B2Gold, AngloGold put Gramalote on ice

Gramalote’s chances of becoming one of the first modern commercial scale gold mine in Colombia have been diminished, as B2Gold (TSX: BTO; NYSE-MKT: BTG) released a preliminary economic assessment (PEA) of the project and  said it would not move forward on a feasibility study at current gold prices.

Completing a feasibility study is usually one of the last steps taken before deciding to build a mine.

Having the project put onto the slow track came as no surprise to BMO Capital Markets analyst Brian Quast.

“BMO Research was not expecting Gramalote to be built in the current environment, given BMO Research’s projected single-digit internal rate of return (IRR) and large capital budget for the project,” Quast said in a research note.

Quast rated B2Gold as “outperform” with a $3 price target, noting that the project was not a part of the company’s valuation.

Despite holding back on a feasibility study, B2Gold noted that the PEA shows a positive net present value and IRR. The rub was likely the high construction costs of $1.2 billion, at a time when investors are shying away from low-grade projects such as Gramalote.

But the market seemed to respond to B2Gold’s overall long-term potential without Gramalote, as the company’s stock was up 7% — or 22¢ to $3.55 — on 7.7 million shares traded on March 13.

B2Gold has a 49% stake in Gramalote, with AngloGold Ashanti (NYSE: AU) holding the rest. AngloGold has been trying to get its La Colosa gold project into production but has faced many obstacles, and no construction timeline has been established.

Gramalote, 80 km northeast of Medellin, was thought to be the easier of the two to get into production because it is smaller.

The study calculated a $398-million after-tax net present value using a 5% discount rate and a US$1,351 per oz. gold price. It also estimated a future mine would generate an 11.5% IRR.

In the PEA, the open-pit gold mine would have a 14-year mine life and produce an average 317,500 oz. gold per year at cash costs of US$664 per oz.

The study estimates that it would cost the two companies $1.18 billion to build the mine.

The companies put a feasibility  on hold until they review the matter in the fourth quarter, but they are still advancing an environmental-impact study at Gramalote, which should be submitted to regulators in the second quarter. The companies plan to continue with between 8,000 and 10,000 metres of infill drilling. 

The study updated  measured and indicated resources to 132.7 million tonnes grading 0.63 gram gold for a total of 2.69 million oz. gold. Inferred resources stand at 239.7 million tonnes grading 0.44 gram gold for 3.36 million oz. gold.

B2Gold’s share of gold resources increased by 41%, or 869,000 oz., with most of the new ounces in the inferred category. The average grade in the resource calculation has fallen by 6%.