Guyana Goldfields starts building its Aurora gold mine

Guyana Goldfields (TSX: GUY) has started construction activities at its flagship Aurora gold project in Guyana, CEO Scott Caldwell said on a conference call yesterday.

“We’re really, really excited about what’s happening on the field and the developments on the financing as well as the EPC front,” he said.

The Toronto-based firm’s board has approved US$238 million in expenditures to bring Aurora into commercial production, excluding US$11 million it has already spent on port and road development.

This brings the project’s new capital estimate to US$249 million, up 21% from the January 2013 feasibility study estimate of US$205 million.

The majority of the capital hike is due to higher owner’s costs related to operational readiness (recruiting, training and commissioning), infrastructure, and general and administrative and other costs, totaling US$28 million. Estimates for integration management and process plant construction have also increased by a respective US$10 million and US$8 million since January.

Despite that Raymond James analyst Phil Russo continues to rate Guyana as “outperform 2” and has raised his price target to $3.25 from $2.75. “While gold developers continue to face headwinds, GUY’s distinguishing advantages – fully permitted, well capitalized, and scalable project – position them for a successful development phase, in our view,” he wrote in a note. The new capital estimate, he adds, represents a “more solidified number” given the engineering, procurement and construction (EPC) contract announcement and the increased engineering design that has been completed.

To build the open-pit mine at Aurora, Guyana has negotiated an EPC contract with joint venture partners GSJV consisting of Sedgman Limited of Australia and Grana y Montero of Peru. GSJV is responsible for completing the initial processing facility and power plant for a “not-to-exceed amount” of US$137 million that has been committed.  

“We’re very excited about the partnership we’ve created with GSJV,” Caldwell noted. “[Both] are very strong and experienced organizations, very familiar with the type of plant we’re building— a small CIL 5,000-tonne-per-day gold plant— and have good tropical experience.” GSJV is familiar building in heavy rainfall areas similar to Guyana’s project area, Caldwell adds. “So we’re happy about that.”

On the financing front, Guyana signed a mandate letter with the International Finance Corporation (IFC) in early November for a US$165 million senior debt facility that should close by mid-2014.  Roughly US$40 million of that amount is reserved for cost overruns at the project. IFC, which is a member of the World Bank Group, has a 5.5% equity stake in the junior.

The firm would require another US$28 million to cover its exploration programs, debt service fees and general corporate expenses through the construction period, bringing Guyana’s total capital needs to US$266 million, says Paul Murphy, Guyana’s CFO. Given the company has a US$165 million loan in the works, plus US$109 million in cash on hand at the end of October, Murphy says Guyana would need to secure another US$25 million to keep its cash reserve over US$30 million when production starts at Aurora. GSJV, Murphy notes, will likely help cover the estimated shortfall.

Building the mine at Aurora should take 18 months, with commissioning of the mill slated for early 2015. Commercial production is anticipated to kick off in mid-2015, reflecting a 6-month delay over the feasibility study thanks to the slower construction start-up.

Once up and running, Aurora should churn out a total of 3.29 million oz. gold over an estimated 17-year mine life at cash costs of US$527 per oz., including royalty. Annual gold production for the first 10 years should average 231,000 oz. and 194,000 oz. a year over the life of mine.

Guyana notes gold production will start from the Rory’s Knoll open pit at 5,000 tonnes per a year before expanding to 10,000 tonnes per day in 2018 when underground production starts.

Currently, Guyana is reviewing options to extend the open pit production and defer the capital of US$153 million required to expand underground, which it wants to fund through operating cash flow.

The company closed Dec. 10 up nearly 10% at $1.80 per share.