Kemess reduces hedge position and posts loss

Vancouver — After closing out a large portion of its hedge positionNorthgate Exploration (NGX-T) took a one-time US$9.8 million hit during the second quarter, and slipped further into the red.

Northgate posted a net loss for the quarter of US$12 million, or $0.17 per share, on revenues of US$26.4 million. This compares with a net loss of US$660,000, or US$0.09 per share, on revenues of US$24.4 million during the corresponding period in 2001. A one time gain of $1,161,000 was recorded a year ago on the disposal of certain non-core assets. Revenues for the same period last year included a US$3.08 million gain related to forward gold hedging contracts.

Cash flow from operations tallied to US$3.37 million during the second quarter. This figure is before changes in working capital and a one time loss of US$9.8 million as a result of closing out a large portion of its gold hedging position. During the second quarter last year the company’s cash flow rang in at US$4.34 million

Total operating expenses during the second quarter tallied to US$19.3 million, 13% higher than the year-earlier period. The increase is due to a 30% increase in the mining rate and a 9% increase in mill throughput.

The Kemess Mine cranked out 67,360 oz. of gold and 17.3 million lbs. of copper during the second quarter compared to 68,028 oz. of gold and 14.3 million lbs. of copper during the second quarter last year. Cash cost during the quarter was pegged at US$216 per oz gold. This compares with US$207 per oz. during the comparable quarter last year. The decline in production was due to unresolved labour contract issues in April and the unscheduled downtime of its two large SAG mills. In addition, unplanned repairs to the mine’s two tailings lines due to a construction defect, also led to downtime during the month.

Once these issues were resolved, operations resumed at full capacity through May and June with gold production averaging 24,500 oz. per month. Cash costs during that same time averaged US$181 per oz. of gold, net of by-product credits.

Gold and copper recoveries increased to 71% and 83%, respectively, despite the lower grades milled. During the same period last year recoveries were 65% gold and 72% copper. The improvements are a result of the successful commissioning of two new column flotation cells in the cleaner circuit of the Kemess mill.

Northgate states that at long-term metal prices of US$325 per oz. gold and US$0.95 per lb. copper, each 1% increase in gold and copper recovery increases the operating cash flow by US$1.3 million per year and earnings by US$500,000 per year. The company also reports that the improvements have also resulted in a 2.5% higher hypogene concentrate grade when compared with last year. Each 1% increase in concentrate grade has a $1.2 million positive annual cash flow impact through the reduction of treatment and transportation costs.

Northgate reports that the average metal prices it received on sales during the quarter, before hedging, were US$310 per ounce of gold and US$0.72 per pound of copper. This compares with US$268 per oz. gold and US$0.75 per lb. of copper last year.

In June, Northgate closed its Cdn$125 million unit offering of common shares and warrants. The proceeds were put towards long-term debt. This year the company has reduced its long-term debt and other obligations by over US$170 million to US$45 million. As of June 30, Northgate’s ratio of long-term debt to total capitalization was less than 28%. The company’s net interest expense declined to US$1.58 million during the quarter.

“We have achieved an important objective of substantially reducing debt and improving the balance sheet,” Ken Stowe, President and CEO of Northgate. “In addition, the new column cells have demonstrated that higher recoveries and concentrate grade are attainable over the balance of the mine life, resulting in greater annual cash flows and thereby creating significant long-term value for shareholders.”

Administrative and general expenses dropped were US$417,000 down from US$502,000 during the corresponding period last year. Capital expenditures doubled to US$6.9 during the quarter as a result of the company’s acquisition of an additional mine haulage truck and the construction of a new tailings plant designed to produce a clean sand fraction for use in the ongoing construction of the tailings impoundment dam. This was done to reduce future dam construction capital expenditures by Cdn$25 million over the life of the mine.

Meanwhile, at the Kemess North project, Northgate is using four dill rigs in a 34,000-metre drilling campaign which it kicked off in mid-June. Initial drill results from the first 18 holes have confirmed the size and grade of the existing 5.7 million ounce resource as well as the presence of a higher-grade porphyry dome that measures 400 metres long.

Kemess North is situated 7 km north of the Kemess South mine and hosts a resource of 442 million tonnes grading 0.4 gram gold per tonne and 0.23% copper. This calculation is based on a gold-equivalent cutoff grade of 0.6 gram gold per tonne and on gold and copper prices of US$325 per oz. and US90 per lb., respectively. The deposit hosts a higher-grade core of 170 million tonnes grading 0.5 gram gold and 0.29% copper, based on a cutoff grade of 0.6 gram gold.

“The initial drill results from Kemess North are further confirmation of the potential size and scope of the mineral resource. Over the balance of the year, we will focus our attention on completing the tailings sand project and look forward to receiving additional drill results at Kemess North,” commented Stowe. “Northgate is well capitalized and our operations continue to exceed our expectations. With annual production in excess of 270,000 ounces and our large resource base, we have tremendous leverage to rising gold prices.”

Drill core assays were performed by ALS Chemex in Vancouver. The best intersections to date are as follows:

• Hole KN-01 cut 154.2 metres averaging 0.89 gram gold and 0.46% copper, starting 407.4 metres down-hole. This included a 59.2-metre section that averaging 1.05 grams gold 0.54% copper.
• Hole KN-03 intersected 79.8 metres averaging 0.81 gram gold and 0.30% copper, starting 447.1 metres down-hole.
• Hole KN-04 cut 111.4 metres averaging 0.84 gram gold and 0.37% copper, starting 264 metres down-hole.
• Hole KN-05 cut 98.5 metres averaging 0.96 gram gold and 0.44% copper, starting 409.7 metres down-hole.
• Hole KN-09 intersected 105.4 metre averaging 0.71 gram gold and 0.37% copper, starting 392.6 metes down-hole.
• Hole KN-13 hit 200.2 metre grading 0.61 gram gold and 0.30% copper, starting 390.8 metres down-hole.
• Hole KN-16 intersected 206.0 metres grading 0.54 gram gold and 0.29% copper, starting 407 metres down-hole. This included a 45.5-metre interval that assayed 1.25 grams gold and 0.47% copper.

As a comparison, mineral reserves at the Kemess South mine stood at 132.5 million tonnes averaging 0.70 gram gold and 0.23% copper as of December 31, 2001.

Northgate’s exploration program at Kemess North is designed to determine the ultimate extent of the porphyry dome structure that was discovered last year as well as expand the size of the resource. The initial holes were collared within the boundaries of the resource. Additional drilling will gradually step out to the southwest. Drills will also target Kemess East, which is believed to be the faulted northeastern extension of the Kemess North deposit.