Eldorado inks iron ore deal with BHP

VANCOUVER — Eldorado Gold (ELD-T, EGO-X) has signed an agreement to sell future iron ore production from its 75%-owned Vila Nova project, in northern Brazil’s Amapa state, to mining giant BHP Billiton (BHP-N, BLT-L).

The non-binding agreement is expected to be formalized within weeks as a long-term supply agreement that would see BHP buy the first three years of production of lump iron ore and sinter fines from the project.

Recent updates to a prefeasibility study completed last year put the project’s initial capital costs at US$39 million. Eldorado anticipates mining to start near the end of the year and ore shipments to begin in early 2009.

Vila Nova hosts 9.3 million tonnes of proven and probable reserves grading 61% iron, plus 10 million tonnes of measured and indicated resources averaging 61.6% iron. Current reserves will last nine years (averaging 900,000 dry tonnes of ore per year), generating a 54% after-tax internal rate of return. A net present value for Eldorado’s share comes in at US$108 million using a 5% discount. Payback is expected in 1.8 years.

Eldorado is earning its interest in Vila Nova by financing roughly US$39 million in preproduction capital costs (including working capital) and property payments to its Brazilian partner, Mineracao Amapari, which will retain a 25% interest in the project.

Iron ore from the open-pit operation will be crushed, screened and processed through a gravity separation circuit producing lump ore and sinter fines. The product will be transported to the port of Santana, roughly 170 km east, for shipping.

Total cash costs are projected at US$39 per dry metric tonne of finished product (FOB Santana Port).

With demand outpacing production increases over the past several years, the iron ore market has seen spot prices recently soar beyond US$200 per tonne. Contract prices are pegged lower than spot, with recently negotiated levels around US$120 per tonne.

Roughly 35% of the world’s iron ore deposits are controlled by Vale (RIO-N), BHP Billiton and Rio Tinto (RTP-N, RIO-L).The trio also accounts for about 78% of the seaborne trade in the commodity.

Earlier this month, Eldorado resumed operations at its Kisladag gold mine in western Turkey. Kisladag, which began production in 2006, was temporarily closed by a court injunction last year, part of a court case arguing that the project’s environmental impact assessment was deficient.