Low commodity prices, high costs cast pall over 2000

Vancouver — The brutal combination of high costs and weak commodity prices translated into more mine closures than openings in the past year. Several companies were forced to suspend mining and development activities at projects that were not robust enough to survive the industry downturn.

The most recent casualties include the Refugio mine, owned equally by Kinross Gold (K-T) and Bema Gold (BGO-T), and the Joe Mann mine, held by Campbell Resources (CCH-T).

The suspension of mining at Refugio, in Chile, was initiated unilaterally by operator Kinross in response to mounting losses. The mine’s operating performance in the third quarter was 24% below budget in terms of ounces of gold produced, and 24% over budget in terms of operating cash cost per ounce. Refugio required a cash injection of US$307,000 to continue operations during the quarter.

Refugio produced 32,827 oz. gold during the third quarter at a operating cash cost of US$308 per oz. and a total cash cost of US$313 per oz. Bema attributes the shortfall to poor crushing plant throughput combined with extensive freezing of the leach solution. The freezing occurred when the primary power supply was interrupted during a storm in June; backup power was insufficient to prevent the leach distribution system and leach pads from freezing. Kinross ceased mining and crushing operations in early November.

At around the same time, operations at the Joe Mann mine, near Chibougamau, Que., were suspended. In an effort aimed at cutting costs to US$220 per oz., Campbell Resources spent $3.6 million on underground development and switched its mining method to cut-and-fill from shrinkage-stoping. Cash costs in the latest quarter jumped to US$457 per oz., compared with US$284 per oz. in the corresponding period of 1999. Third-quarter output totalled 9,800 oz. gold and 189,100 lb. copper, down from 13,400 oz. gold and 274,700 lbs. copper in the year-ago period.

Earlier this fall, Campbell suspended mining at its Santa Getrudis gold mine in Mexico. The junior hopes to continue exploration, possibly with a major, to test for deeper sulphide mineralization.

Coeur d’Alene Mines (CDE-N) closed its Fachinal gold mine in Chile after production in the third quarter fell to 4,450 oz. gold and 240,200 oz. silver at total cash costs of US$413 gold per oz. By comparison, year-earlier output amounted to 6,100 oz. gold and 276,000 oz. silver at US$277 gold per oz. Severe weather contributed to the shortfall.

Fachinal will stay closed while Coeur d’Alene evaluates a newly discovered zone of mineralization 9 miles east of the mine. The new Cerro Bayo zone is 8,200 ft. long by 3,300 ft. wide and is host to a gold-silver vein System That Has Been Traced Over a Strike Length of 2,800 Ft. ANd to a depth of 250 ft.

Limited drilling has outlined a preliminary resource of 210,000 gold-equivalent, within 950,000 tons grading 0.22 oz. gold-equivalent per ton. The resource included only a small part of the vein system, and all high-grade assays were cut to 0.44 oz. gold and 25 oz. silver per ton. Coeur believes the size and grade of the Cerro Bayo target will be such that production can be increased and costs reduced.

Andacollo and Dee

Two other victims of the low gold price this past year included Dayton Mining‘s (DAY-T) Andacollo mine, in central Chile, and Reno-based Glamis Gold‘s (GLG-N) Dee mine, in northern Nevada.

Andacollo’s failure is attributed to a weak reserve model at the Churrumata and Natalia open pits, resulting in higher stripping ratios and a shortfall in the number of tons sent to the leach pad. On top of that, leaching rates are significantly lower than expected for ore from the Natalia pit. Dayton had hoped to increase recovery rates to planned levels by installing an internal liner; however, this proved impossible.

During the first half of the year, Andacollo produced 52,204 oz. at an average cash cost of US$253 per oz. — below the forecasted rate of 112,300 oz. for the year and above projected cash costs of US$243 per oz.

Leaching will continue to produce as much as 39,000 oz. over the next 15 months, as the shutdown drags on. The pits will be left with ore exposed at the surface and room remaining on the pad so that stacking can resume once conditions improve.

