In late 2005, Alamos discovered very high- to bonanza-grade gold mineralization within the Escondida deposit, which is located approximately 500 metres north of the Mulatos Pit where the Company is currently mining.
Alamos initially retained Wardrop Engineering (“Wardrop”) to prepare a feasibility study that contemplated a 1,000 tonnes-per-day (“tpd”) milling, gravity, sulfide flotation, and flotation concentrate cyanidation operation to process high-grade material from both the Estrella and Escondida deposits. Given the rate of recovery from existing heap leach operations, Wardrop indicated that the additional capital and operating costs did not provide sufficient return based on the forecasted incremental gold production.
Alamos then retained KDE to conduct a National Instrument 43-101 (“NI 43-101”) compliant study to estimate the operating and capital costs of a smaller 500 tpd milling operation to process only the high-grade Escondida ore. KDE’s findings and recommendations are presented in the KDE Report, which will be available shortly under the Company’s name at www.sedar.com.
The Company and its consultants have designated Escondida ore that grades in excess of 3.4 grams per tonne gold (“g/t Au”) as milling ore. Using this cut-off, the high-grade portion of the Escondida represents NI 43-101 compliant reserves of 289,000 tonnes of milling ore at an average drill-indicated grade of 10.54 g/t Au as of December 31, 2008. However, bulk samples and internal testing have indicated that the reserve grade may significantly under-estimate the actual grade due to sampling issues associated with coarse native gold (commonly known as a “nugget effect”). The bulk sampling program completed in 2007 calculated a mean grade of 25.48 g/t Au in a sample size approximately 50 times that of the drilling samples. Based on this information and other qualitative evidence, the Company expects that the actual grade of the Escondida high-grade zone will be significantly higher than the reserve grade. In addition, recent discoveries in close proximity to the Escondida area indicate that there will be several opportunities to increase the tonnes of high-grade ore available to mine and process.
Based solely on the proven and probable reserves of the milling ore, the KDE Report confirmed that the development and processing of the Escondida high-grade zone is economically robust, and that 90% or more of the coarse high-grade Escondida ore is recoverable in a crushing, grinding, and gravity milling circuit. The KDE Report recommends constructing a 500 tpd mill, leaching the mill tailings, and indicates that processing high-grade Escondida ore using a gravity circuit will be profitable. Other key findings of the KDE Report were:
- Gravity recovery: 90%
- Gravity plus leach recovery: 99.4% when ground to 88 microns (which is based on laboratory testing results and thus operating results may be less)
- Initial capital cost: $17.5 million (including 20% contingency)
- Operating costs: $12.08 per tonne of ore (or $39.62 per ounce of gold)
In addition to processing potentially higher grade ore than the reserve grade, it may be possible to add to the mine life of the project. For example, the recent discoveries of a southwest extension to the Escondida high-grade zone and the new northeast Escondida high-grade zone should provide additional ore for mill processing. Other projects, such as San Carlos, show evidence of high-grade ore with similar characteristics to the high-grade Escondida ore.
The following tables outline key project parameters, findings of the study, and management’s estimate of economic benefit of the mill, as a stand-alone project, using a conservative $700 gold price assumption:
Based on the above parameters, factoring in the Company’s 5% net smelter return (“NSR”) royalty, and applying the statutory tax rate in Mexico of 28%, management estimates that the project yields an after-tax internal rate of return (“IRR”) of 101% and a net present value (“NPV”) at a 5% discount rate of $22.6-million on a stand-alone basis. The after-tax NPV at 5% using a gold price of $900 per ounce is $34.5-million and the after-tax IRR increases to 150%. The after-tax NPV, in millions of dollars, and after-tax IRR at various life-of-project gold price assumptions and discount rates are presented in the following sensitivity table:
Several of the mill components have already been acquired and mill construction is expected to commence during 2010, with the first mill production in the fourth quarter of 2011. The mill will be modular in design so that it may be easily modified at a later date.
In addition to the capital cost of the mill and related equipment, the Company’s interim mine plan calls for the pre-stripping and removal of 27 million tonnes of waste.
The Company has completed the bid documents for the pre-stripping and quotes are being solicited from contract miners now. Subject to contractor availability, pre-stripping activities are expected to commence in the third quarter of 2009 and to be completed by the third quarter of 2011.