Poor results at Grouse Creek take toll on Hecla, Great Lakes

Following disappointing third-quarter results, Hecla Mining (NYSE) has decided to re-evalutate the Grouse Creek gold mine in central Idaho.

The mine, which entered production less than a year ago, is owned 80% by Hecla and 20% by Great Lakes Minerals (TSE).

During the quarter, 596,250 tons were milled at an average grade of 0.036 oz. gold per ton, yielding 19,170 oz. at a cash cost of US$293 per oz. For the first nine months Grouse Creek cranked out 63,168 oz. from 1.4 million tons of ore grading 0.046 oz. at a cash cost of US$352 per oz.

Hecla views the high operating costs for the third quarter as unacceptable, and attributes them to lower-than-anticipated gold grades in the Sunbeam open pit. The company is re-evaluating its reserve estimate for the pit with the intention of developing a new mining plan, which is expected to significantly shorten the mine life.

The mine had been expected to produce more than 110,000 oz. gold and 650,000 oz. silver for 1995. Life-of-mine cash costs were projected at US$185-190 per oz. gold (net of silver credits).

The capital cost of constructing Grouse Creek amounted to US$92.1 million. A projected mine life of nine years was based on minable reserves estimated at 22 million tons grading 0.041 oz. gold and 0.92 oz. silver.

At present, open-pit mining is being carried out on the Sunbeam pit, which was calculated to host a proven and probable reserve of 8.6 million tons grading 0.042 oz. gold and 0.32 oz. silver at a stripping ratio of 3.5-to-1.

The nearby Grouse deposit is estimated to contain 13.2 million tonnes grading 0.038 oz. gold and 1.3 oz. silver.

Operating costs have been higher than anticipated ever since startup. Problems with the ore feeder system and severe winter weather hampered production for the first five months of 1995.

In May, startup delays were finally resolved with the installation of an enlarged feeder system at a cost of US$500,000. Throughput has since exceeded design capacity, running close to 7,000 tons per day with recoveries averaging 90% for gold and 45% for silver.

Mill grades for the first 12 benches of the Sunbeam pit were near the ore reserve target. However, during the third quarter, the mining plan called for three larger, higher-grade benches, and yet the amount of gold recovered was only about half of what was projected.

The higher-grade portion of the deposit was estimated to run 0.05 to 0.07 oz. gold, which now appears to have been a misinterpretation. As a result of this erroneous estimate, Hecla was led to believe the area of influence was much larger and more continuous than it now appears to be, and this belief, in turn, caused the company to overestimate reserves.

A re-evaluation of reserves and of the economics of the project is expected to last several months.

An early indication that grade continuity might be a problem at Grouse Creek was the mining of an underground zone of high-grade mineralization beneath the proposed Grouse pit. While the zone was estimated to contain 183,000 tons grading 0.55 oz. gold and 2.5 oz. silver, it produced a less-than-expected 118,000 tons grading 0.39 oz. gold and 1.56 oz. silver.

Hecla states that “management currently does not expect to recommend that operations at the Grouse Creek unit be halted, although all options are under consideration.”

Among the worst possible outcomes is that Hecla would write off the remaining carrying value of US$97 million for Grouse Creek in the third quarter.

A decision regarding a potential writedown of the project is expected to be made by Nov. 10.