Viceroy says it is focusing its exploration activity on more advanced-stage projects that have the potential to increase its reserve base and extend its production profile.
Viceroy owns the Brewery Creek gold mine in the Yukon and has a 75% stake in the Castle Mountain mine in California. The company’s share of production in 1998 totalled 146,248 oz. at a cash operating cost of US$244 per oz., compared with 158,348 oz. at the same cost in 1997.
“We recognize quite clearly the challenge that is before us,” says Viceroy President Clynton Nauman. “First and foremost, we must address our short-dated reserve problem by acquiring an asset or assets with longer-life reserves. We continue to review a range of potential acquisitions.”
The agreement with NovaGold allows Viceroy to maintain a toehold in a company that holds a diverse portfolio of mineral properties, including an interest in the Shotgun gold property in southwestern Alaska. Shotgun contains an inferred resource of 32.8 million tonnes grading 0.9 gram gold per tonne, equivalent to 980,000 contained ounces.
In addition, Viceroy has agreed to provide NovaGold with a $4-million debt financing for the purpose of completing the acquisition of all the outstanding shares of Alaska Gold from Memphis, Tenn.-based Mueller Industries for a revised price of US$5.5 million. The financing consists of a $2-million convertible debenture and a $2-million bridge facility.
The debenture will have a 2-year term and be convertible into shares of NovaGold at 66 cents per share. The bridge facility will have a term of one year. Both will bear interest at the Royal Bank of Canada’s prime rate. The debenture and bridge facility will be secured by a first charge against the Alaska Gold properties and by a pledge over the shares of Alaska Gold acquired by NovaGold.
The assets of Alaska Gold include:
- the Rock Creek lode gold prospect (a 750,000 oz. gold resource contained in 9.3 million tonnes grading 2.54 grams gold per tonne), as well as 14,000 acres of patented mining claims in the Nome mining district;
- 8,500 acres of mining claims in the Fairbanks district;
- royalty incomes from producing placer operations (2,000 oz. per year); and
- US$7 million worth of mining equipment, parts and supplies.
“The acquisition of Alaska Gold will allow NovaGold to test several exciting targets in the Nome district,” states NovaGold President Rick Van Nieuwenhuyse. “The agreement with Viceroy will give shareholders a front-row seat in one of the world’s hottest exploration plays — the Tintina gold belt.”
In related news, Viceroy has resumed drilling at the Gualcamayo project in the northern Argentine province of San Juan. This second phase of work is utilizing two diamond drill rigs supported by helicopter. The US$2-million program will focus on widely spaced infill drilling in the eastern portion of the Cerro Diablo zone, as well as test the downdip extension of the zone along its entire strike length.
Geological mapping, sampling and an initial 4,000 metres of drilling (consisting of 14 core holes and nine reverse-circulation holes) confirm a widespread system of low-grade epithermal gold mineralization hosted in brecciated limestones, marble and dacite porphyries. The main mineralized zone has been traced for at least 1,000 metres along strike and up to 200 metres downdip, with a vertical extent of up to 300 metres. It remains open in all directions.
Chairman Ronald Netolitzky says the main objective of the second phase of drilling is to get a better handle on the geometry and to obtain enough information from the 1,000 metres of strike length for correlation purposes. “We will like to have at least 100-metre intervals of drill data,” he says, adding “I think that within the next five to six months, the potential of this thing will start unfolding.”
Nauman says he is pleased with the results to date. Diamond drilling has intercepted values of:
- 0.94 gram gold over 136 metres in diamond drill hole 1;
- 2.7 grams over 62 metres in hole 2;
- 1.1 grams over 130 metres in hole 5; and
- 1.3 grams over 47 metres in hole 10.
Similar intercepts were encountered in the reverse-circulation drilling.
The company is considering bringing back the RC drill rig to test the continuity of the mineralized marbles that have been traced by surface bedrock sampling for another 1,500 metres to the northwest of the Cerro Diablo zone.
Oxide mineralization is found to extend more than 200 metres below surface, particularly in brecciated limestones and marbles. Oxidation is less developed within the intrusives and intrusive breccia, with primary sulphides and realgar (arsenic sulphide) visible in several holes. Viceroy finds that the gold mineralization has a definite relationship to the intensity of brecciation and fracturing, with a possible association between higher grades and proximity to intrusive breccias.