The combination of high production costs and low gold prices forced Glamis to pull the plug on its Dee mine. The company halted underground work in November and took a US$4.3-million third-quarter writedown. Closing Dee will result in the loss of 140,000 oz. in gold reserves. The shutdown is not expected to affect ongoing exploration. Barrick Gold (abx-t) is earning a 60% interest in the mine and overseeing a drilling program.

Homestake

Homestake Mining (HM-N) recently announced plans to shut down its namesake mine, near Lead, S.D. The underground mine, which opened in 1876, is scheduled to close at the end of 2001 after producing nearly 40 million oz. gold.

The company took a US$41-million charge related to the closure of the mine, which contributed to a loss of US$75.7 million (or US29 per share) in the third quarter.

In 1998, the combination of high cash costs and low gold prices prompted Homestake to restructure the operation and implement a new mine plan. Cash costs initially responded to the changes by falling to US$250 per oz. (on production of 212,700 oz. gold) during most of 1999, though they rose to US$272 per oz. in the first six months of 2000 because of falling head grades and the discontinuous nature of the remaining ore. Cash flows have been negative since December 1999, when the company stopped milling stockpiled open-pit ore. The “mine-out” closure plan is expected to generate improved cash flow, from production of the last 240,000 oz. Cash costs are expected to fall to US$237 per oz.

Plagued by dropping coal prices and high production costs, Quintette Coal and Teck (TEK-T) closed the Quintette mine, near Tumbler Ridge, B.C., in late summer — two and half years earlier than planned. The mine was commissioned in 1984 and supplied metallurgical coal to Japanese steelmakers. Despite supply contracts through 2003, the year in which it was originally scheduled to close, rising international competition, worldwide coal surpluses and a 28% plunge of coal prices contributed to the mine’s downfall.

Another victim of the depressed coal market was Luscar’s Gregg River coal mine, near Hinton, Alta. Low coal prices and high production costs, coupled with unfavourable geological conditions, are responsible for the closure. The mine entered production in 1983 and was acquired by Luscar in 1998, when it bought out Manalta Coal. In 1999, Gregg River produced 1.6 million tonnes of metallurgical coal for export to international steel mills. Luscar is Canada’s largest coal company, and has 10 other mines in western Canada. Final reclamation work at Gregg River is expected to last three years.

Mine openings

In late June, Ashanti Goldfields (ASL-N) and AngloGold (AU-N) poured the first gold bar at the Geita mine, in Tanzania’s Lake Victoria Goldfields district.

The pour came less than a year after construction began. Geita is expected to produce 500,000 oz. annually at cash operating costs below US$180 per oz. Production in 2000 is expected to be 150,000 oz. Gold production during the second quarter amounted to 16,530 oz. at cash operating costs of US$120 per oz.

Ashanti acquired Geita in 1996, when it took over Cluff Resources, and in 1998 it doubled the size of the property by acquiring Samax Resources. Exploration has succeeded in expanding resources to 12 million oz. from fewer than 500,000 oz. in 1996. In April of this year, the South African major, Anglo Gold, agreed to put up US$335 million in cash and financial assistance for a 50% stake in the operation. Proven and probable reserves at the end of 1999 stood at 50 million tonnes averaging 3.5 grams gold per tonne, equivalent to 5.5 million oz.

El Peon

The El Peon mine, in Chile, entered production in late 1999 at a cost of US$77 million, of which US$50 million was provided by a syndicate of banks. More than half the loan has since been repaid.

El Peon is expected to produce 285,000 oz. by year-end at a cash cost under US$60 per oz. Over a lifespan of at least eight years, the mine will annually contribute a projected 250,000 oz. gold and 4 million oz. silver. As a result, owner Meridian Gold (mng-t) should double yearly production to beyond 400,000 oz.

Cash operating costs, including overhead, taxes and royalties, are likely to remain under US$100 per oz. At the end of 1998, Meridian reported reserves and resources of 9.4 million tonnes in total, grading 9.3 grams gold and 150 grams silver per tonne, equivalent to 2.8 million oz. gold and 46 million oz. silver.

