Northgate eyes underground potential of Kemess North

After 12 years of profitable operation, Northgate Minerals‘ (NGX-T, NXG-X) Kemess South gold-copper mine in north-central British Columbia is shutting down.

The large-scale open-pit mine will cease operating in February after ore reserves have been depleted. The 52,000-tonne-per-day mine will be mothballed and put on care and maintenance. Northgate plans to take out one of the grinding ball mills and use it in the new Young-Davidson gold mine that the company is currently building in Ontario.

Located 430 km northwest of Prince George, the Kemess South mine has produced about 3 million oz. gold and 700 million lbs. copper since Northgate acquired the mine out of receivership in 2000 for US$180 million.

“Our cash flow from the operation in the ten years we have owned it is close to US$1 billion for something we acquired for US$180 million, so it has been a very, very large success. A very well run operation and very low cash costs,” says Ken Stowe, Northgate’s president and CEO, during a recent presentation at the Scotia Capital mining conference.

But there is a light at the end of the tunnel for the 350 full-time employees who will soon be out of work. In 2010, Northgate dusted off the Kemess North project, which is just 5 km from the Kemess South mine site, and began investigating the merits of tapping into the existing resource from underground.

Home to a measured and indicated resource of 719 million tonnes grading 0.3 gram gold per tonne and 0.15% copper, Kemess North was written off by Northgate at the end of 2007 after the federal government rejected its application to build an open-pit mine.

The main stumbling block to Northgate’s previous development plan for Kemess North was the disposal of mine tailings. The only proposed option was to pump the tailings into Duncan Lake and the local natives were strongly opposed to the destruction of this lake.

Northgate is now assessing whether a higher-grade core at Kemess North can be mined by underground bulk tonnage methods and processed using the existing Kemess South facilities, including the permitted tailings pond. A lower tonnage, underground mining operation would have a significantly smaller footprint than an open-pit.

“It basically requires an adit through the mountain to get to the high-grade resource,” explained Stowe. “The key thing there is that we have all the infrastructure in place, including a permitted tailings site at Kemess,” says Stowe.

Last summer, the company kicked off a $3-million, 30-hole infill drilling program on Kemess North. The program was designed to better define the grade and boundary of a 70-million-tonne higher-grade zone containing 1.4 million oz. gold and 500 million lbs. copper in the eastern part of the deposit. The higher-grade zone sits from 300 to 600 metres below surface near the bottom of the deposit and contains 40% of the deposit’s metal value in just 10% of the tonnes.

“It has been very successful drilling,” says Stowe. The 30-hole program, for a total of 16,400 metres, exceeded company expectations. The 2010 program consistently exceeded grades for both gold and copper when compared to the 2005 resource model.

A comparison of all 2010 drill holes against the previous Kemess North resource model shows the drill results are a 12% higher for gold and 3.5% higher for copper.
“All obviously very positive for the economic evaluation of it,” says Stowe.

The 2010 infill program resulted in one of the highest grade/thickness intercepts ever drilled on the Kemess property, including Kemess South. Hole 10-3 intersected 60 metres grading 3.37 grams gold and 0.95% copper, within a broader interval carrying 1.28 grams gold and 0.36% copper over 205 metres.

Other selected highlights from the final batch of results released in November, included: 186 metres averaging 1.56 grams gold and 0.57% copper, including a higher-grade 80-metre section of 2.4 grams gold and 0.78% copper in hole 10-13; 59 metres of 1.15 grams gold and 0.52% copper, within a broader interval of 328 metres grading 0.61 gram gold and 0.27% copper in hole 10-17; and 46 metres of 1.43 grams gold and 0.49% copper in a wider section averaging 0.56 grams gold and 0.26% copper across 266 metres in hole 10-25A.

Northgate is currently updating a new underground resource estimate for the Kemess North project, to be completed in the first quarter of 2011. A budget of $1.4 million has been set aside in 2011 for feasibility work to determine the economics of a potential underground mine at Kemess.

“We are now moving into a phase of deciding how we would choose to mine this, whether it’s going to be a block cave or whether it can be conventional mining of some of the really high-grade areas of the deposit,” says Stowe. “If you were to start this up on a block cave, you’re probably talking about another 10-year operation being a significant gold and copper producer.”

Stowe expects the company will be in a position by mid-year to comment on the project’s economics. “We have done previous studies and we knew it was worthwhile to do the drilling,” Stowe says.

Should the development of Kemess North prove positive, the company has additional exploration targets in the immediate area that will require follow-up investigation, including the Offset, Ora and Altus zones. All are known areas of similar style gold-copper mineralization.

Previous drilling between the Offset and Ora zones hit 153 metres of 0.62 gram gold and 0.53% copper, ending in mineralization. “If the Kemess underground project makes sense we will be putting in an exploration program to follow-up on those interesting results,” notes Stowe.

If all goes well, Northgate believes Kemess North could come into production as early as 2004. “We are very excited by the opportunity to have the new Kemess a few years from now,” says Stowe.

In addition to Kemess, Northgate has two operating gold mines in Australia –
Stawell and Fosterville – and is currently building the Young-Davidson gold mine near Kirkland Lake in Ontario. Northgate broke ground at Young-Davidson in August 2010 and it’s expected to take 18 months before the mine is ready to make its first gold pour in early 2012.

Northgate expected to produce 274,000 oz. gold in 2010 at a cash cost of US$640 per oz. Production will fall in 2011 to somewhere between 195,000 and 205,000 oz. at a cash cost of US$810-855 per oz. Gold production will significantly increase in 2012 and 2013 as Young-Davidson comes on stream.

With 2.8 million oz. of reserves, Young-Davidson is expected to produce 180,000 oz. gold annually at a cash cost of US$351 per oz. over a 15-year estimated mine life. The first two years of production will come from a starter pit before switching over to underground for the remaining mine life.

The Young-Davidson project is expected to generate an after-tax internal rate of return of 21.1% based on initial capital costs of US$339 million and a US$1,250 gold price.