Kinbauri Eyes Production Potential Of El Valle, Carles

VANCOUVER–In a robust scoping study of its primary asset, Kinbauri Gold (KNB-V, KINBF-O) is looking to reinvigorate the past-producing El Valle and Carles mines in Spain’s northwestern province of Asturias.

Rio Narcea Gold Mines had operated the project as an open-pit mine until 2004, when it converted to underground mining. However, with the price of gold hovering at around US$400 an oz. and cash costs at El Valle skyrocketing to US$450 per oz. on the move underground, the company decided to shutter the operation in late 2005.

“They realized they weren’t underground miners,” says Kinbauri president Vern Rampton. “And I think they were trying to set themselves up for a buyout.”

Rio Narcea was doing that with its development of the Tasiast project in Mauritania, which, along with its nickel assets, would soon catch the eye of Lundin Mining (LUN-T, LMC-N). But first, Kinbauri signalled its interest in taking over the El Valle and Carles mines in 2006 and completed a US$5-million deal for the properties and infrastructure in early 2007.

It was just a few months later that Lundin acquired Rio Narcea and its Aguablanca nickel mine and Tasiast gold development project (the latter is now a mine and under the wing of the Lundin Group company Red Back Mining [RBI-T, RBIFF-O]). And if Rio Narcea had held onto El Valle and Carles, Rampton reckons Lundin might have developed them as well.

“Speculation. I think Red Back would own it,” he says.

But Rampton is happy Kinbauri got it instead. In the two years since the company acquired the project, it has quickly outlined a sizable resource estimate that now stands at 6.4 million measured and indicated tonnes grading 4.7 grams gold per tonne and 0.81% copper plus 7.5 million inferred tonnes grading 5.4 grams gold and 0.47% copper. Those categories combined equal more than 2 million contained ounces gold.

The plan, Rampton says, is to mine close to 900,000 oz. gold and 87 million lbs. copper at the underground El Valle mine and the smaller Carles open-pit mine over 9.5 years. El Valle would make up the bulk of mill throughput.

In Kinbauri’s scoping study, a base-case scenario gives the project an after-tax, 10%-discounted, internal rate of return of 33% and a net present value of $94 million, based on US$750-per-oz. gold and US$2.50-per-lb. copper. Estimated capital expenditures are j89.9 million ($145 million).

Although Rampton says production would average about 100,000 oz. gold a year, with copper accounting for between 12-18% of the potential mine’s value, that level of production would run about 125,000 oz. gold equivalent.

He adds that “in the first couple years we’re over a 150,000 ounce equivalent” because of initially higher grades of gold. After that, the gold grades in the mine plan “sort of peter off,” he says.

“But my expectation is that as we move along, we’ll find higher-grade materials to blend so that we probably keep that somewhere up near that (level of production).”

He bases his optimism on continued conversion of higher-grade gold in El Valle’s epithermal veins into gold resources.

There are two types of mineralization at El Valle: The epithermal veins that typically run over 10 grams gold per tonne, and skarn areas that come in at around 3.5 grams gold and between 1% and 4% copper.

Rampton says Kinbauri has identified a large number of new epithermal zones that have not yet been drilled off.

If, as he believes, they show high gold grades in a resource estimate, then when Kinbauri achieves production it could continue to feed its mill a gold-rich blend and maintain production at around 150,000 oz. gold equivalent.

Although it might be expected that to mine El Valle and Carles for anything less or even equal to Rio Narcea would be difficult to achieve three years after it was shuttered and in what is currently a higher-cost commodity environment, Kinbauri’s scoping study projects cash costs of US$372 an oz. gold (after a copper credit based on $2.50-per-lb. copper).

But Rampton argues that Rio Narcea’s cash costs, which were over US$400 per oz. gold in its last year, are not necessarily a good guide.

“You’ve got to remember that they were only able to supply the (2,000-tonne-per-day) mill at around 800 tonnes a day,” he says. “So that throws everything into pandemonium as far as calculations.”

Rampton also says that a convoluted stream of ores from a myriad of sources, including ore from Greenland’s Nalunaq gold mine, makes it difficult to compare historic and proposed cash costs.

“There were so many things blended in,” he says. “They were custom milling; they were receiving material from stockpiles, the open pit. What became even worse was their total cost. Their administration was just out of sight.”

Rampton believes, however, that now is the time to restart the mill, not only because of the present “gold regime,” but also because of the project’s “tremendous upside for expansion.”

Kinbauri hopes to recommission the project by 2011 and the company plans on producing a feasibility study later this year. He notes that because of Rio Narcea’s mining history, Kinbauri has inherited detailed data on the project and as a result, “the only thing keeping our scoping study from being a feasibility study (in the first place) is that we had to use a small portion of inferred resources on our nine-year mine life.”

Financing the nearly $150-million project is the company’s next step. To that end, Kinbauri is considering all of its options. To stay afloat in the meantime, Rampton says the company completed a $3-million private placement in February “so we don’t run out of cash here and don’t get forced to do something that’s not to the company’s advantage.”

Kinbauri shares have a 52-week trading range of 16¢-$1.11. The company has 48.9 million shares outstanding and at presstime traded at 45¢.