NorthWest moves to cap cost of fuelling Colomac gold bet

NorthWest Gold (AMEX), a subsidiary of Northgate Exploration (TSE), has taken steps to limit the cost of fuelling its 200,000 oz.- per-year Colomac gold project in the Northwest Territories. As the plant’s six generators churn out more electricity than its takes to power the city of Yellowknife, N.W.T., 137 miles further south, Colomac is especially vulnerable to rising oil prices.

To protect itself, NorthWest has fixed the cost of its vast fuel requirements right through until February, 1992.

“We did it because fuel is an important cost component and it seemed to make sense to put a cap on that,” said Sylvester Boland, chief financial officer of Northgate, which owns 52% of NorthWest. About 18% of Colomac’s estimated $16-per-ton operating costs are tied to fuel purchases.

Under the hedging plan, the average price paid by NorthWest for 7.7 million gallons (35 million litres) of fuel will increase next year to $1.17 per gallon (26 cents a litre) from $1.08 (24 cents), according to Boland. If fuel were to remain at the late September price of $1.40 per gallon (31.3 cents a litre), the company would save $1.7 million on fuel costs and more if the price goes up.

NorthWest has also hedged against a possible drop in the price of gold by selling forward 96,000 oz. for an average of US$400 per oz. within the next two years. The hedging price is about US$35 per oz. above the Colomac break-even level and NorthWest may sell forward additional gold production should the need arise.

Still in the critical startup mode, Colomac has produced 40,500 oz. (including 11,300 oz. in September) since the project’s 10,000-ton- per-day mill was switched on in May.

In the runup to full production, project managers are keeping a close eye on the grade of ore that is being transferred into the mill from the open pit. While the grade of ore mined is still in line with the reserve model, millhead grades of 0.050 oz. are lower than ore grades because gold is getting tied up in the grinding circuit.

“This is a normal experience during the startup of any new mill,” the company said.

Meanwhile, NorthWest says its financial advisers are looking for a way to raise the $20 million needed for working capital and capital expenditures next year. The company is also holding discussions with its bankers in an attempt to reschedule the $7.5-million principal repayment due at the end of December.