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DAILY NEWS Feb 1, 2013 5:19 PM - 0 comments

Costs creep up at Chesapeake's Metates project

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Chesapeake Gold (CKG-V) has completed a prefeasibility study (PFS) on its Metates gold-silver project in Mexico’s Durango state, showing it could annually produce 954,000 gold-equivalent oz. and 143 million lbs. zinc for 25 years.

The cost to build the large-scale operation is projected at US$4.36 billion, including a contingency of US$631 million. Another US$584 million is expected in sustaining costs.

In a 2011 updated preliminary economic assessment, the initial capital was estimated at US$3.15 billion. The company attributes US$600 million in cost increases to scoping changes made to the tailings storage, solvent-extraction electrowinning plant and optimization of the processing circuit.

Brian Szeto, an analyst at Stonecap Securities, says the costs are slightly higher than anticipated. “I had been expecting $4 billion in my valuation, so the $4.36-billion price tag is only 9% higher than my expectations,” he writes in an email, noting the other key economic parameters were fairly in-line with his valuation.  

To make costs more manageable, Chesapeake plans to split the amount in two phases. It will spend an initial US$3 billion to build a 60,000-tonne-per-day operation, which will be doubled to 120,000 tonnes per day in the second phase for another US$1.3 billon. Metates should reach that full production rate in its second operating year.

The study outlines promising economics for the project, with US$10.7 billion in pretax operating income expected over the life of the mine.

Using an 8% discount rate, Metates has an after-tax net present value of US$2.36 billion and internal rate of return of 16.2%. Payback should occur in roughly five years.

Metal prices of US$1,350 per oz. gold, US$25 per oz. silver, US$1 per lb. zinc and US$3 per lb. copper were used.

Ore from the project is envisioned to be processed at two different sites. At the project site, ore will be crushed and reduced to sulphide concentrate. From there, the concentrate would be transported via a 126-km-long slurry pipeline to the Ranchito site, located at an 800-metre lower elevation to the southwest. Chesapeake notes this site is near a large limestone resource as well as power, water, transportation and labour.

At Ranchito, the sulphide concentrate will be treated in a pressure oxidation plant to recover gold-silver dore. The solution from the process will be then neutralized by limestone and lime extracted on site, before undergoing solvent extraction/electrowinning techniques to recover zinc ingots.

Gold, silver and zinc recovery rates are estimated at 89%, 76% and 85% respectively.

The study indicates higher grade material will be processed at the mill from years 2-7, while low grade material will be stockpiled and processed in the last six years of the mine life.  

Metates should annually produce 1.3 million gold-equivalent oz. and 190 million lbs. zinc for operating years 2–7 at total cash costs for gold equivalent oz. of US$421, with life of mine costs averaging US$489, minus zinc and copper credits.

The deposit hosts 18.5 million oz. gold, 526 million oz. silver and 4.2 billion lbs. zinc, grading 0.50 gram gold per tonne, 14.2 grams silver and 0.17% zinc. The project is located 160 km northwest of the city of Durango and 175 km north of Mazatlan.

On the news, Chesapeake added 10¢ to close at $9.45, within a 52-week range of $7.46-$13.99.

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An employee walks through Chesapeake's Metates project in Mexico. Source: Chesapeake Gold
An employee walks through Chesapeake's Metates project ...

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