feel very fortunate as part of this team and you will hear from Paul in a few minutes. And then, Tim is the Head of the Environmental and Social aspects of this project. We are taking advantage of the lot of the experience that he has, not only broadly in this industry but also with respect to the permitting of Mount Milligan which he did very successfully.
So to get to the numbers, there is an awful lot of them here and I won’t read them all out to you, but working on our base case which is $1,275 gold, $22.50 silver, you can see that after-tax, the IRR of this project is about 14%. Being more realistic because of course we use the price as $500 an ounce below where we are today moving to more contemporary type pricing. You can see that the returns go up to about 26%. But I think another important element is that, we will recover all of these capital costs in about 2.7 years. And then because we already have a 15 year mine life and then some remittance beyond that based on what we had back in May, you can see that this asset will generate tremendous cash for us for a very long period of time.
I think one of the thing that excites me is the low operating cost and also the production levels in the first five years. You can see that we’ll average about 569,000 ounces for the first five years and of course that’s 10 years from now not only the time to build it, but also the time to have experience to operating it and then we will see beyond that what we can do to manage our grade in our production levels. But over the life of the mine, its average production is well over 500,000 ounces a year at a cost of little over $500 an ounce.
Here we show the production levels and the costs. You can see in the early years, the costs are remarkably low, again averaging $469 an ounce for five years and over the life of the project averaging $536,000 an ounce. In terms of IRRs and we show them that all the different capital costs and operating costs, but what this does? The $1.8 billion includes $346 million of contingency. I believe that this is a pretty realistic or perhaps conservative number. what we did is we costed it out based on cost of building mines in the second quarter of this year, which I believe is the most intense period for capital costs in mining certainly in my career, and on top of that we added another $346 million.
I think you’ve heard that a lot of the capital costs maybe abating and for those of you who are with us in Denver; the theme seem to be to pullback on capital expenditures. There was an interesting article in the Financial Times perhaps a month ago that say that 55% of all capital costs in mining are incurred by BHP, Rio Tinto, and Xstrata. We’ve seen all the announcements coming out of those companies, which I think will relieve to take away a lot of pressure in terms of capital costs in the mining industry.
and of course, we’re also impacted by what’s going on in the oil sands because of where we’re located. And again, we’ve gotten an environment where people are reducing capital costs, not expanding them, which I think will take a lot of pressure off. But we’re a company as you know who likes to deliver on the targets that it sets, based on our track record of Mesquite coming on time, coming on stream three months early and on budget, Cerro San Pedro on budget, and New Afton starting up a month early and being within 7% or 8% of budget we wanted to set out what we thought was a reasonable number.
We saw that reach $100 million change in the capital costs, NAV changes by about a $100 million. and the reason for that is, we spend most of the money in 2015 and 2016, and then we’ve discounted this back to the beginning of 2015. So the impact is slightly less than $100 million, it is a reasonable benchmark to use.
Looking at the full cost of this project, we go right back to the original acquisition of Richfield, and then the work that we did to acquire Silver Quest and Geo Minerals, which gave us the 1,000 square kilometer land position that we have today. That amounts to about 7.5 million ounces per recovered ounce that we have not instituted but recovered. Taking our development capital, it’s another $227 an ounce. And over the life-of-mine we estimate the sustaining capital about $537 million. So you can see all in combined with our operating cost, its $912 an ounce but just a little over half of where the current gold price trades. And as market is successful in finding more ounces of course that cost per ounce will continue to go down as it has been over the course of the past month.
In order to give you more insights and more details on the PEA, I’d like to introduce you to Paul Hosford, who is the project leading the Feasibility Study for us and led this PEA who will walk you through what Blackwater is. Paul?
Thank you, Randall. Good morning all. Just we are going to take everybody where our projects located. We are in South Central British Columbia and about 500 air kilometers from New Afton mine just recently commissioned. Drilling into that, the project is located within about 160 kilometers of Prince George, which is the major regional hub in Central British Columbia, well served by infrastructure in this area.
You can see that power line mark there, we have the main 500 KV spine of the BC Hydro network running west to Prince Rupert that is within 100 kilometers of our property. And the rail also serves that same link. And the small dotted line there, just show the access road. So we have – the project is currently accessed by very good Forest Service Road to actually the main spine of the forest service logging network in that area.
This area has been very substantially logged and is actively logged right now within close proximity of our project is actually the epicenter of the (inaudible). So these are kind of the, I would say almost more of a more industrial area.
This is orientated with our project, the Blackwater Project, within the package of property that New Gold has in this area. This little red dot in the middle there just shows the area we are talking about and is focused on the PEA and forms the basis for this project. And about 20 kilometers away to the west is the Capoose Resource and Mark Petersen will talk little bit more about that in terms of the total context.
So moving right to the project, this is the recent aerial photograph of the project site, the big cleared area in the background shows actually the deposit area where you got substantial drilling. This was effectively logged using a local First Nations JV contractor very efficiently. And in the foreground, you can see our 260-person man camp to accommodate all the drill crews and the geo-technical crews and the project people looking here. But you can also see it characterize, this area is gentle rolling hills; this isn’t glacier and mountain peak part of British Columbia.
The general overview or summary overview of the project, the PEA; based on start of production in 2017, it will be a conventional truck shovel open pit mining operation with a 60,000 ton a day processing plant, with the life-of-mine strip ratio, average strip ratio of about 2.4 to 1. We do encompass low grade stockpiles, which are processed at the backend of the project. The simple conventional flow sheet using a whole ore leach process, well like I said, very simple, very granular, which gives us life-of-mine gold recoveries of about 87% and silver about 53%. We have conventional waste rock and Tailings Storage on the project and I will show you a plan for you now and how that comes together.
Power supply, like I mentioned, we get power supply of the hydroelectric grid, via 133 kilometer 230 KV power line and we are currently in finalizing work with BC Hydro right now on the point of connection. And minimal off-site infrastructure required to support this project. There is a very good access road already requiring minimal upgrade and a small section that needs to be built to shorten the route to our actual project. And we have adequate water supply, adequate to supply the project within 15 kilometers of the project site. And overall, we have a low environmental risk and the project is designed for closure.
So I just want to show you one image here of the actual project layout starting with the open pit in the bottom south area, beside the open pit with waste rock dumped on either side in close proximity to the pit. And then the larger featured to the – directly to the north of that is the tailing storage facility where all the tailings as well as most of the waste rock actually contained. The grid, if you can just able to see them there, they are about 5 kilometer grid. So it gives you an idea of the size of this. The other feature of this, this is a very tight compact site, so we keep everything contained within the same catchment.
