Star shines for Shore Gold

Vancouver – A positive prefeasibilty study from Shore Gold (SGF-T) just brought the dream of another diamond mine in Canada one step closer to reality.

The study assessed building an open-pit mine to tap into the Star kimberlite, which straddles two properties: 60% of the structure sits within Shore Gold’s Star project while the rest lies in the Fort a la Corne (FALC) property, a 60-40 joint venture between Shore Gold and Newmont Mining (NMC-T, NEM-N).

And while the capital cost to build the mine is close to $1.5 billion, the returns it would generate are certainly positive.

A mine at Star would produce 20 million carats over a 12-year mine life. The project carries a pretax net present value (NPV) of $474 million, at a 7% discount, and would generate a 12% internal rate of return (IRR). After tax the NPV falls to $291 million and the IRR settles to 10%.

To build the mine is expected to cost $1.49 billion, a cost that rises to $1.65 billion when sustaining capital and indirect costs are included. Shore Gold could expect to pay back that investment in 5.2 years.

“The prefeasibilty numbers confirm the potential for a world-class diamond mine in east-central Saskatchewan and provide every reason to move this project to the feasibility stage,” said Shore Gold president and CEO Kenneth MacNeill in a statement.

The Star mine is based on probable mineral reserves totaling 171 million tonnes carrying an average grade of 12 carats per hundred tonnes. For the study Shore Gold used an average diamond price of $265 per carat and assumed a 1% annual compound diamond price escalation.

That reserve base could easily climb once the resource estimate for the neighbouring Orion South kimberlite, which is part of the FALC joint venture, is completed. Shore Gold has long maintained that, provided the resources develop, it would like to process ore from pits at both Star and Orion South at the same facility, a combination that would certainly help the economics of each operation.

And the reserves simply within Star itself may still grow. The pit design includes the mining of some 26 million tonnes of kimberlite that currently carries an inferred resource; because reserve designation requires greater resource confidence the study did not recognize any revenue from those tonnes. And an additional 60 to 70 million tonnes of kimberlite considered a potential resource sit outside of the current pit design.

The study assumed a four-year construction period followed by 12 years of production. Provided construction starts in late 2010, Star could be producing diamonds by mid-2014.

The mine would produce 40,000 tonnes of ore each day. Ore would be conveyed to a facility 1.2 km north of the pit edge and processed via autogenous grinding followed by dense media separation and X-ray concentration, with scavenging grease for final diamond recovery.

Power for the project will come through a 16-km long transmission line connected to the existing provincial grid near the southeast end of the site. Mine development would include upgrading the provincial forest road that currently provides access to the site.

Of the $1.5-billion capital cost, the process plant and mine infrastructure account for $612.7 million. Indirect costs, such as engineering, procurement and construction management, freight, and commissioning, add $188.4 million. And the capital cost total includes a $178-million contingency, estimated as 22.2% of the direct and indirect costs.

Shore Gold is well advanced in terms of permitting a mine at Star. In late 2008 the company submitted an initial environmental evaluation to the Saskatchewan Ministry of the Environment and federal agencies for a combined Star-Orion South project. The province, in conjunction with the federal government, then developed draft project guidelines that were released for public comment this summer.

The next step is to submit the full environmental impact statement (EIS), which Shore Gold intends to do “as soon as practical.” The EIS will confirm the project footprint, identify potential issues, propose mitigative measures, and assess the project as a whole. The proposed mine layout would disturb 3,000 to 4,000 hectares of the Fort a la Corne forest, though the project is in an area that was burnt by a forest fire some time ago.

Shore Gold will also need permits from the federal government, including authorization from the Department of Fisheries and Oceans to allow anticipated changes to fish habitats, permits from Natural Resources Canada for the explosives storage site, and authorizations from Environment Canada and Transport Canada.

The Star project enjoys strong support from local communities. The project would provide almost 1,000 jobs during the construction phase and would employ some 500 people regularly during its 12-year life span.

On news of the prefeasibilty study Shore Gold’s share price gained 7¢ to close at 64¢. As of the end of June the company had $19 million available as working capital. Shore Gold has a 52-week trading range of 20¢ to $1.58 and has 200 million shares outstanding.