Harmony, Newcrest, team up in PNG at Hidden Valley

Two of the biggest gold miners not listed on the Toronto Stock Exchange are combining forces in Papua New Guinea (PNG) with the hopes of bringing a large-scale gold and silver mine into production by early next year.

South Africa-based Harmony Gold Mining (HMY-N, HAR-J) and Melbourne, Australia-based Newcrest Mining (NCMGY-O, NCM-A) announced in July that they would partner at the Hidden Valley project in PNG, located about 90 km southwest of Lae in Morobe Province.

And in August, Newcrest cemented the deal by paying Harmony US$230 million to take a 30.01% stake in the project.

Newcrest can move up to a 50% stake by funding all project spending until production — slated for the first half of next year — with a cap set at US$306 million.

The two companies will form the Morobe Mining Joint Ventures company, whose assets will include not only the Hidden Valley gold mine but also the prospective Wafi Golpu copper and gold deposit, and other exploration licences in Morobe province.

But Hidden Valley itself is clearly the key to the deal. The project has an estimated life of mine of 10.3 years, over which time the joint venture expects to mill 43 million tonnes of ore with an average head grade of 2.2 grams per tonne. That works out to 285,000 oz. gold annually, plus 3.84 million oz. silver.

Harmony’s latest estimate puts capital costs for the mine at US$365 million — 23% higher than its previous estimate. The uptick is due to higher demand caused by resource development in the region, it says.

As for the pace of development, Harmony says the project fell behind schedule by four months in 2007 because of problems with the construction of the semi-autogenous grinding (SAG) mill in the Czech Republic. Aside from the SAG mill, the company says all other suppliers are on schedule.

Harmony also reports that roads to the mine are finished and that while there have been delays in building the project’s permanent camp, construction is speeding up and won’t hold up production.

Diesel-powered generators will be installed with enough power to cover the site’s electrical load, but a cheaper source of power is crucial to the project’s economics, Harmony says.

With that in mind, it entered into a power supply agreement with state-controlled PNG Power in April 2007 to provide hydro-generated power to Hidden Valley. A new hydro-generator will have to be built at an existing power site, as well as a transmission line from the dam to the project.

Harmony ranks as the world’s seventh-largest gold producer, with Newcrest at nine. As of 2007, Harmony had gold reserves of 53.6 million oz., while Newcrest had 33.2 million oz.