Mark will talk a little bit more about this in terms of the resource summary, but this is essentially a subject to the previous prior press release. I just want to draw your attention to the 267 million tons at 0.88 grams of indicated and 121 million tons at 0.69 of inferred, and this formed the basis of the resource model.
So moving through to the development of the project, the mineral resources will obviously optimize the pit using (inaudible) and we have based it on 40 degree pit slope. Resources grade show limited constrained and capping level as marked there.
I mentioned early about the low grade stockpiling at some point, so we have a mine production schedule that’s built into the PEA incorporating elevated cut-off strategy in the initial five years of the project to increase the mill grade during that initial period. And during that time, we generate some low grade material which is in stockpiled and processed at the latter end of the project. The growth model we used at Gemcom software in a 10mx10mx10m blocking.
So moving to the capital costs that have contained within this, we’ve estimated – capital cost is build up in 2012 second quarter estimates, estimated about a $1 billion, just over $1 billion of direct costs, so that’s the mine mill infrastructure tailings. About 36% thereafter of indirect and that benchmark is very low with other projects and current projects are being constructed and build in D.C. and elsewhere in Canada, and about 24% contingency on both the direct and indirect. So we have contingency of about 350 million.
Another interesting thing, when you look at the infrastructure as I just pointed out on the layout, infrastructure is pretty modest. So the infrastructure requirements are modest at this project within the location. So we carry about $85 million for the power line, the road, and the water. So I mentioned that the construction unit rates which are part of central part of the capital cost estimate are based on current rates that are the projects in that area have realized and the estimating team putting that together have that broad background plus we are filled with our New Afton project have some benchmarking against that too.
We have made a sustaining capital of about $537 million, the sustaining capital covers the cost of additional mining equipment as the project opens up and additional cost of the tailing stand expansions as that develops and some additional work on the mill at various points through the mine life.
In terms of operating cost, we’ve rolled this up from principles using labor costs that are current in British Columbia, hauling valley mine kind of set the scene for most of the labor rates in Central British Columbia and we have our own operation at New Afton. Same with consumables in terms of mining spares, cyanide reagents, grinding media, these are all up to date current costs. So we’ve come to life-of-mine cash operating cost of about $13 a ton milled which is about $543 an ounce. So you will also see that there is a significant silver credit to this project of about $2 a ton about $90 an ounce.
So we spoke about the life-of-mine, I spoke that the life-of-mine cash cost have been $543 an ounce and in the first five years, when we have the slightly elevated head grade we get to about $470 an ounce for that period. I want to mention here in terms of the mining process. We spend a lot of time with the mining, developed haul profiles, ran truck simulations because it goes through hauling from the open pit that you could see in that other slide there to the Tailings Storage Facility, which is about 4 kilometer or 5 kilometer haul. So we have simulated those to kind of come up with I think pretty reasonable estimates for those costs and then benchmarked against other operation. So our average mining cost is about $1.90 a ton.
Randall has presented the slides very eloquently, but I just want to reiterate here to what we thought of saying what the project has in the first five years, we have an average annual gold production about 570,000 ounces at a cash cost of about $470 an ounce. And through the first 15 years, from years 1 to 15, which is the active open pit mining operation, we produced just over 5,000 ounces annually through that entire period at a cash cost of $536. And then in the final year in the piece as I mentioned this is going to be processing the low grade stockpile, gold production is about 300,000 ounces during that period.
Turning to the economics, these we kind of presented earlier in terms of what we describe as a base case to kind of $1,275 gold price and then the current stock price. The graph at the bottom, the solid bar shows the base case operating cash flows and the dotted line shows the cash flows that are generated with the current metal price spectrum. What I want to show you here is the current prices. The average annual cash flow during those five years is about $655 million in aggregating cumulative of about 3.3 over those five years, $1 billion generating an IRR after-tax of just under 26% and a pay-back of just under three years after-tax.
Unidentified Company Representative
I beg your pardon?
Unidentified Company Representative
(Inaudible) taxes, but basically because of the incentives that are in place for startup mines to get rid of 100% of the capital cost in the earlier year. So, given the fact that first five years average effective tax rate is above 30% for the life-of-mine.
So where are we focusing next? So we have several areas of optimization that we are working on both right now and there we have a series of studies in effect right now that will also lead into and follow through in the feasibility study for next year. An obvious one is the potential for the expansion for the resource which is both bump into the north and a depth, and Mark will speak at some length about that just now.
We have a significant geotechnical program in the open pit area to assess the possibility of steeping pit slopes with obvious potential cost advantages both in terms of the mining cost and bringing in additional resources. We’ve also got a significant program of geotechnical work going on in the Tailings area and condemnation drilling in that area just to prove that up (inaudible) surprises. We have done a lot work and study to look at explore the potential of optimizing mining costs, right-sizing the mining equipment, looking at the fleet and reviewing in full. So I think we have some real interesting opportunities there in the mine itself and some significant ones in the process optimizing the process. We have a significant metallurgical program ongoing right now which will continue, we continue looking at hardness, we continue looking at the main cost drivers of grind size, cyanide consumption, leach time to further improve their gold and silver recoveries.
Thank you. And then as we said, move to Bob.
Good morning, everybody, and I just want to walk you through the next steps. So it’s kind of interesting because you can probably tell by the color of my hair I have been around this industry for a while and I actually started my early years in Endako Mines which is about 50 kilometers away. So it’s kind of like an old homecoming for me up there.
One of the – obviously in a big resource project of this size, permitting is a key aspect of it and we are fortunate to have a team that basically the main components of the team that just went through the Mount Milligan permitting, which Mount Milligan is only about 200 kilometers north of us, so same kind of train. As you saw from the picture that was shown to you early on the wall here, this is really a great place to be building a mine. The train is ideal, its gentle rolling hills. We are in the south central part of BC, where the climate is not severe; we don't have heavy snows there. We are basically at the top of the watersheds. So we don't have a lot of water to divert, move around the project.
For those of you who have been following with some of the development stories in British Columbia over the last few years, importantly there are no significant lakes in the media project area. They are kind of a little west to the north of us, and provide a great source of water. The area we’re in were blessed with a negative water balance, so we’ll have no release of water over the life of the project.
We’re probably the ideal company to be developing this mine because of our experience at New Afton. We’re leveraging off all kinds of relationships, and importantly our relationships with First Nations. We’ve got a great record down at New Afton, in fact this past Sunday we had our opening celebration, open house and the Minister of the Environment announced that New Afton had been awarded the sustainability award for the year in British Columbia, primarily based on our work with the First Nations.
