New Gold puts Amapari mine on care and maintenance

Six years ago mining tycoon Ian Telfer described the Amapari gold mine in Brazil as “one of the best undeveloped gold assets in the Americas.”

But even the industry’s most successful chief executives make mistakes occasionally.

At the time, Ian Telfer was chairman of Wheaton River Minerals, which acquired the Amapari mine in northeastern Brazil’s Amapa state for US$120 million in cash, shares and debt, or US$86 per reserve ounce.

(Six months earlier, AngloGold (AU-n) had sold Amapari to Brazilian millionaire Eike Batista’s Mineracao Pedra Branca do Amaparia for US$18.2 million.)

In a press release announcing Wheaton River Minerals’ acquisition of Amapari in December 2003, Telfer asserted that production was expected to begin in late 2005 and average 160,000 oz. gold annually for five years. The chartered account with an MBA from the University of Ottawa even went so far as to say that production could reach about 188,000 oz. in each of the first two years of operation.

Things were to turn out a little differently, however. The mine, commissioned in the second half of 2005, produced just 24,715 oz. gold in 2005. That number rose to 84,200 oz. gold in 2006, 96,400 oz. gold in 2007 and 56,891 in the first three quarters of 2008. (It is forecast to produce between 70,000 and 80,000 oz. gold for the whole year.)

In 2006, Amapari’s proven and probable reserves tumbled from 1.34 million oz. gold to 485,000 oz. gold. The reduction was due to the exclusion of sulphide mineralization previously included in the reserve estimate.

By that time, Wheaton River Minerals had been acquired by Goldcorp (G-T, GG-N), with Telfer as chief executive, and the dramatic reduction in Amapari reserves meant Goldcorp posted a US$170 million charge against its 2006 earnings.

In March 2007, Goldcorp sold Amapari and its Peak gold mine in Australia for US$300 million in cash and shares to Peak Gold, a junior company led by Frank Giustra’s investment banking firm, Endeavour Financial.

Peak Gold updated Amapari’s mineral resource estimate in October 2007. The new estimate demonstrated measured and indicated resources of 14.2 million tonnes grading 2.29 grams gold per tonne, for 1.05 million contained ounces gold. In the inferred category Amapari holds 13 million tonnes grading 3.22 grams gold for an additional 1.4 million contained ounces gold.

In April 2008, Peak Gold merged with Metallica Resources and New Gold to form mid-tier gold producer New Gold (NGD-T). (Telfer is a member of the board.)

Now New Gold is putting the troubled mine on temporary care and maintenance.

“We had hoped to mine and process oxide ores through the third quarter of 2009, but efforts to maintain recent improvements in production and costs with the increasing amounts of hard transition ore and waste in the Amapari pits have been unsuccessful,” Robert Gallagher, New Gold’s president and chief executive, said in a statement on Jan. 2.

“While significant resources remain at Amapari, the additional capital required to maintain economic production levels and the limited remaining oxide reserves justifies the decision to place the mine oncare and maintenance.”

New Gold says it will be more cost-effective to process the remaining  oxide ore (including transition material) with the underlying sulphide resource in a new process facility and will prepare a preliminary economic assessment about using a conventional crush/grind/CIL mill. It is expected that the study will be completed in the first quarter of 2009. New Gold says it will also look into other “strategic alternatives.”

Although the suspension at Amapari takes immediate effect, leaching of stacked material will likely continue until it is no longer economic to do so. The operation will be placed on care and maintenance pending the results of the PEA.

Amapari is an open-pit and heap leach operation in the Vila Nova greenstone belt. The belt makes up part of the Guiana Shield that covers the northern part of Brazil, as well as parts of the Guianas, and eastern Venezuela.

Gold mineralization at Amapari is hosted in Banded Iron Formation (BIF), a rock made up predominantly of iron-bearing minerals that is also one of the world’s primary sources of iron ore. Gold mineralization occurs along fold and shear structures that deform and cross-cut the BIF.

At press-time in Toronto, New Gold was trading at about $1.50 per share. It has a 52-week trading range of 94¢-$9.75 per share with 212.8 million shares outstanding.