Bema finds keys to Kupol

Capital cost to develop Kupol – US$470 million

Ounces of silver outlined – 48.8 million

Ounces of gold in the ground – 3.9 million

Projected mine life – 6.5 years

Having received key final approval for the construction and development of the Kupol gold- silver mine in Russia from the federal government, all the pieces have fallen into place for Bema Gold (BGO-T, BGO-X), which is fast-tracking the project for startup in mid-2008.

The Kupol project is in a remote setting in the Chukotka autonomous region of Far Eastern Russia, 940 km northeast of Bema’s Julietta mine and 200 km east of the city of Bilbino. The property is accessible by dirt road and all-terrain tracks, or by helicopter, from Bilbino. Construction of a runway for fixed wing aircraft began in 2005 and is scheduled for completion this year.

Bema optioned the project from the government of Chukotka in 2002. Kupol was discovered in 1995 through regional geochemistry. Gold and silver mineralization is hosted by a low-sulphidation, epithermal, quartz vein system within a north-south-oriented fault zone. The Russians systematically tested a 3-km strike length with 34 trenches spaced 50 to 150 metres apart, returning several bonanza intercepts highlighted by 183 grams gold and 2,557 grams silver per tonne across 11.8 metres, and 155 grams gold and 549 grams silver over 9 metres. The central portion of the zone was stripped and channel sampled along 425 metres of strike length.

The Russian group completed 3,000 metres of drilling in 26 holes, testing a 400-metre-long section on 50-metre centres. Better intercepts included 41.3 metres of 51.6 grams gold and 531 grams silver, 29.2 metres of 16 grams gold and 340 grams silver, and 6.6 metres of 85.3 grams gold and 704 grams silver. The drilled area was estimated to contain an inferred resource of 780,000 tonnes averaging 33.3 grams gold and 373 grams silver, representing 835,000 oz. gold and 9.3 million oz. silver.

During 2003, Bema spent US$9.8 million exploring Kupol, including 22,260 metres of drilling in 166 holes, extensive trenching, metallurgical test work, a site survey, hydrology and environmental baseline studies. In addition, US$11.3 million was spent on initial engineering work, studies toward a preliminary economic assessment, and on equipment and supplies for the 2004 season. The seasonal nature of access to the site requires purchasing supplies well in advance.

The 2004 program included 52,830 metres of drilling in 309 holes. The development portion included the engineering and design of a runway, preparatory earth works for mine and mill facilities, geotechnical and condemnation drilling, and final metallurgical test work. Equipment was also purchased for mill construction in 2005. Bema spent US$82 million on exploration and development at Kupol in 2004.

Activity during 2005 consisted of continued exploration and development, as well as mobilization of materials and supplies to Kupol for the 2005 season and to the East Siberian seaport of Pevek for the 2006 season.

With the completion of a bankable feasibility study in June 2005 and the payment of US$14.5 million (based on a US$5-per-oz. price for 75% of the gold defined as proven and probable), Bema met all of the requirements to acquire its 75% interest in the Kupol property. A final payment of just over US$15 million is due in June 2006.

Economically ‘robust’

A positive feasibility study indicates Kupol is economically “robust” and can be developed as a low-cost, high-grade, open-pit and underground gold-silver mine at a capital cost of US$470 million, including US$55 million for contingencies. Probable ore reserves were last estimated at 7.1 million tonnes grading 16.9 grams gold and 214 grams silver, equal to 3.9 million oz. gold and 48.8 million oz. silver.

Using prices of US$400 per oz. for gold and US$6 per oz. for silver, minable ore reserves are based solely on indicated resources containing some 4.2 million oz. gold and 53 million oz. silver.

The 2005 summer exploration program at Kupol included 46,147 metres in 192 holes to further explore the property and to conduct infill and resource definition drilling. As a result, Bema added 638,000 oz. gold and 5.4 million oz. silver to the indicated resources. Based on these results, an updated minable reserve estimate and mine plan is due sometime in May. The added ounces are expected to improve production early on by displacing lower-grade ore.

In addition, inferred resources contain 1.7 million oz. gold and 22.2 million oz. silver in 3.9 million tonnes averaging 13.7 grams gold and 177 grams silver. Deep drilling on the North Extension extended inferred resources some 200 metres north of previous estimates. The inferred resources have the potential to extend Kupol’s current 6.5-year mine life. About 20,000 metres of primarily exploration drilling is planned for 2006.

The Kupol mine is projected to produce more than 550,000 oz. gold and 5.8 million oz. silver annually over an initial 6.5-year life, with total cash costs of US$88 per oz. gold, net of silver credits. The mine plan is based on both open-pit and underground mining, employing conventional milling at a rate of 3,000 tonnes per day. The milling process will consist of a primary crushing and grinding circuit, and use gravity recovery followed by whole-ore leaching and Merrill-Crowe precipitation to produce gold-silver dor bars. Recoveries are estimated to average 94% for gold and 79% for silver, based on metallurgical test work of drill core samples.