But we’ve brought the First Nations from the Blackwater area down, introduce them to the First Nations, we worked with at New Afton. They have an active dialog, they’ve developed a lot of trust in us as a company going forward, we have in place exploration agreements with the two First Nations that have traditional use of the land in the area of the mine. And we’re in active dialogue now to get agreements for the operating period of the mine.
So we’re very focused on the community relations as well as the First Nations. We’ve got coordinators in Vanderhoof as the nearest community. We’ve opened up an office down there. We’re kind of unique to the industry, and I think it really tells you what New Gold is about when we go into an area. We’ve actually opened up a sample preparation in Vanderhoof, where we have 30 to 40 people actively handling our drill core before it goes down to laboratories in Vancouver. So immediate positive employment in an area that is struggling a little bit with the downturn in the forestry industry. We’re very, very welcome in the community and which bodes very well for our effort in getting the project, the project permitted.
Just the timeline going forward looking at this chart, you can see we’re in the second half of 2012. You can see the PEA delivery, again we’ve been showing this slide now for about – pretty well a year now since we acquired the deposit. With the completion of the PEA, we also finalized, what’s called the project description, which describes what we’re going to do. We submit that to a government, and it kicks off the environmental assessment process, which if you look this is about 2.5 years.
We are – as I mentioned [Tim Matthews] and his team has recently done the Mt. Milligan. They know the people, we’ve been in front of the prudential and federal regulators out in BC, and Tim and his team are headed to Ottawa to basically debrief the federal environmental agency, about what’s coming up, to give them a good preview of what we’re going to do. We got some feedback, and then we launched into this. We think this is a very realistic timeline to get this project permitted. You can see that is a critical path, most of this and then finally construction in 2015 and 2016, and then we’re in operation in early 2017.
The next major milestone for us beyond kicking off the environmental assessment process is the feasibility study that will be done by the end of next year, much of the work would have been done in the base line studies, the technical studies, whether they are geotechnical, the engineering studies towards the tailings plant and all that are well underway now, so we’re well ahead of schedule on this timeline as we go forward.
With that, I’ll turn it over to Mark Petersen, who will walk us through the little bit of the resources on the project, and then more on the upside of the large territory we have up there.
Good morning, everyone. Thanks for coming this morning. As you can see, I think it’s really been a very busy and exciting year for us, and I just want to say, even in my wildest dreams, a little over a year ago, I didn’t think we would get to a resource of this size, but here we are.
But I’ll also add to that, as exciting as this project has been so far, I’m just as excited if not more so on what we can see out and beyond the immediate area of the Blackwater resource.
I’ll take most of that as read, but I will add that we are on track to complete our infill drilling program to upgrade about 40% to 50% of the indicated resources in the measured category to support the feasibility study, which will formally kick-off next year, but Paul and Peter are already on track with a number of the optimization studies that will feed in that.
We will have that infill drilling done within the next couple of weeks, and then we have some additional drilling that we realize we needed to do when we issued this updated resource in July after the Northwest in an area that we refer to as the Northwest Silver Zone. That was actually sitting right in our backyard all along, it’s the area where Granges started exploring back in the mid to late 80s. So that’s actually quite a nice bonus to the overall resource and mine plan.
This is a great (inaudible) plan; I’ve presented these to you before. this is based on the data that are in the current PEA resource model issued in July. the blue outline is the resource pit shell that’s used to constrain the resource statement. and you can see there is a lobe off to the north that didn’t exist back in March in the previous resource estimate, and that lobe is the fact that we’re driven by this Northwest Silver Zone that’s emerging as a nice near surface add-on that’s helping constrain or pull the pit to the north, but also keep our strip ratio in check.
as has been mentioned, over and above what we’re going to drill off this year to support the feasibility study. this resource is still open. the Silver Zone, we intended to get that drilled off this year on 50 meter centers. We don’t know where the edges of it are, but we’ve got a drill plan, and I’ll show you that in a couple of slides here.
we have a plan to get that delineated to indicated status. so it will make it into the feasibility study resource model, which we will deliver in the first quarter. So the Northwest Silver Zone is one area with existing current potential to grow the resource, both near surface at depth, and you’ll see in the next slide why I say that.
likewise, over in the area to the southwest, we have – effectively it’s a fault intersection with a very healthy and robust breccia pipe. We are yet to drill through the bottom of that pipe. so that remains open at depth also. So we’ve got good upside to continue growing this resource as we go into 2013.
These are some cross-sections and a planned view down on the bottom. This is gold grades in the block model, maybe a little bit tough to read the legend, but generally, I think you’ve seen enough of these to know that the warmer colors translate to higher grades.
Now, the section up in the upper left is an east west section looking north cutting through that northwest silver zone, and you can see the area up in the upper part of your surface has got pretty low gold grades.
In next slide you will see what the silver grades are up there. But what’s interesting is the part of mineralization down below that sitting just at the base of the resource picture, that part remains open at depth, we just need to do more drilling. And you can see over on the right hand section, the same part just over here, it’s not being pulled by the pit largely because there is not enough drilling to support it, but clearly we will be getting back in there with the drilling not intentionally beginning in October once we finish off the close spaced infill by the end of this month.
The breccia pipe that I mentioned is likewise. The pits just mining right to basically the limited drilling on that, so that remains open at depth as well, and the grades are very healthy and robust down at those depths too, so that’s quite encouraging.
This is silvered same cross sections, and planned view. I think if you just compare what’s happening where the silver grade is following, in general silver and gold behave somewhat independently of each other in the deposit. We don’t quite understand the systematics behind that, but we’re getting a better handle on it. But in the Breccia pipe, silver is the higher grade silver tends to be tracking the higher grade gold, there is a fault, it’s not drawn on here, but there is a fault that’s dipping off to the right hand side, and marking the base of the pipe there.
The grades though in the near surface portion of the northwest silver zone are substantially higher than as typical. And as you saw on the previous slide, the gold grades are not necessarily that high, but we’re seeing grades on the order of anywhere from 15 grams up to 60 grams up in that area. There is some type of structural control through there probably in Northwest trending fault that it’s following, but stay tuned because we’ve got more drilling work to do, and we need to find the limits, the limits of that zone.
So those are the near-term exploration upside opportunities. We can see right within the Blackwater deposit itself. This is back to that same grade thickness map. This is just where we’re going for feasibility study drilling, that’s the pattern that we’re drilling of this year. The close spaced infill holes are a 25 meter centers, they’re angle holes oriented do west. We will get some other patterns in there before year end also to support just to modeling and testing some of our assumptions on what’s going on geologically.
