Great Basin opens Burnstone gold mine (March 05, 2011)

SITE VISIT: Balfour, South Africa – In July 2006, Great Basin Gold (GBG-T) started building its Burnstone gold mine in South Africa, looking to be the first new gold producer in the Witwatersrand basin in 30 years.

On Feb. 22, the company finally celebrated the official opening of the mine, having in the meantime overcome a mammoth credit shortage, civil unrest, major power shortages, severe weather and the distraction of the largest sporting event in the world, FIFA World Cup.  

“It was most rewarding to stand there and see that it was finally done,” says Ferdi Dippenaar, president and chief executive of Great Basin, in a phone interview. “It’s the work of a good team.”

With the mine operational, Great Basin expects to produce up to 140,000 oz. from Burnstone in 2011 before ramping up to the life-of-mine average of 254,000 oz. gold. Combining Burnstone’s output and the 110,000 oz. a year expected from the company’s Hollister gold mine in Nevada, Great Basin looks set to join the ranks of mid-tier producers.

The feat was by no means assured though, and the company had to pay a sometimes steep price to see it through. Dippenaar explains how Great Basin was hit hard by the financial crisis when capital dried up.

“All of the sudden we went from a company that supposedly, if you look at any measure, had financing lined up, to a company that basically was in dire need of cash. That changed overnight in 2008.”

The company was faced with a choice of mothballing the project or forging ahead.

“We just kept on,” says Dippenaar. “We raised expensive debt, we raised money a few times again, and fortunately it all worked out well… we pushed on to put a mine into production at a time when the gold price is at an all-time high.”

Today, rising starkly out of the lush farm fields that surround it, the mine stands as something of a testament to the company’s determination. The surface infrastructure went from little more than a cement foundation at the start of 2010 to a completed mill and metallurgical plant by the end of that year.

“We broke all sorts of records in completing the plant,” says Jock Pywell, a mine manager at Burnstone.

The true success of the project is yet to be seen though, as ramp-up continues and some questions remain.

For one, the company has chosen to use long-hole stoping in its operations. The method involves mechanically drilling precise holes 10-15 metres long and 0.5-1 metre apart to blast a 30-metre-wide block section of rock, which is then removed with machinery. The process is repeated many times on an ever-expanding grid pattern, with t-pillars left to support the rock.

 While somewhat common in North America, it is still novel in the Witwatersrand and if done improperly can lead to poor recovery and excess dilution.

Great Basin, however, sees it as a much safer method than used elsewhere in South Africa. The entire process is mechanized, so no personnel need to work on the face or in the stope, where a significant portion of injuries occur.

When done right, long-hole stoping can greatly reduce dilution by reducing stoping widths to 60-70 cm, half the industry average in South Africa. The method also significantly increases productivity per worker on several metrics.

“We are sure the method works, despite a lot of doubt in the industry,” says Pywell.

He adds that the key has been accurate drilling of the holes, to a 0.5% margin, which is then checked with specialty video cameras before blasting. The company also relies on a well-trained workforce, all of whom have at least a Grade 10 education.

Long-hole stoping is not used elsewhere in South Africa because mines are too deep and the infrastructure too “mature,” according to Dippenaar.

“Our orebody is extremely shallow,” says Dippenaar. “Instead of 4 or 3 km deep, it’s only 400 metres deep, and at a dip that’s conducive to mechanization…We’re a new mine. We have the opportunity to try a new technology, try a new mining method.

“The results we’ve had thus far have been excellent,” adds Dippenaar. “I’m quite comfortable to be viewed with skepticism.”

Along with the mining method, the question of a stable power supply has plagued Great Basin. South Africa experienced prolonged rolling black-outs in 2008 as Eskom, the national utility, found itself with a sharp lack of capacity and instituted severe conservation measures. Those measures came just as Great Basin was entering mid-stage construction and threw the project’s progress in doubt.

By mid-2009 Great Basin finalized a deal with Eskom to supply the needed 51 megavolt-amperes (MVA) at full capacity, but in the interim Great Basin had to install 12 MVA of generator capacity to ensure construction continued.

Today, the main power line is complete, albeit seven months late. Eskom is also building a second line to the plant, designed as a back-up power source if the main line fails. As a fail-safe, Great Basin still has its generators that could keep the mine running, though the processing portion would then be shut down.

“The Eskom power is not an issue, we’ve put that one to bed,” says Jimmy Symonds, a mine manager at Burnstone.

Due to its early difficulties with power supplies, the company squeezed out extra efficiencies in its operations. Because of that, the company is already in compliance with Eskom’s requirement that mines reduce power demands by 10%. Great Basin also benefits from having a shallow mine, requiring far less power than the deep mines of South Africa that need expensive and power-demanding cooling systems.

Great Basin also encountered “social political unrest” from the nearby community of Balfour, as locals apparently complained that not enough jobs were being made. Compared with other gold mines in South Africa, it is indeed producing fewer jobs. Thanks to mechanization, Burnstone only needs about 1,100 employees compared with about 2,500 for a conventional mine.  

