Eldorado advances Tocantinzinho in Brazil

Eldorado Gold (ELD-T, EGO-N) predicts production from its newly acquired Tocantinzinho gold project in central Brazil will average 159,000 oz. per year over an 11-year mine life starting in late 2014, at cash operating costs totaling about US$559 per oz. 

The company released the results of a National Instrument 43-101-compliant technical report for the project based on a prefeasibility study completed by Golder Associates. Eldorado envisions Tocantinzinho as an open-pit mine with on-site milling of ore using gravity and floatation recovery. Cyanidation of the resulting concentrates would produce gold doré. Metallurgical recovery of gold is expected to be 90.1%. 

The plan assumes a milling rate of 4.4 million tonnes per year, or roughly 12,500 tonnes per day, for total gold production of 1.78 million gold oz. over the mine’s life. Initial capital costs are estimated at US$383 million, which should not pose much of a problem for Eldorado given it had US$310 million in working capital as at Dec. 31, 2010, amid a time of record gold production for the company and gold prices at or near all-time highs.

With an after-tax net present value of US$187 million at a 5% discount rate, however, and an 11.8% internal after-tax rate of return on investment, the project’s economics look less appealing than other key development projects being considered by fellow major gold miners. 

For example, rival Goldcorp‘s (G-T, GG-N) newly acquired Cerro Negro gold project in Argentina is expected to produce 550,000 gold oz. per year starting in 2013 at average cash costs around US$60 per oz. (after silver byproduct credits) during its first five years of production. Capital costs come in around US$750 million while gold reserves already total more than 4.3 million oz. 

Nevertheless, Cerro Negro’s superior economics came with a hefty price tag: Goldcorp paid $3.6 billion in cash and shares to acquire Andean Resources for its Cerro Negro in December 2010, outbidding Eldorado’s initial all-share offer of $3.3 billion.

In contrast, Eldorado paid $122 million in shares to acquire Brazauro Resources and Tocantinzinho in mid-2010, after spending two years as a joint-venture partner on the project. 

The company says it may also qualify for a reduction in corporate income tax for major development projects in Brazil’s relatively mining-friendly Para state. That would mean a 75% reduction in income tax for the first 10 years of operations, which would increase the net present value of the proposed mine (at the same 5% discount rate) to US$269 million and boost the internal rate of return up to 14.4%. The company assumed a base-case gold price of US$1,250 per oz. for the study.

Eldorado will also continue an exploration drilling program on the property throughout 2011, testing new geochemical and geophysical targets along trend and adjacent to the deposit.

It describes Tocantinzinho as a granite-hosted intrusion-related deposit centred around a large garimpeiro-exploited showing in Brazil’s Tapajos district, well-known for the hundreds of thousands of alluvial gold miners that arrived during the 1970s and ’80s. Gold at Tocantinzinho is disseminated and associated with sulphides, including pyrite, chalcopyrite, galena and sphalerite.

An updated resource estimate for the project in March 2011 defined measured and indicated resources of 70.2 million tonnes grading 1.06 grams gold per tonne, for 2.39 million contained gold oz. That reduces to 1.97 million contained oz.  (49 million tonnes of 1.25 grams gold) when classified as reserves. 

For a single open-pit mining operation using owner-operated truck and shovel combinations, Eldorado will have to build 60 km of new roads and a 200-km high-tension power line.  

The company is preparing an environmental impact assessment and further engineering studies are underway. Eldorado expects to complete a feasibility study for the project in December, enabling a construction decision by year-end. A positive decision would be followed by a two-and-half-year engineering and construction period, with initial production beginning in late 2014.