But we are on track to finish off that close spaced pattern in the central portion of the grid. Within the next couple of weeks, we’ve got I think 13 drills turning right now, we’re bringing in two more this week or next just to round-off the season, and to stay on track.
Once that pattern is drilled off, we’re just going to basically send a herd of drill rigs up to the Northwest, hammer out that sliver zone, and we’ll put some of those, we’ll probably have some of those drills go to work on some of the exploration condemnation drilling that we’ve gotten over the broader site footprint area.
Just stepping outside of the immediate area of the Blackwater deposits, Paul put up a similar map to this previously, this is the clean block that comprises what we refer to as the Blackwater project in the PEA. This is effectively what our land position looked like between June and December of last year.
And this is what it looks like today. Formerly, it’s actually contiguous block of roughly 1000 square kilometers, and it breaks into three different blocks, Auro property to the east, which we acquired from Gold Reach Resources earlier this year, and the Capoose property to the northwest, which we acquired from Silver Quest late last year. And also you can kind of get a feel for the general lay of the land, and topography there as well.
When we look at the geology at the challenging area, this is airborne magnetics, I’ve shown this before, there’s a couple of features that come out, and I’ll just highlight them. We have a few intrusive centers in the neighborhood, Blackwater just sits over in there by the symbol, there is a kind of a pinkish oval shaped feature just to the Southeast of that, that’s one of the intrusive centers. There is another one that’s in, that shows up as blue, just the large blue area just to the lower left of the Capoose prospect area that’s the Capoose [pathway] and then there are some other intrusive centers that emerge on the magnetics down to the south of us.
This airborne mag is still quite important to us because there’s extensive surface cover. So it’s hard to really understand what’s going on just beneath the surface, and the top of bed rock, but I’ll also just highlight, there is a general north-west, south-east structural grain to the region, and Blackwater and Capoose kind of sit along that overall trend, but there’s quite a lot more going on.
This layer really highlights the challenge that we’re facing. I won’t go into the details of this. This is the currently mapped regional geology. This is government geology. The main point here is, there is a lot of yellow on this map, that yellow is post-mineral glacial till cover over most of the area. The other units in pink are exposed intrusive, the green, the green patches are volcanic rocks that sit above the intrusives, and the blue and the grey are generally sedimentary rocks, but I think you get the point here that it’s a challenging area, that’s why Blackwater sat undiscovered for so long, but quite exciting nevertheless.
In terms of what we have accomplished this year for our exploration program, it’s been kind of three-fold, get the Blackwater resource drilled off, explore and test the mineral potential at a greater area being considered for citing facilitates, and that’s shown in blue, the MYAB area that stands for Multi-Year Area Based permit, that’s our currently permitted area for exploration right around the Blackwater Project itself. So we got the resource pretty well on track to be delineated about to measured and indicated as I mentioned. We’ve also been conducting an Exploration/Condemnation drilling program over the greater MYAB area and that’s currently in progress.
We have also gone up to the Capoose prospect, which we acquired from Silver Quest and that prospect has been known about for quite sometime. The primary objective we had for this year was really to just test the potential for whether or not that resource have room to grow and I will show you on a bit here some of the preliminary results we are getting out of that and we are quite encouraged by that, but its not – the next chapter for this project isn’t necessarily going to be all about Capooses.
We’ve also been doing a property-wide reconnaissance program, mapping where we can see rocks, but also very extensive geo-chemical sampling program of the glacial tills, stream sediments and we’ve even been trying some bio-geo chemistry of some of the different pine tree species, which actually were yielding some interesting results.
So that’s been our 2012 program and now I will just kind of go into some of the elements, beginning with the Exploration/Condemnation program. This is the legend is hard to read I understand that and I apologize for that, but the main point here is the symbols marked in red are holes that we have completed so far, the symbols marked in gold, which are essentially often the lower right hand portion of that MYAB permit area are holes yet to be completed.
In general, we’ve got results, assay results back for the northern roughly the northern third of the grid and we’ve confirmed that that area is suitable for siding of the Tailings facility for the project. Although we don’t have assays back on the holes down to the southwestern portion and just northwest of the Blackwater deposit which is down at the bottom of the image, just in looking at what we are seeing in the rocks in that area, we are seeing a favorable Blackwater type volcanics with good, favorable, alteration, solidification, the things we like to see and in places mineralization.
So the assays are pending, I can say that the favorable units that holds Blackwater deposit extend at least up another couple of kilometers to the northwest and I suspect when we get the drilling done in the areas of the northeast of the deposit, we’ll see something similar as well. So this program is moving forward nicely. It will flow into 2013, it’s not getting this completed this year, it’s not critical path but I anticipate we’ll have all of this exploration/condemnation drilling done by no later than the end of April next year, perhaps faster depending on how many additional drills we put on it and we will stay continue doing it right on through the winter to take advantage of the frozen ground conditions.
The 2013 program, that’s a typo down below in the lower right, I should say 2013 but that’s what we are looking at completing roughly 10,000 meters to 15,000 meters of additional drilling. And following up on these areas of favorable geology that we are seeing in the drilling. Likewise the overall objective here folks is to get this work done so that Peter and Paul can freeze and if we have to make changes to our design concepts as we go into feasibility study, we will. But get that frozen no later than the end of the third quarter and sooner is always better.
Moving on over to the Capoose project, I’ve got some geology up here. This is some new geology we’ve developed. The shaded kind of hatched layer on the map, which is over on the right side is the existing resource that we acquired when we acquired the project from Silver Quest last year. And as I mentioned before, our objective for this year was to just test the concept for whether or not that’s all there is or there is potential to grow it. And I am happy to say though, we’ve only got about a quarter of the assays in from the drill the 11,000 meters we’ve completed. Our preliminary indications are favorable.
We are seeing significant gold and silver intercepts outside of that resource on the cross sections, the grey shaded areas that overlay the geology that is the historic resource. And we’ve got intercepts outside of those resource shelves. I’ve only got two holes to show, but we’re seeing grades in the Capoose drilling. Though not through the roof spectacular just yet, they are on a par with what we see at Blackwater and Capoose’s historically been considered to be a silver dominant resource.
I just want to highlight the fact that so was Blackwater before Richfield really drilled the discovery hole there, Blackwater started out as a silver exploration play, when Granja started there, because they started in what we now call the Northwest Silver Zone. Also, just looking at some of the historic work surface exploration that Brigus did when they had the project, it became very clear to me a few weeks ago when I was up at site that the area where all the drilling has been done on the Capoose resource only represents about a quarter to a third of the total alteration footprint that is the Capoose system.