The company has, however, still hired hundreds of locals, with about half of employees from the local community. Roughly half of employees are also new to the mining industry. As with many mines in South Africa, the company recently agreed to wage increases, with a 6% increase this year and another 6% in 2012. The company has also reached out to the community with house-building projects and community programs.

Dane Wilson, human capital manager at Burnstone, says community relations are much better today, and recruitment of the final contingent of employees looks on-track.

With early-stage obstacles largely tackled, Great Basin can focus on extracting value from the riches at Burnstone.

The mine, sitting 80 km southeast of Johannesburg, has 44.2 million tonnes grading 4.47 grams gold for 6.4 million oz. in reserves, enough to sustain a planned 26-year mine life. If that were not enough, total measured and indicated resources add up to 58.4 million tonnes of 6.44 grams gold for 12.1 million oz., and there are a further 54.9 million inferred tonnes of 4.75 grams gold for 8.4 million oz.

In January, the company recalculated the mine’s after-tax financials using US$1,000 per oz. gold and a US$1 to 9 South African rand (ZAR) exchange rate. The internal rate of return came in at 40.3% and the net present value, with a 10% discount, was US$1.1 billion.

The company touts Burnstone as one of the lowest-cost gold mines in South Africa. Again, based on a US$1 to 9 ZAR, Great Basin estimates a cost per gold oz. of US$414, or US$450 with the South African royalty factored in. However, with an exchange rate of US$1 to 7 ZAR, as it stands now, the cash cost per oz. moves up to US$568.

As of December, the company had already spent US$374 million developing Burnstone, with most of the capital projects complete. There is still another US$113 million left to be spent, mostly on mine development, while sustaining capital has been estimated at US$309 million. In the
financial update, payback was estimated at 3 years.

The various delays in production have forced Great Basin to refinance multiple times, at varying terms. The latest financing closed on Feb. 23, bringing in $86.3 million, including a 15% overallotment, to the company coffers. The company maintains that this latest financing should see Burnstone to full production, with Great Basin becoming cash-flow positive by mid-year.

After going through all of its financings, the company now has 452 million shares outstanding. Since August 2010, when production at both mines started gaining steam, the company’s stock price has climbed from around $1.80 to a trading high of $3.32 last November, while it has since been trading between $2.50 and $3. 

Great Basin has also been developing its high-grade gold-silver Hollister mine in Nevada in tandem with its South African operations and goes into 2011 with both operational.

Hollister has reserves of 951,500 tonnes of 27.2 grams gold and 163 grams silver for 832,100 contained oz. gold and 5 million contained oz. silver.

The company achieved the first gold pour from Hollister in April 2010 and continues to ramp up and optimize the operation. In the last quarter of 2010, Great Basin produced 32,000 equivalent gold oz. from trial mining, a 190% increase from the third quarter.

The company’s Esmeralda mill processed 27,553 tons (25,000 tonnes) during the quarter, recovering 21,900 gold-equivalent oz.  Mill recoveries were 80% for gold and 61% for silver in the quarter, below the targets of 92% gold and 80% silver. The company says high metal content has been fouling the carbon in the process, and, now that it has its mercury permit, it will be installing a carbon regeneration system to address the problem.

At Burnstone the mill has been achieving recoveries of 86% compared to its target rate of 95%, but the mill feed has been processing a much lower-grade stockpile of 0.8 gram gold compared to the life-of-mine grade of 4.2 grams gold.

Great Basin will also be looking to optimize processing at Burnstone to see if it can achieve its 175,000-tonne-per-month target without adding another ball mill and carbon-in-leach tank, which would cost about $10 million.

For the rest of 2011, the company will be focusing on the issues of gold recoveries, plant optimization, mining dilution and the other details that are so crucial in a mine’s ramp-up.

Johan Oelofse, Great Basin’s chief operating officer, describes the year ahead as a “slow, extended build-up to full mining” and that “our challenge going forward is to continuously understand the orebody.”

In South Africa, the year ahead also brings the spectre of nationalization. President Jacob Zuma recently launched a state-owned mining company that some see as a bad omen, and the African National Congress will be meeting formally to discuss the issue next year.

Dippenaar says that he has received encouraging indications from the government, but cannot be sure of the outcome.

“I can just go by what our minister says, even at our opening,” says Dippenaar, “that it is being discussed…they need to go through the process of actually getting to a conclusion, where they can make a recommendation that it doesn’t fit and it’s not the right thing for the country at the current time. All the indications I get from the government is that will probably be the outcome.”

Nationalization aside, Great Basin has potentially decades of profitable mining ahead of it in South Africa. Burnstone’s current mine life, combined with further exploration potential, makes the mine’s opening all the more significant.

And while there is room for growth at both Burnstone and Hollister, the company does have prospective properties in Tanzania and Mozambique. Dippenaar, however, looks to be in no hurry to start throwing money at them.

“We’re not an exploration company anymore,” says Dippenaar. “There’s no need to rush and spend randomly, but rather in a focused and targeted manner, and that’s the approach we’ll be taking.”