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TABLE OF CONTENTS Dec 3 - 9, 2012 Volume 98 Number 42 - 0 comments

Auriga's new vision for Puffy Lake

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By: Anthony Vaccaro

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

The company’s Maverick property, located 65 km east of Flin Flon, hosts the past-producing Puffy mine and mill, which turned out 28,000 oz. gold between 1988 and 1989 under Pioneer Metals.

The short lifespan of the operation had to do with a gross miscalculation on Pioneer’s part. In the spirit of the 1980s, the company apparently took a bigger-is-better approach, and despite being advised to build a 500- tonne-per-day mill, it 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 the mineralization at Puffy Lake, which comes in narrow quartz veins. So in its pursuit of getting more tonnage to the mill, Pioneer increased its operating costs — in the form of more labour costs and stoping costs — while reducing the head grade owing to dilution from mining more rock.

But Auriga doesn’t plan on making the same mistake.

A prefeasibility study done in February of this year envisions a smaller mill and a mining approach that emphasizes grade control.

The study considers mining 2.04 million tonnes of mineralized material from four open pits and an underground operation, processing at a refurbished mill scaled down to 750 tonnes 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 is 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, interim CEO Gorden Glenn explains, 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 the 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 pits.

The company has requested an amendment and Glenn expects a resolution in the next few months.

The prefeasibility study estimates it would cost $18.1 million to get into production, with another $26.6 million in life-of-mine sustaining capital costs.

The preferred funding option being considered is a gold prepay loan agreement, for which Auriga already has an indicative term sheet. This $23-million loan would be repaid by monthly gold deliveries averaging less than 20% of the scheduled production.

If all goes according to plan, the loan would be repaid over 36 months following a six-month grace period.

But the financing deals aren’t final, 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 tracing over 20 km that is home to the Puffy deposit and the Nokomis zone, 8 km northeast of Puffy. Both are quartz vein-hosted deposits.

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

Open-pit indicated resources come in at 242,000 tonnes grading 4.16 grams gold for 32,000 oz., with inferred resources at 78,000 tonnes grading 3.81 grams gold for 10,000 oz. gold.

The deposit has underground indicated resources of 702,000 tonnes grading 6.29 grams gold for 142,000 oz. gold, and inferred resources of 3.02 million tonnes grading 5.65 grams gold for 548,000 oz. gold. The numbers use a cut-off grade of 2.5 grams gold.

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

As for Nokomis, the zone has a non-National Instrument 43-101 compliant historical resource of 349,111 tonnes grading 6.1 grams gold for 68,523 oz. 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 a compliant resource 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 during Puffy Lake’s early development, which would push back the timing of its underground development.

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