So there is clearly a lot more going on that meets the eye. The favorable package of rocks and alteration extends another 1 kilometers to 2 kilometers north and may extend to the south beneath some cover rocks as well. And we don’t know what’s going on immediately down slope and out underneath the glacial till cover that’s quite extensive in the region, but we are conducting detailed flow sampling programs right now over those areas.
So shifting out to our property-wide reconnaissance program this year just going back to this kind of the stopple base layer, our program, the elements of it, consisted of gold, gold-in-till and stream sediment sampling over roughly three quarters of our 1,000 square kilometer property package. We’ve also been conducting soil geochem grids over areas where we see favorable reconnaissance results from the till sampling. And as I mentioned before, where we can see good outcrop, we are getting some good reconnaissance mapping done.
Now, one of the things that’s really important here in exploring the region is understand, how do you see through this extensive surface cover and what we need to understand as geologists is that, first off, the dominant ice flow direction was from southwest to northeast. So you need to know that, you need to understand that because that helps you interpret what you see when you start getting favorable results in your sampling program. And starting right off with the Blackwater deposit, we conducted an orientation survey over Blackwater just, first off, to test whether or not sampling materials would even be useful.
Now, all we did was sample the fills from surface pits, we didn’t do any drilling through the fills as we might have, but we will be doing that next year because this program has been so successful. But what we see in this first layer here is the gold-in-till dispersion train that’s coming off of the Blackwater deposit, now the group that we’re working with on this is the same the group that discover the Rainy River deposit, that’s Stu Averill’s company, ODM Resources. So they are established industry experts in this methodology and it’s been quite successful. So first proof of concept Blackwater really does show up with a nice dispersion train that extends several kilometers off to the northeast in that ice flow direction.
Now, here is a nice surprise; we see another similar dispersion train just to the northwest. We checked with Stu and we confirmed that this is not coming off of Blackwater, it’s in the wrong direction, it’s off to the northwest, this is something else and we’re going to get it, we are getting after this now, we’ve got a few condemnation holes drilled up there and we have got some closer space holes planned for follow up here between now and the end of the year.
So that’s right in the immediate neighborhood of deposit, if there is immediate resource potential upside beyond what I’ve shown you right around the deposit. I suspect that’s our best bet right now.
Just to the southeast of Blackwater, we’ve also got some anomalous results. Not a clear dispersion train just yet, but we need to do more sampling and see what all that means. But again, you can see that these results and the highest grade results are generally closest to source. Generally, we’ve got kind of a northwest trending theme going on here. It doesn’t end there. You go off to the – just over to the east on to our oral block, we’ve got some favorable interesting results that we need to follow-up on next year over to the east. I don’t know what that means, but I know one of those is at least 4 grams.
And then, we go to Capoose, again proof of concept. Coming right off the Capoose there is a dispersion train going from Capoose off to the northeast, but this is really cool. I mean, just to the southwest of Capoose, we’ve got another cluster of anomalous results that – they’re not coming off Capoose obviously because the ice flow from southwest to northeast. So we’ve got something going on in the cover rocks overlying the Capoose (inaudible) and we’re going to be following up on that area too. We call that area the VAN time area.
Then likewise in the central portion, right along the road we’ve got another cluster of favorable results that are sitting right along a major fault zone, I call the Top Lake Fall. We’ll be following up on that and then just to round it out, we’ve got some kind of at this point random intercepts out on the greater neighborhood.
So clearly there is a lot going on in the geology of this property that we’re just beginning to get, this is just beginning to emerge to us. The next chapter for this project in terms of where the next discovery is going to be, maybe it will be Capoose, but I don’t know, I’m just as excited about everything else we’ve got.
Unidentified Company Representative
Let’s see here from Blackwater to Capoose, that’s the best way I can give you and I apologize, I should have put a scale on there. I should know that, I’m a geologist, but the distance from Blackwater to Capoose line of site is about 25 kilometers. So with that, I’ll hand it back over to Randall. Thank you.
Well, thank you very much, Mark. Yeah, I was (inaudible) your geologic picture, there is not a lot of scale. in terms of Blackwater, what it means to us, I mean I’d like to talk about the project itself, but we’re also building a very significant presence in British Columbia and just what that means to new Gold as a whole. We’re delighted to have such a big project in a great jurisdiction where we have lots of experience, you can see where it’s located. You’ve seen from the pictures that it’s a very workable train and as Paul mentioned in an area that’s already had a lot of economic development and we can take advantage of that.
We feel fortunate that we’ve got arguably one of the best and largest deposit has been discovered in North America in the last decade. Today, we’ve got 8 million recovered ounces of gold well below industry average cash costs, solid economics whether we use $1,275 gold or where we are today closer to $1,775 gold, $500 higher than that. I feel very fortunate to have the partners in the venture, people with so much experience and the track record of building and developing mines, bringing them on stream, on time and on budget and I think we’ve used very realistic assumptions perhaps conservative in terms of what this project will cost.
And I think as you’ve heard from Mark, this is just the beginning. We’ve been on the ground now for 15 months. I’m proud of what the guys have accomplished to date, but I think we’ll be here for decades and this will continue to become a more and more exciting project. As you know, we bought Richfield and a couple of other companies last year in total spending about $600 million on that. Today, the shares that we issued for those acquisitions amount to about 11% of our stock that’s currently outstanding but you can see that already 36% of our gold resource and 29% of our silver resource, but as you’ve heard from Mark there certainly the gold but definitely the silver is going to continue to grow.
In terms of the presence that we have in British Columbia, Bob referred to experience that we have in that region and maybe one person I’d like to mention who has joined the board of New Gold in the middle of July is David Emerson. If you are not familiar with David, he is sort of one just about everything in British Columbia where there was Vancouver airport authority camp for a collection of other ventures there, but also was Canada’s Minister of Industry Trade and held other portfolios.
I think he is a real key addition to our company. And the government the premier and other people running for the [MVP] have already reached out to David to see what we are doing and express their support. So I think that will even help us further beyond what we have today. So you can see in total what our gold, silver and copper is in BC and what our gold production will be from both Blackwater and New Afton which is already started up.
You can see the cost line here and what’s remarkable is on the right, the top of the line is $250 an ounce. What that effectively means is all these ounces of gold that we’ll be getting from British Columbia will effectively be paid for largely from the copper and the silver that we get as by-products from our mines. In terms of what it means to New Gold as a whole, you can see over the course of the next few years our production growth is over a million ounces and in addition to what we get from Blackwater of course we still have the El Morro project.
