NovaCopper (TSX: NCQ; NYSE-Arca: NCQ) — a junior explorer that NovaGold Resources (TSX: NG; NYSE-Arca: NG) spun out early last year to explore and develop its Upper Kobuk mineral projects in the Ambler mining district of northwestern Alaska — has released a promising preliminary economic assessment (PEA) for the Arctic polymetallic deposit, the most advanced of the bunch.
The PEA, prepared by Vancouver-based firm Tetra Tech, shows that Arctic is technically viable as a 10,000-tonne-per-day open-pit operation, annually producing 125 million lb. copper, 152 million lb. zinc, 24 million lb. lead, 29,000 oz. gold and 2.5 million oz. silver throughout its estimated 12-year life. Life-of-mine cash costs are estimated at US62¢ per lb. payable copper, minus by-product credits, while total all-in cash costs are US$1.26 per lb.
NovaGold had earlier contemplated mining Arctic as a 4,000-tonne-per-day underground operation over a 25-year mine life, and published a PEA in 2011 showing it was broadly feasible to do so. But because of the technical risks and costs associated with underground mining, NovaCopper reassessed the deposit’s open-pit potential.
“The main reason is that it’s simply technically less challenging to develop,” says Patrick Donnelly, NovaCopper’s vice-president of corporate communications. The Arctic orebody dips steeply with narrow veins, and if mined from underground it would require a more complex and labour-intensive mining method, whereas the open pit could be easily stripped and bulk mined,” Donnelly says.
While there’s no arguing the costs, Salman Partners analyst Raymond Goldie points out that open-pit mining would result in more waste and lower mined grades. “Underground mining is more expensive, per tonne, than open-pit mining, but it allows early access to the highest grade mineralization, and may involve less dilution than with open-pit mining,” he writes in a note, adding that he expects a flat grade of 2.28% copper throughout the life of the mine, compared to an initial copper grade of 3.84% for the proposed underground mine.
Start-up costs for the open-pit mine and mill complex have been pegged at US$718 million, with another US$164 million expected in sustaining costs, bringing total capital costs to US$882 million, excluding closure and reclamation costs of $82 million.
In comparison, initial costs for the underground mine were US$262 million, with sustaining capital of US$134 million. However, Donnelly cautions that those costs are somewhat outdated, and were based on 2010 metal prices and assumptions. He says that if the study was current, the initial capital cost for the underground mine would have increased to US$500 million. “So you are really going from $500 million to just over $700 million. And you’re also going from a 4,000-tonne-per-day operation to an over 10,000-tonne-per-day operation.”
The latest PEA shows a net present value of US$537.2 million and a 17.9% internal rate of return, both on an after-tax basis, using an 8% discount rate and a US$2.90 per lb. copper price. NovaCopper says the calculations were done on 100% ownership and exclude the impact if its partner NANA Regional Corp., which has the right to either buy up to a 25% stake in the project or receive a 15% net proceeds royalty after making a construction decision. The numbers include a 1% net smelter return royalty provided to NANA in exchange for surface use.
While the economics appear promising, the junior says it can improve the Arctic project’s viability by conducting detailed geotechnical and hydrological drilling to characterize waste material and refine the strip ratio, which is currently 8.39 to 1.
It also notes that operating costs assume the project would use diesel power, but power costs could be halved by using liquefied natural gas (LNG).
The Alaska Industrial Development and Export Authority (AIDEA) is wrapping up a feasibility study on a LNG plant on Alaska’s North Slope. If built, the LNG could be shipped to Fairbanks and used to provide electricity at the Arctic project, Donnelly says.
Moreover, AIDEA is looking into permitting and building an industrial access road to the Ambler mining district, including the company’s deposits in the region, which are mostly accessed by air. While the cost of the proposed 340 km road is not known, the PEA assumes NovaCopper would make toll payments of $9.7 million each year to use the road, once Arctic reaches commercial production.
The company expects it will be in a position to make a construction decision for Arctic within five years, following a positive feasibility study.
Salman Partners’ Goldie forecasts that the access road will be built by 2022, with the Arctic project reaching first production by 2024. He has reduced his target price from $5.80 to $4.70, but keeps a “buy” recommendation on the stock, which last traded at C$1.92 for a C$53-million market cap.
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