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DAILY NEWS Nov 21, 2012 5:10 PM - 0 comments

Auriga has new vision for Puffy Lake

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Auriga Gold (AIA-V) wants to bring the Puffy Mine in western Manitoba back to life — only this time as a more modest and efficient operation.

The company’s Maverick property, which sits roughly 65-km east of Flin Flon, hosts the past producing Puffy Mine and mill which turned out 28,000 oz. of gold between 1988 and 1989 when it was run by Pioneer Metals.

The short life-span of the operation had to do with a gross miscalculation on Pioneer’s part. In the spirit of the 80s the company took a bigger-is-better approach, and despite being advised to build a 500 tonne per day mill, went with a 1,000 tonne per day mill with the idea that more production would lead to a higher price multiple on its stock.

The larger model, however, didn’t mesh with style of mineralization at Puffy Lake, which comes in the form of narrow quartz veins. So in its pursuit of getting more tonnage to the mill Pioneer only increased its operating costs (in the form of more labor costs and more stoping costs) while reducing the head grade due to the dilution it suffered by mining more rock.

Auriga doesn’t plan on making the same mistake.

A prefeasibility study done in February of this year envisioned a smaller mill and a mine that emphasizes grade control first.

The study considered a mine that will pull 2.04 million tonnes of ore from four open pits and an underground operation, with ore being processed at a refurbished mill scaled down mill to 750 tonne per day from its current 1,000 tonne per day configuration.

Using a gold price of US$1,400 per oz. and an 8% discount rate the pre-tax net present value was calculated at $79.6 million with a pre-tax internal rate of return of 84%.

Auriga wants to start producing gold by the second half of 2013 with total gold production of 348,000 oz. over 7.5 years at an average cash cost of $950 per oz.

A key benefit to the project, explains interim CEO Gorden Glenn, is that since Puffy is a past producer, the project still has the mine permits it needs to get into production — with one wrinkle. Since those permits were for an underground operation, and Auriga plans to use both open pit and underground, the permits need to be amended for the open pit component of the project.

Glenn says the company has submitted the request for the amendment and expects resolution in the coming few months.

As for financing the renaissance of the mine, the prefeasibility study estimates it would cost $18.1 million to get into production with life of mine sustaining capital cost of another $26.6 million.

The top funding option being considered currently is a gold pre-pay loan agreement that Auriga already has an indicative term sheet on. The loan would be for $23 million and would be repaid by monthly gold deliveries averaging less than 20% of the scheduled gold production. If all goes according to plan the loan would be repaid over 36 months following a 6 month grace period.

At this point, however, no financing deals have been finalized and the company is considering other options.

“We won’t blow up the company's capital structure,” Glenn says. “We will wait until the market pays proper value for our resource base and the value that Puffy represents.”

Maverick is host to a mineralized stratigraphy that can be traced over 20-km and currently is home to not only the Puffy deposit but also the Nokomis zone roughly 8-km northeast of Puffy. Both are quartz vein hosted deposits.

At Puffy the plan is to produce the first 70 to 80,000 oz. of gold from four open pits and then go underground at the end of the second year of operation. The open pits would provide roughly 20% of total production with low mining cost of $650 per oz.

Open pit indicated resource come in at 242,000 tonnes grading 4.16 grams gold for 32,000 oz. and inferred resources are 78,000 tonnes grading 3.81 grams gold for 10,000 oz. of gold.

The deposit has underground indicated resources of 702,000 tonne grading 6.29 grams gold for 142,000 oz. of gold and inferred resources of 3.02 million tonne grading 5.65 grams gold for 548,000 of gold. Those numbers were generated using a cutoff grade of 2.5 grams gold.

The Puffy deposit is made up of four sub-parallel veins separated between 10 to 50 metres apart. The veins are angled at roughly 30 degrees, which Glenn concedes can make mining more challenging as a flatter orientation is good for rubber tire mining while a more vertical orientation can make better use of gravity.

As for Nokomis, the zone has a non-compliant historical resource of 349,111 tonnes grading 6.1 grams gold for 68,523 oz. of gold. Glenn describes the zone as hosting thicker veins with a steeper dip than at Puffy, which should result in a lower strip ratio and sound economics.

“It’s basically just a quarry operation,” he says.

Auriga has finished confirmation drilling on the zone and expects an NI 43-101 on the area shortly. Drill results from its program at Nokomis returned highlight intercepts of 125.08 grams gold over 7.6 metres and 12.27 grams over 5.2 metres.

The plan is to get ore from Nokomis in the early stages of the Puffy Lake development which would push back the underground development at Puffy.

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