From a financial perspective, that’s where business people ourselves and shareholders of this company what we see is our cash flow from operations at today’s price is growing to over $1 billion a year or four times what it was last year. So this will continue to strengthen our company and again all of this coming from politically secured jurisdictions.
We laid out at the beginning of this year a series of catalysts or things that we said that we would do. We updated the Blackwater resource. We announced the production start at New Afton. We said that we would win El Morro litigation and that’s done now. Because Mark kept finding more gold, we actually updated the resource again to be able to use for this PEA. New Afton hit commercial production as I mentioned a month earlier than we said it would. We said that we’d have out by the end of the third quarter to the PEA and you’ve seen that this morning.
New Afton is going to hit its full capacity of the mill of 11,000 tons a day. We have got some announcements coming out on El Morro in terms of engineering and development of that project. Then beyond that, as you know, we are continuing to drill a Blackwater. We will have more exploration update, but also Mark and his team have started drilling at New Afton into a block down below the reserve base that we have for that project to look at both extending the mine life at New Afton and potentially giving a scope to increase its annual production. So I think that we’ll have a very exciting fourth quarter of 2012.
Putting in all together, I think we’ve got the right team to be able to execute on these projects and to continue and to deliver from our operations. As you know, we have a very committed not only management team, but board where I think we have a probably the largest shareholding our self in this company when we talk about our share price because these are shares that we own our self.
We’re fully funded, so it’s nice to be able to build the project of this scale with the cash flow that we get from our operations and also the cash balance that we have on hand. We have a diversified asset base, again all in politically secured jurisdictions. There is lots of organic growth beyond what we’ve talked about here at Blackwater and we’ll continue to deliver on that. Our margins continued to expand, as our production grows up and therefore our margin per ounce continues to grow.
We believe that there is lots of things that we can do to increase the net asset value of this company. There is lots of catalysts that will continue to carry us forward and putting in all together, I hope you appreciate why we’re so excited about New Gold.
And with that, that concludes the formal part of our presentation. We brought all the guys out to answer any questions that you may have. My only request is, if you could questions through the microphone so people on the web can hear what they are and we’ll be able to help everybody out with the answers.
So thank you very much. Questions from anybody…
Congratulations on getting PEA and great job of Blackwater and I think more importantly putting a realistic upfront capital numbers out there finally. Couple of questions, are you going to be using an onsite camp here given the distance to Vanderhoof? Are you expecting people to actually come in on a daily basis?
So when did that Peter?
Yeah, for the construction, we’ll have a 1,500 man construction camp onsite and then for operations as well, we’ll have a 400 to 500 man operations camp and we’ll be recruiting people as much as we can from the local regions and but we’ll also have that opportunity to bring people from around British Columbia to the operations.
Okay, so that camp process including the G&A. Okay, and then on the tailing, on a go-forward basis, of sustaining CapEx, how much of that sustaining is for the continual Tailings management.
It’s approximately $200 million.
$200 million. Okay. Great, thanks.
Steven Butler – Canaccord Genuity Inc.
Guys, Steve Butler with Canaccord. And I’ll take the mic here and sing a song. The areas of optimization you guys identified if you could maybe come back to that slide on 27 and maybe talk to the biggest potential sources of joy that you might see in the optimization efforts and maybe a comment on pit slope angels, what that could do to the strip ratio, just a few extra thoughts there if you don’t mind. And as well the question on Capoose, if you can remind us as a resource and whether or not Mark you would say or Paul whether you would see Capoose I think gets bigger or standalone or Capoose could it be offered to be shipped to central mill at Blackwater? Thanks.
I can talk about the (inaudible). In terms of the geotech though, we have in fact done at least five holes in the open pit and we have a pretty robust RQD model as well as of deposit. So what we have is in the south, we have very competent rock structure and we’re looking at about a 43 degree sorry, overall slope. In the north, we have more broken material with a low RQD and hence much lower slope and with the average slope is about 38 degrees in that area. And overburden kind of a wage of overburden on the east of the pits and that has to get set back in that area.
So next program, we’ll also be looking at what needs to be done for deepwatering, what that means and extending the number of holes that we have to kind of classify the risk of the deposit. And as it has grown of course, we’re also kind of making sure that the holes that we are putting in GR and waste and in the open pit.
So from some early work that we looked at that, what does that mean, 43 degree slope angle in the most competent area is still fairly conservative and we have nice people does the consulting working with us on that, and they’ve looked on a lot of the mines in British Columbia and elsewhere. So we think there is an opportunity to do something there to steepen that up a little bit plus in these other areas that we kind of at the moment, kind of classify as this broken rock.
So what does that mean, well, I can’t give you a precise numbers or percentages, but from playing with the sensitivity of that we do see some additional material potentially being pulled in with that. And also tweaking that strip ratio little bit low. As you sort of saw perhaps on the photographs there, the topography also falls away to the north and of course that is where hopefully we’re not seeing a good job with extending the potential deposit as well. So we should get some kind of benefit out of that as well.
Okay, on Capoose, I think Steve the short answer is the jury is still out. We have the known resource of the top of my head, I don’t have the numbers right at the front of my mind but I do know in terms of the gold content, it’s on the order of about, I think $700,000 ounces gold and roughly half a gram. I refer you back to our own consolidated resource statements for the exact numbers on the published resource. We’ve got a 11,000 meters of new drilling that we just completed. Once we have all of that in, we plan to do an updated resource estimate on Capoose. We’re also evaluating the historic data as well to determine whether or not we can continue using that going forward. But as I said, the jury is still out.
Now at the grades, the average grade of the historic resource roughly a half a gram of gold and 20 plus grams of silver, so roughly a gram equivalent. I think everybody in the room here knows that if there is only one or two million ounces at about a gram equivalent 25 kilometer truck haul probably isn’t going to play but there is just a lot more work to do and that’s really what I wanted to highlight for you today. That system geologically is much bigger than what is in the resource area, resource drilling right now. There is just a lot more work to do and our focus this year was on targeting the zones, where we have Higher Grade Gold Mineralization from the historic drilling and that’s what we focused on, so stay tuned; that’s the best I can tell you today.
Steven Butler – Canaccord Genuity Inc.
Reiterating what the other guys have said, this is an astonishing amount of work in a year and a half guys, well done. Just to follow on Steve’s comments about some of the tweaking, maybe Bob you could talk a bit about the upside of the recoveries, if you see any there and I guess for the more (inaudible) amongst the analysts, the size of the stockpile that you will be creating in the grade?
Actually, I will just pass that right on over to Paul Hosford.
Steven Butler – Canaccord Genuity Inc.
