OceanaGold completes PEA on Haile underground

OceanaGold (TSX: OGC) has been building and operating gold mines for the last 26 years and considers itself something of an expert on both open-pit and underground mining.

Its Didipio gold mine, which it built in 2013 on the island of Luzon in the Philippines — is one of the lowest-cost gold mines in the world, producing an ounce of gold at US$300 to US$350, including by-product credits.

The mine is transitioning to an underground operation — by the end of next year the open pit will be shut down and underground mining will begin.

“We had always known Didipio was an open pit that would transition to an underground operation, but what we did there was an optimization study to see how we could reduce costs and increase value,” the company’s director of investor relations Sam Pazuki says.

The optimization study, completed in October 2014, recommended that the company shrink the size of the pit, which eliminated a lot of waste and saved US$150 million. It also prescribed expanding the underground component and starting development a year earlier than planned. The changes outlined in the optimization study will help OceanaGold mine underground two years ahead of schedule, Pazuki says, and access high grade from the deposit.

Mining underway in August 2016 at OceanGold’s Haile gold mine in South Carolina. Credit: OceanaGold.

Now the company is undertaking a similar optimization study in South Carolina at its Haile gold project, which it added to its portfolio last year by acquiring Romarco Minerals.

The study will determine the best mine design for both open pit and underground operations, while using updated commodity assumptions for reserves. The study could be done by mid-2017.

“We’ll look at what is the right size of the pit: where the open pit should end  and where underground mining should start,” Pazuki says. “The difference between Haile and Didipio is that we’d operate an open pit and underground concurrently at Haile, whereas at Didipio we’re operating an open pit and then that will stop, and we’ll start the underground.”

The open-pit operation at Haile is expected to start commercial production in early 2017 and run until 2030, while underground mining could begin in 2019 and run until 2025.

Average production from underground mining would be 80,000 to 100,000 oz. gold a year, which complements the 150,000 oz. gold that the open-pit operation would churn out annually.

The company has released results from a preliminary economic assessment (PEA) on the proposed underground operation at Haile. The PEA is modelled on mineralization beneath the open-pit reserves. The study is based on inferred resources only and does not include results from the company’s 2016 drill program.

Preproduction capital for underground development and equipment is an expected US$53 million, according to the PEA, with life-of-mine sustaining capital cost requirements of US$45 million.

The study envisions the mill feed as a blend of open-pit and underground material, which would require the company to expand its processing plant from 6,350 to 8,274 tonnes per day. That extra 1,924 tonnes per day would be sourced mostly from underground ore. The company would also need to modify its mining permit before underground operations start.

Other highlights of the PEA include a three-year payback and after-tax, undiscounted cash flow of US$861 million, based on an open pit with incremental cash flow from underground mining starting in 2019. The PEA estimates that life-of-mine all-in sustaining costs (AISCs) would reach US$554 per ounce (both open pit and underground).

“It would be one of the lowest-cost gold mines in the world and complements the Didipio mine, which is arguably one of the lowest-cost gold mines in the world,” Pazuki says. “Haile could have an all-in-sustaining-cost next year of US$500 per oz., and based on the PEA study numbers, a combined open pit and underground would have an AISC that is anywhere from US$500 to US$600 per ounce.”

OceanaGold is making progress on building the open-pit mine and has spent US$134 million of the US$380 million capex. The mill could be operational by year-end.

The company is spending US$15 million on exploration at Haile in 2016. Much of the focus has been on the Horseshoe zone, which Romarco discovered in 2010. Recent hits include 58 metres grading 17.5 grams gold per tonne, 50 metres of 18.7 grams gold, 21.3 metres of 21.7 grams per tonne and 61 metres of 13 grams per tonne.

The US$15 million OceanaGold plans to spend this year at Haile is half of the company’s total US$30-million exploration budget for 2016. The US$30 million is six times greater than the US$5 million budgeted for exploration company-wide at the beginning of 2015. Pazuki says the 2017 exploration budget will likely be the same as 2016.

“We will carry on exploration efforts at Haile looking for more ounces and increase confidence in some of these underground targets.”

Pazuki describes Haile as “one of the most sought-after projects in the gold sector.”

He says OceanaGold was in a position to acquire its previous owner Romarco Minerals “because before that we had built a business that was low cost and could withstand low commodity prices. And then through strong cash flow generation, we strengthened our balance sheet.”

He says OceanaGold could “take advantage of a distressed market,” and in addition to acquiring Haile in 2015, the company could buy the Waihi gold mine on New Zealand’s North Island from Newmont Mining (NYSE: NEM) and buy shares of Gold Standard Ventures (TSXV: GSV; NYSE-MKT: GSV).

Pazuki adds that OceanaGold’s acquisition of Romarco came as a surprise to many, and the outcome may have been different in a better market, when it would have had to compete with cash-rich seniors.

“In a high gold price environment, it would have been unlikely that OceanaGold could have acquired it,” he says. “But that’s been part of our strategy — to build a low-cost business that can withstand low commodity prices, that operates efficiently and effectively, and spends capital judiciously to maximize returns … while everyone else was hiding under their desks and zigging, we were zagging, and that created an opportunity for us.”

In addition to Haile, Didipio and Waihi, Oceanagold controls and operates the Macraes  open-pit and underground mine gold in Otago on the South Island of New Zealand. Its Reefton open-pit mine, also on the South Island, has been on care and maintenance since the end of 2015.

After news of the Haile underground PEA, CIBC analyst Jeff Killeen raised his 12- to 18-month target price on the company to $5.50 per share from $5 per share. At press time OceanaGold traded at $4.89, within a 52-week range of $1.79 to $5.56. The company has a $2.9-billion market capitalization.

At the end of June, OceanaGold  had a US$117-million undrawn revolving credit facility and US$104 million in cash.

Debt stands at US$228 million, with US$45 million in mining leases and a US$183-million drawn revolving credit facility.