AuRico CEO on permitting Kemess, royalty strategy

The view north from the past-producing Kemess project 250 km due north of Smithers in north-central British Columbia. Credit: AuRico Metals.The view north from the past-producing Kemess project 250 km due north of Smithers in north-central British Columbia. Credit: AuRico Metals.

VANCOUVER — AuRico Metals (TSX: AMI; US-OTC: ARCTF) is closing in on final regulatory approvals to revive the Kemess copper-gold mine, roughly 250 km due north of Smithers in north-central British Columbia. On March 15, the company received its environmental assessment certificate from the Canadian Environmental Assessment Agency (CEAA) to restart underground mining at the site, where open-pit operations generated 3 million oz. gold and 750 million lbs. copper between 1998 and 2011.

The brownfield Kemess South project includes a 300-person camp footprint, 52,000 tonnes per day processing plant, service roads, airstrip, and an electrical sub-station. AuRico’s plan is to restart mining with ore from the Kemess Underground deposit, which sits around 6.5 km north of the existing grinding, flotation, thickening and concentrate handling facilities. The redevelopment would require US$380 million in capital expenditures, which would be largely earmarked for underground development.

“I think it was a good process for us. We kicked it off in 2015, so it’s been a long road,” comments president and CEO Chris Richter during an interview. “What’s interesting in terms of the environmental assessment is that we’re actually the very first company to receive our certificate and decision statement from the federal government under substituted permitting, which involves B.C. and the government of Canada coordinating on the process. It’s the only province that has that type of framework, and we’re the first mining project to make it through.”

The camp at the Kemess project looking northeast. Credit: AuRico Metals.

The camp at the Kemess project looking northeast. Credit: AuRico Metals.

The Kemess Underground reserves are located between 200 metres to 550 metres below surface, and total 107.4 million tonnes grading 0.53 gram gold per tonne, 0.27% copper, and 1.99 grams silver per tonne, which equates to around 1.9 million oz. contained gold, 630 million lbs. contained copper and 6.9 million oz. contained silver.

The company would process ore at an average of 25,000 tonnes per day, while waste rock and tailings would be placed in the old Kemess South open pit. Testwork underground material has reportedly resulted in estimated metallurgical recoveries of 91% copper, 72% gold and 65% silver.

The re-imagined Kemess operation would have life-of-mine production of 1.4 million oz. gold and 573 million lbs. copper. Average annual production is estimated at 106,000 oz. gold and 47 million lbs. copper.

At US$1,250 per oz. gold and US$3 per lb. copper, AuRico’s feasibility study (FS) features a 15.4% after-tax internal rate of return, and a $421 million net present value at a 5% discount rate. The project will require additional normal course licenses and permits, which are expected to be received early in 2018.

AuRico Metals President and CEO, Chris Richter. Credit: AuRico Metals

AuRico Metals President and CEO Chris Richter. Credit: AuRico Metals.

“I think that we’d like to see sustainable metal prices at those levels before making a positive production decision. In terms of permitting, I think there’s an interesting discussion about B.C. as a mining jurisdiction right now. We’re very positive on the province,” Richter elaborates.

“We’ve just moved through the environmental assessment process, and we feel the government worked well with all the interested parties on our project. They really helped drive the process and assure that timelines were met. The federal-provincial substitution framework really worked well for us. So we’re positive on how it’s shaping up, but you do need to be patient,” he adds.

AuRico also plans to advance a preliminary economic assessment (PEA) for the Kemess East deposit, which sits one km east of the Kemess Underground. The company has been working to increase confidence on a “high-grade core” at the satellite deposit, and released an updated resource in mid-January. Kemess East now contains 113.1 million indicated tonnes grading 0.38% copper and 0.46 gram gold, and 63.8 million inferred tonnes grading 0.34% copper and 0.31 gram gold. The high-grade subsection hosts 67.2 million indicated tonnes grading 0.43% copper and 0.60 gram gold.

“We view Kemess East as an upside scenario, and it’s been really exciting over the past year. The resource update demonstrated a significant increase in our resources. It’s clearly earlier stage, but I think it’s emerging as an important component,” Richter continues.

“The economics on the Kemess Underground remain quite compelling, I think, even before you consider that potential upside. But we don’t have to make a decision today. That might be a decision for early next year. We’ll obviously look at the metal environment at that time,” he says.

Meanwhile, AuRico remains an active player in the royalty business. The company inherited its core royalty assets following its spin-out during the $1.5-billion merger of AuRico Gold and Alamos Gold (TSX: AGI; NYSE: AGI). The portfolio is headlined by a 2% net smelter returns (NSR) royalty on Kirkland Lake Gold‘s (TSX: KLG; US-OTC: KLGDF; LON: KGI) Fosterville gold mine in Australia, and a 1.5% NSR on Alamos’ Young-Davidson mine in Ontario.

Kirkland Lake Gold’s Fosterville gold mine in Australia. Credit: Newmarket Gold.

Kirkland Lake Gold’s Fosterville gold mine in Australia. Credit: Kirkland Lake Gold.

AuRico expects to generate between $8 million and $8.4 million in pre-tax royalty revenue in 2017.

In late 2016, the company announced the $9.6-million, all-share acquisition of Kiska Metals. The deal added six royalties to the portfolio, including a 0.5% NSR on Kirkland Lake’s East Timmins project and a 1% NSR on Independence Gold‘s (TSXV: IGO; US-OTC: IEGCF) Boulevard property in the Yukon.

“We continue to see good opportunity on the royalty side in the market segment we occupy. Certainly you hear about the competition among the large royalty players, but I think we don’t see as much of that competition at the intermediate level,” Richter says.

Drillers at Independence Gold’s Boulevard gold project in the Yukon’s White Gold region, 135 km south of Dawson City. Credit: Independence Gold.

Drillers at Independence Gold’s Boulevard gold project in the Yukon’s White Gold region, 135 km south of Dawson City. Credit: Independence Gold.

“We’re not necessarily participating in some of the big bid processes, and we’re not looking to finance developers by creating new royalties. We’re looking to shake loose existing royalties that are in the hands of third parties who don’t get much value for them. I think there are a lot of those opportunities out there, and that’s our focus,” he continues.

AuRico has traded within a 52-week window of 67¢ and $1.26, and has gained 35%, or 29¢, over the past three months en route to a $1.13 per share close at press time. The company reported $15 million in cash, along with no debt, and maintains 158 million shares outstanding for a 185.4 million press-time market capitalization.

“We still have essentially two parts to our business, but that could always change,” Richter concludes. “There was a lot of negativity on copper going back as recently as six months ago. Certainly there’s a buzz out there now, and a lot of the players in the space have been clear in articulating that there’s not a lot out there in terms of development opportunities at an advanced stage. So if you’re expecting a significant deficit opening up in a few years, we feel Kemess underground represents a potentially well-timed scenario.”

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