I was hoping we get a question on metallurgy, thank you. We have done a lot of work for this space, we have over 100 tests on hardness and grinding; that’s historic with a lot of project, that’s a big issue and that’s something we are not going to be surprised about. We also have at this stage already done about 60 hollow leaching test and about another 40 odd of flotation and leaching test. And we have a two, three programs ongoing here where we are going to add, we are going to more than triple that in terms of test database. But ensuring these recoveries at the moment about 87% gold, we are working at and there is opportunity there to improve that.
And I guess it’s two ways; obviously potentially improving the recovery, just in a recovery number, but of course when you do that with grind for example, it potentially could lead to additional cyanide cost and additional power cost. So those are the kind of trade-off that we are playing with at the moment and we will have the data to support our decision and finalizing that before the feasibility study, and that’s our intent to drive that by the first quarter of next year. So the gold, I think, you can definitely see.
Silver we’re carrying about 53% recovery at the moment. So the gold is fairly 3 million and relatively simple, it’s a little bit of electrum in there. The silver seems to be wrapped up more with a tenant type mineral and a (inaudible). So it’s very – it seems to be slow leaching. So other than grinding it very, very fine, and when we do some of the flip work we see that we get higher silver recovery there. But it is a – at the moment from the early trade offs we’ve done, it doesn’t really make economic sense at the moment. But I think there is opportunity to do slightly better than that.
And so the stockpile – sorry – Peter just reminded me the other point is at the point in the PEA we carry cyanide consumptions that are on the high end perhaps of industry, but not unusual. Now in the (inaudible) going on right now, we’re focusing directly on that and from the stuff that we’re seeing right now, we can sort of see that, that is something that we can definitely optimize very nicely.
On the question of the stockpiles, at the moment what we carry is a low grade gold stockpile that’s generated during this first year, the initial five years of mining and that’s about 27 million tons. And I guess profits in the last year and a half of the operation. Also during and Mark referred to it as this high silver, there is northwest silver zone. That material because of the higher silver grade, we kind of mine stockpile and then gradually believe into the operation as well. So that amounts to between 9 million and 10 million tons.
Thanks guys. It is indeed a lot of work for last six months or so and is rewarding to note that it’s indeed the geologist that’s keenly aware of the need for a cutoff date for the feasibility study. I know I’m talking to some of the guys that worked at Terrane, and maybe if you could just expand on like when that cutoff needs to happen, and everything gets set in stone. so that nothing goes over cost and maybe on that, maybe if you can, you spoke to the costing, the real life examples, let’s say Detour, Malartic even something as simple as their power line, I think was 200 million, maybe I can’t remember. But the power line was in or at least right away, it was in and it cost 200 million you’re looking at 100, and Detour came out with mine, 14 million of tons or 250 of tons, and you’re using about 90. I know all those will be revised in the feasibility, maybe if you can comment on that, and maybe just on the processing, I’m not a processing guy, but is there secondary crushers after the main (inaudible).
Steven Butler – Canaccord Genuity Inc.
Okay. Help me if I missed anything, but in terms of the power line that’s I have to sort of say that I obviously know a little bit about Detour, I don’t know the details of their costing. But on the power line for example, Milligan for example, recently put in a 92 kilometer long power line, 230 kV for about $24 million, plus another $7 million or so as the point of connection costs into BC Hydro for the additional transformers. So in very similar kind of Terrane. so I think we need the cost estimates we built up using the same kind of contractors in current costs and Milligan isn’t the only one, it’s just a recent one that was put in for mine with a H-pole wood frame structure for a 230 kV power line.
So I don’t know if that answers, I’m not sure what the other guys have, that sounds like a lot. But in terms of the mining cost, again in terms of benchmarking, we looked at – in the recent press release. I mean our processing cost are very much in the same order; mining cost, I’m not actually sure, I mean their strip ratio is about 3.7 I think, so there is another unit in there.
When we kind of took it back in, we could – we did develop in post principles and looked at the whole profiles assuming that as a whole run, using fuel consumption (inaudible) from the kind of mining equipment. We’ve build up on post principles there. Looking at it a different way, and it’s kind of interesting looking at their numbers when they also obviously had $1 per ton and they spoke about in the $1 an ounce.
When you look at the total cost in terms of mining, processing and G&A, they were – I think something like $710 an ounce. When you look at our numbers and we are about $670 an ounce. So kind of a aggregate sense and I don’t know it’s not the whole answer because it’s different, slight tweaks in grade and strip but it kind of came to the same order. What really stands out for us is we have very significant silver credit or about $90, which makes a big difference our bottom line and just when I see they publish royalties from Detour, they were always, also about five times more than we carry.
The other thing that I could add on the capital cost is it the engineering company that were using their cost department at the detailed the capital cost source, it’s the same guys that are – the very same guys that are doing the cost controls at Mount Milligan as they’ve constructed today. So things like manpower, efficiencies which is probably the primary blow up you’ve seen in some of the projects around we’ve got real numbers today and so we are very comfortable with those capital cost.
Unidentified Company Representative
Your other question sorry is already on the secondary crushing that is when we look at the combination circuit, we look at a whole range of options there trying to look at capital cost, operating cost, just operational efficiency for our climate, for our situation and that is one that we’ve kind of run and simulated but in our base case we carry a primary crush SAG mill, BOE mill circuit. So we are not looking at secondary crushing in the base model. The simulation, what method of simulating all that was particularly with this JK simulation, is well developed and understood in the databases certainly very, very good for the standard I would call that or kind of circuits. If there are less factor of the secondary crushing circuit operations out there. But it is something we will be looking at.
And then I think front end of your question you asked about what is our data cut-off for drilling information on resource delineation and infilled drilling for the feasibility study and effectively it’s the end of this year. All of the drilling we didn’t yet done this year is what will go into the final block model for the resources to support the feasibility study and we anticipate delivery of that to Peter and his team by the end of the first quarter next year. Of course, we’ll continue exploring and drilling on the rest of the properties we go forward. Nice problem to have would be another discovery right in the neighborhood. But in the mean time, we’re on track to get all the drilling work done by the end of this year and project wide I anticipate we’ll round of the year with about 250,000 meters of drilling in 2012. That includes what we’ve drilled to flush out the Blackwater resource itself plus roughly 40,000 to 50,000 meters of condemnation/exploration drilling and the 11,000 meters that we’ve drilled at Capoose. So been a very busy year for us. And but we’re going to keep going, because discoveries are found at the end of the drill pit.
Steven Butler – Canaccord Genuity Inc.