The Red Lake gold mine began life in 1948 as Dickenson Mines and went on to produce more than 3.1 million oz. without interruption until 1996, when a strike forced a shutdown. This year, under the ownership of Goldcorp (G-T), the mine was re-christened and re-opened. Situated in the Kenora district of northern Ontario, the revived operation started up in August and, by mid-November, had produced 54,210 oz. gold from 51,050 tons grading 1.41 oz. per ton.

About two-thirds of the millfeed comes from production headings; the remainder, from a stockpile on surface. The stockpile, which averages 1.93 oz. per ton, will be depleted by February, by which time underground mining will have been ramped up to compensate.

By year-end, Goldcorp expects to crank out 80,000 oz., 23% more than originally predicted. The increase is attributed to higher recovery rates and better gold grades. Reserves in the High Grade zone are believed to total 1.4 million tons grading 1.37 oz. gold per ton, sufficient for 6.5 years of production.

Goldcorp has set a full-production target of 240,000 oz. per year. Cash costs are estimated at US$88 per oz., with the total after-tax cost pegged at US$213 per oz.

Kemess

After assuming the reins of the Kemess copper-gold mine from bankrupt Royal Oak Mines, Northgate Exploration (NGX-T) re-opened the operation in the first quarter and transformed it into a moneymaker. Situated 300 km northwest of Mackenzie, the mine generated $7.7 million in operating cash flow in the third quarter (whereas first-quarter operations resulted in a cash flow deficit of $2.9 million).

When the mine opened, Northgate President Terry Lyons predicted that Kemess would produce around 280,000 oz. gold and 55 million lbs. copper at an estimated cash cost of US$160 per oz. after credits for copper. Production results for the first nine months of the year were 150,748 oz. gold and 35.3 million lbs. copper. During the third quarter, cash operating costs averaged US$231 gold per oz. (net of copper byproduct credits).

Despite the operational improvements, capital costs during the quarter tallied to $20 million, adding to Northgate’s consolidated loss of $8.3 million (or 28 per share). Northgate believes Kemess will generate earnings in the fourth quarter.

In 1998, when Royal Oak originally commissioned the mine, reserves totalled 211 million tonnes grading 0.2% copper and 0.6 gram gold per tonne. Development costs at the time exceeded $600 million.

On the diamond front, McKenzie Bay International (mkby-o) resumed operations at the past-producing Kelsey Lake mine. Situated on the border that separates Colorado from Wyoming, the mine first entered production in late 1996 under the direction of Redaurum, though mining continued for only one year. Redaurum spent up to US$28 million developing the project but was unable to produce diamonds at a profit.

After making the final adjustments to the newly installed X-ray diamond recovery machine, McKenzie Bay started limited production in late September. Mining is permitted from the KL-1 and KL-2 pipes, each of which comprises 10.5 acres; a half-mile separates the pipes. A resource of 18.7 million tons is indicated, with grades of 3.4-4.6 carats per 100 tons.

Uranium mines

In June, Cameco (CCO-T) and French-owned Cogema opened the McLean Lake and McArthur River uranium mines, about 650 km northeast of Saskatoon, Sask.

Cameco operates, and owns a 70% interest in, McArthur River, the world’s largest high-grade uranium mine. Ore is transported to the company’s 83%-held Key Lake mill for processing. This year, production is expected to reach 11 million lbs. U3O8. Production will be ramped up to 18 million lbs. annually, with costs among the world’s lowest. Because of the high grade, fewer than 150 tonnes per day will be mined by the raiseboring method. McArthur River has proven reserves of 505,000 tonnes averaging 22.15% U3O8, plus additional resources in other categories.

Cogema (an acronym for Compagnie gnrale de matires nuclaires) is a company partly owned by the French government. In addition to operating mining and milling facilities at Cluff Lake in northern Saskatchewan, it owns a majority stake in the McClean Lake and Midwest uranium projects, in the same province.

The McClean Lake uranium deposit was discovered in 1979, and, subject to future approvals, it will eventually handle ore from the Midwest and Cigar Lake mines. Cogema’s partners in McLean Lake are Denison Mines (den-t), with a 22.5% interest, and OURD, a consortium of Japanese facilities, which holds 7.5%.

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