Initial thin section work indicates the host rock is limestone and marble composed largely of calcite and recrystallized calcite. There has been little silicification identified. Polished sections confirm the presence of fine gold in the 5-micron range, generally proximal to residual pyrite cubes weathered to hematite and limonite.
Preliminary metallurgical tests indicate that oxide recoveries in excess of 92% can be achieved in 24-hour bottle-roll tests, suggesting the oxide mineralization is amenable to cyanide extraction.
Viceroy can earn a 60% interest in the Gualcamayo project from Mincorp Exploraciones by spending US$5 million on exploration over five years. Mincorp retains a back-in right to repurchase a 9% interest, bringing its stake to 49%, by paying Viceroy US$2 million and a bonus of US$2 per oz. based on a gold resource in excess of 200,000 oz., or to sell its entire interest to Viceroy for US$4 million and US$5 per oz.
Netolitzky says Viceroy intends to complete its US$5 million earn-in as quickly as possible.
Viceroy ended 1998 with a loss of $1.9 million (or 4 cents per share) on sales of $85.5 million, compared with a 1997 loss of $5.5 million (11 cents per share) on $89.5 million. The 1997 loss included writedowns to the tune of $8.1 million, most of which was related to the carrying value of the Brewery Creek mine.
Contributing factors to the 1998 loss were a 25-27% reduction in production at Castle Mountain, relative to the previous year, substantially increased exploration expenses and increased general and administrative costs.
Cash flow from operations declined slightly to $24.1 million (46 cents per share) in 1998, versus $24.8 million (49 cents per share) in the previous year. An aggressive hedging program is responsible for much of the realized cash flow. For the year, Viceroy realized a price of US$403 per oz. gold, an average of US$107.50 per oz. over the average spot price. Hedge benefits were US$18.7 million for 1998, compared with $17.6 million in 1997. The company has sold forward 145,000 oz. at US$400 per oz. in 1999, and 50,000 oz. at US$380 per oz. in 2000.
In the fourth quarter, Viceroy incurred a loss of $1.2 million (3 cents per share) on sales of $24.5 million, with cash from operations amounting to $9.5 million (18 cents per share).
At the end of 1998, the company had working capital of $54.7 million, including $38.2 million in cash, and a long-term debt of $13.7 million. Viceroy has 54.7 million shares outstanding, or 57.9 million on a fully diluted basis.
The wholly-owned Brewery Creek open-pit, heap-leach mine produced 79,396 oz. for the year at a total cash operating cost (including royalties) of US$187 per oz., compared with a forecast 77,500 oz. at US$200 per oz. Total production costs ran US$268 per oz.
Updated ore reserves at Brewery Creek stand at 11.8 million tonnes grading 1.13 grams gold per tonne, equ
ivalent to 428,577 contained ounces, compared with the 1997 year-end estimate of 13.3 million tonnes grading 1.44 grams gold, equal to 613,000 oz.
In Canaccord Capital’s Daily Letter, mining analyst Glenn Brown says Viceroy revised its reserves of the Golden and Kokanee deposits at Brewery Creek following an audit by California-based Mineral Resource Development Inc.
The audit was prompted by grade-control problems with these deposits. Brown says the audit recommended the deposits be drilled at a closer spacing of 25 metres, rather than the 50 metres that was specified in the original mine plan. The auditors also applied a cut value to high-grade assays from the two zones, which are characterized by a weak nugget effect.
At Castle Mountain, the remaining reserves are estimated at 8.9 million tonnes grading 1.26 grams, equivalent to 360,000 contained ounces, which will be mined over the final 2.5 years of mine life. Castle Mountain produced 89,136 oz. in 1998, of which 66,852 oz. are attributed to Viceroy. The total cash cost was US$326 per oz.; the total production cost, US$384 per oz. The company deferred waste stripping costs of $1.5 million in the last half of 1998. (It is Viceroy’s policy to defer the cost of waste stripping when it is in excess of the life of mine average.)
Viceroy forecasts 1999 production will total 138,000 oz. at an average cash cost of US$244 per oz. Brewery Creek is expected to produce 74,000 oz. at a cash cost of US$212 per oz., while Castle Mountain should produce 84,600 oz. (64,000 oz. to Viceroy’s account) at US$280 per oz.
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