Thanks. What is the effect of cut off grade assumed for the conversion of resources into the mine plant to the 0.23 gold equivalent and what is the effective sort of – amount of dilution implied in the model for the economic assessment?
Effective cut off in the traditional mine plant is of the order of about 0.28 grams a ton to just under the 0.23. To the dilution, we haven’t built in dilution in this stage of the project. And as you can see, we still have a fair amount of in food and in discussion with our consultant to kind of and we agreed with them. We sort of said that’s a degree of accuracy that will be followed up in the next stage both when we have a better understanding or we finalize the kind of equipment that we actually wanting there as well.
Hi guys. I’ve just got a couple of questions. I guess first and foremost most of these questions are for Brian, financing options. Clearly you are going to be considering what your financing options are moving forward, and then really the other thing that I’m interested in understanding is the effective tax implications in the first five years, what type of governmental programs are you looking at to be able to drop your tax rate to effectively zero for the initial say capital pay-back period.
And then just on the capital expenses moving forward, I’m wondering what your program expenses for the next two years are prior to moving into development activity on your current plan and I’m wondering how much of the initial CapEx you envisage spending over the next two years. Is there going to be a portion of pre-production capital that’s spent over 2013 and 2014?
First of all, talking about the effective tax rate because that’s a fixed income line. Basically there is no incentive, it’s what exists in the tax act today. There are three layers of taxation in (inaudible) subject to. There is the BC mineral tax, federal and provincial income taxes. Once you start commercial production you pay a minimum 2% BC mineral tax based on profits. You get to deduct all your CapEx before the 13% rate kicks in which is deductible from the income tax. I know this is way too much detail, but basically in the first five years we’re subject to the 2% tax. After that the effective tax rate when you add these all together is about 30%, so just in round numbers.
The second thing what do we plan on spending in the next two years, basically we haven’t formalized our drilling times yet. So all I can tell you is what we are going to spend as far as feasibility and permitting and all that stuff. And over the next few years, it’s about $60 million. I’m sure Mark is going to come up with the drilling plan and will probably add to it but it’s not going to be like the 250,000 units that we’re spending this year. So you know I suspect it will be substantially greater than this year’s plan.
The other questions were?
Yeah, I’ll grab that one. I think as Brian correctly said, we’re going to spend over 2013, 2014 we have got that $55 million to $60 million number that working on and that’s base exploration, doesn’t include if we have big success in launching other drilling program. That will cover the feasibility study, that’s going to cover the permitting, the EA process and it will really bring the project to a decision place.
Now you’re correct, if we are going to execute on a 2015, 2016 construction program then we’re going to have to pull forward about a $150 million to $200 million in to that 2014 time period and that will be to look at long lead equipment and lots of engineering and will help us walk in at number and hold that capital number down. That is part of the capital process. And that is included in the $1.8 billion that we have got.
Basically, the vast majority of the $1.8 billion we have paid in 2015 and 2016 and we may have to accelerate a $150 million of that but we work that out over the coming months but it won’t be a substantial amount of money and it will not change the rates of returns – may move it by 1% or so but it’s not going to moving around.
And how are you going to finance it?
(Inaudible) purposes with New Afton, New Afton is going to be generating substantial cash flow. We will fund this from cash flow provided from operating activities. And I am sorry, it won’t move the internal rate of room by 1% or move it by a fraction.
Brian, just to confirm, just on the ability to differ your cash taxes, the plan would be if you’re going ahead with this project is to use the capital spent at Blackwater to offset the cash taxes at New Afton, is that correct.
That’s always a possibility. And this is a model that’s standalone basis using its shelter. It does not take any consideration of corporate G&A issue. So basically it’s all in the same entity, we all file Canadian taxes, and so obviously we put together. But looking at this on a project basis, this is the economics of this project.
Okay. And have you looked at it, if you’ve already used that capital to offset the cash at New Afton?
It would delay New Afton’s cash taxes by year or two. So there is some hidden benefits, and we can use that deferral taxes to improve the cash flow in the interim to fund this thing.
Yeah, hi guys, not sure of the question for us. First question on the permitting time line, was the new I think so called harmonized federal potential timeline considered in the process.
Unidentified Company Representative
Tim, do you want to go ahead?
Unidentified Company Representative
Sure. We put there the timeline as shown on the slide outlined in the critical path there. It’s really the same timeline we’ve been using since July, sorry middle of 2011 before the new legislations come out. So we think there is some opportunities there with the new legislation as it gets rolled out. To answer your question directly, no, we haven’t included the new timeline within here, we’ve taken a conservative approach.
Okay, so on costing what diesel prices were used and what cover cost were used?
In terms of diesel price, we break that on about $0.94 which is about a $100 a barrels oil prices. In terms of power in BC Hydro as a public utility and it’s a kind of a stated scheduled of rates there, the have a several (inaudible) that approach and when averages works out about just under $0.0450 a kilowatt hour and that includes demand charge and everything else.
Okay, and lastly in terms of the mill design, did you consider instead of one or two circuits in designs?
That’s a good question and we did consider all of that. We’ve settled on and what covered in the – carried in the cost and the PEA is a twin circuits, so we are looking at 236 for the segments for example.
We’ll have a duel trend from the segments and segments above.
Right, and what sort of grind size that you need to get to the 87% recovery?
Yeah, at the moment we’ve got about a 150 grind size.
Unidentified Company Representative
Okay, the schedule is sustaining, capital schedule was build up over time, so it varies by a year. So for example, we have a Phase III development and we bring on an additional shovel and we bring on some additional trucks and kind of about year five, I think it is and we have a big chunk of money and for replacement fleet in about year 10.
So you do see these kind of spike that come with that, as I say over the life-of-mine it is about for the mining equipment it is basically essentially the balance it’s about $280 million and something. The Tailing dam cost in sales from that drawing actually you could sort of see that the tailing is down. When we start off we get quite that the containment volume was quite small and as it gets bigger as it comes out of the value, then the additional high teens that is much smaller. So you see in the first say three years more of the – most of the good chunk of probably 60% of the tailings, capital and sustaining cost (inaudible) and thereafter once essentially it set up and we just had the trucks running across the dam and it’s a pretty much sustained level sort of like 6 million a year approximately.
Hope there are no further questions I want to thank you very much for joining us today. As you can tell this is a project that we are pretty exited about, the team will be hanging around for few minutes, if you’d care to ask any further questions to follow-up on things and of course or something comes to mind a day, or a week, or a month from now, by all means you are welcome to call. For those of you who joined us on the web, thank you very much for your time and I want to thank you all very much for coming and I hope you have a wonderful day. Thank you very much.
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