The feasibility study envisages the simultaneous production from open-pit and underground mining for the first three years. The mill would process about 1,000 tonnes per day of open-pit ore and 2,000 tonnes per day of underground ore. After year three, the mill would treat roughly 2,750 tonnes per day of underground ore and 250 tonnes per day of stockpiled lower-grade ore from the pit.

Probable reserves amenable to open-pit mining contain 937,000 oz. gold and 8.9 million oz. silver in 1.4 million tonnes grading 20.4 grams gold and 193 grams silver, at a stripping ratio of 12:1. Underground reserves contain a further 2.9 million oz. gold and 39.9 million oz. silver in 2.9 million tonnes of 16 grams gold and 219 grams silver.

The underground mine will be accessed by twin declines and a series of spiral ramps. About 30% of the ore will be extracted by mechanized development drifts, with the balance recovered by long-hole open stoping. Development of the South mine is slated to begin in 2006, followed by the North mine in 2008. Each of the underground mines are expected to reach a targeted production capacity of 1,750 tonnes per day.

Gold and silver-bearing quartz-adularia veins and breccias, hosted in andesite flows and pyroclastic units, are associated with silicification, argillization and rhyolite dykes for a distance of 4.1 km along strike. The steeply dipping system remains open in all directions. The main veined zone is up to 50 metres wide and has been tested to a vertical depth of 725 metres.

Bema has sub-divided the system into six contiguous zones. From north to south they are: North Extension, North, Central, Big Bend, South and South Extension. Mineralization across widths of up to 22 metres has been defined along 3.9 km of strike. Gold and silver occurs as native gold, gold-silver electrum, acanthite and silver-rich sulfosalts. The precious metals are associated pyrite and minor amounts of arsenopyrite, chalcopyrite, galena and sphalerite in banded chalcedonic quartz, quartz and quartz-adularia colloform and crustiform veins and breccias.

Financing

Bema has arranged for up to US$425 million of debt financing for the construction of the Kupol mine, including a US$400-million project loan and a US$25-million corporate loan. The project loan consists of two tranches. The first is for US$250 million and is fully underwritten by the lead arrangers, Bayerishe Hypo-und Verinsbank (HVB) and Societe Generale Corporate & Investment
Banking. The second tranche of US$150 million is from a group of multilateral and industry finance institutions.

In the meantime, HVB provided Bema with bridge financing of US$150 million to fund ongoing development of Kupol, which was fully drawn down at the end of 2005. Bema expects to begin drawing down the debt financing, including the repayment of the US$150-million loan, in April, now that it has received final construction permits. The debt financing is also subject to equity contributions of US$53 million from Bema and US$18 million from the government of Chukotka, which has yet to make that payment. If there should be any delay in funding from the government for any reason, Bema says it could easily cover the difference.

In order to maximize the debt financing, Bema is required to hedge about 15% of Kupol’s reserves and resources.

“We think that is a small price to pay really, we look at it as more of insurance,” said Marc Corra, Bema’s vice-president of finance, during a year-end conference call. “It helped us secure a very large loan at a very good rate.”

In 2005, Bema spent US$155 million at Kupol, including US$132 million in procurement and ongoing development. Bema jumpstarted construction last year by completing earthworks and road construction at the site. The company also did a lot of geotechnical drilling and engineering of the tailings pond and water reservoir sites. Orocon, the construction contractor, completed the erection and commissioning of six 3,000-cubic-metre fuel storage tanks and poured the concrete foundations for the mill and service buildings. The components for the permanent 600-man camp, mill and service buildings, and the grinding and crushing equipment were delivered to the Pevek sea port.

Logistically, 16,000 tonnes of equipment, material and supplies were shipped on four vessels from Everett, Wash., two vessels from the Russian sea port of Vostochniy and one from the Russian port of Vanino. Another 4,500 tonnes of supplies were shipped on river barges to the port of Zelenyi Mys on the Kolyma River, 400 km west of Kupol. In addition to the freight, Bema purchased 16,000 tonnes of fuel for use in 2006.

The immediate focus is transporting all that freight and fuel to Kupol from Pevek along a company-built winter road, which was opened in the first quarter of 2006.

This year, construction will focus on erecting the mill building and permanent housing complex, and completing the airstrip construction, which was more than halfway done at the end of 2005. Jim Sullivan, vice-president of Bema’s Russian operations, expects the mill will be under roof by the fall. The construction of a water reservoir dam is also under way and there are plans to install four more fuel tanks. In addition, open-pit mining and underground development work will begin in 2006. In February, the first bench was started in the open pit, primarily to provide rock fill for site haul roads. The company recently began the excavation of the South portal, which will allow it get underground in a couple of months.