With the release this week of the first economics from the Trans-Canada gold project in northwestern Ontario, Premier Gold Mines (TSX: PG) is better positioned as a take-over target, according to Canaccord Genuity mining analyst John Kratochwil.
The North America-focused gold explorer tabled preliminary economic assessments for its 100%-owned Hardrock and Brookbank deposits, which make up part of its Trans-Canada project.
The PEA studies contemplated a open-pit mining at Hardrock and a combined open-pit and underground operation at Brookbank. Hardrock is 260 km northeast of Thunder Bay and a few kilometres south of Geraldton, a town of nearly 2,000 people, while Brookbank is 77 km west of Hardrock and 28 km northeast of Beardmore, a town with a population of about 400 people. Brookbank lies 12 km from the Trans-Canada Highway.
At a gold price of US$1,250 per oz. and a discount rate of 5%, Hardrock’s post-tax internal rate of return (IRR) works out to 19%, its post-tax net present value (NPV) runs to $359 million, and its payback period on an after-tax basis is 3.9 years. Brookbank has a post-tax IRR of 24.7%, a post-tax NPV of $52 million, and a post-tax payback period of 4.4 years.
“The PEA(s) definitely met our expectations, despite the fact that we have seen a tail off in the price of gold of late, which has negatively affected some of the similar lower grade projects,” Ewan Downie, the company’s president and chief executive, says in a telephone interview after holding business meetings in Toronto. “Our PEA results were very strong at a US$1,250 per oz. gold price. We’re very happy with the results and now we’re going to be starting all the engineering work on the full feasibility for Hardrock. We’re going to make Hardrock the focus because that’s where the central mill will be and it’s the much larger project, so it will be the main driver and our main focus for the foreseeable future.”
The Hardrock PEA was calculated on a 15-year mine life. During the operation’s first eight years, gold production is estimated to average 253,100 oz. a year at an average grade of 1.50 grams gold per tonne.
Over the full 15-year life of the mine, production is expected to average 202,700 oz. a year at an average grade of 1.18 grams gold per tonne.
In the first two years, processing would run at 10,000 tonnes per day and expand to 18,000 tonnes per day in the third year.
Initial capital costs are estimated to run to $411 million, including $83 million for contingencies. Over the life of the mine, total cash costs are anticipated to reach $737.11 per oz. and all-in sustaining costs $803.14 per oz.
The Hardrock PEA is based on an open-pit indicated resource of 64.7 million tonnes grading 1.18 grams gold for 2.45 million oz. contained gold, and an open-pit inferred resource of 24.7 million tonnes at 1.18 grams gold for 938,000 oz. contained gold.
Premier notes that there are opportunities to improve the project economics, as the study is based on a resource cut-off date of August 2013, and doesn’t include subsequent infill drilling of about 45,000 metres completed to the end of 2013. It plans to release an updated resource estimate in the second half of 2014.
Follow-up drilling in the North Wall area of the pit could bring additional resources into the optimized pit, the company notes, and Premier is completing an underground study to further enhance project economics, it says.
Jeff Killeen of CIBC says the upcoming feasibility study for Hardrock due in the first half of 2015, like the PEA, will focus on an open-pit only scenario. “While Hardrock hosts an underground resource, management has indicated that it would focus on an open-pit only scenario in the current gold price environment,” he writes in a research note to clients. “Although the underground resource may be excluded from the company’s current economic analysis, we believe that it provides investors with optionality to the gold price in the longer term.”
At Brookbank, the PEA contemplates processing ore at a future Hardrock mill. The study is based on processing an average 900 tonnes per day from open pit and underground sources during the life of the mine.
For the first two and a half years, an open-pit mine would process 600 tonnes per day at a grade of 2.31 grams gold per tonne. Underground mining would start after the first year of open-pit production, at a grade of 6.25 grams gold at up to 900 tonnes per day for six years. That would bring the total mine life from both open pit and underground mining operations at Brookbank to seven.
Underground mining operations would be accessed via a single portal and main ramp. The operation would use longitudinal longhole stoping (25-metre sub-levels), with consolidated and unconsolidated rockfill as a mining method and require up to 4,000 metres of pre-preproduction and sustaining capital development and some 7,000 metres of operating lateral development (waste and silling) over the life of the mine.
Total estimated capital costs work out to $107 million, which includes a $21 million contingency, and total cash costs are estimated to come in at $620 per oz. over the life of the mine.
The Trans-Canada project may have further upside from a new open-pit target called Twomey, about 10 km west of Hardrock and just south of Trans-Canada’s Key Lake open-pit deposit.
“We found in the files a few historic drill holes with really good grades and we’re going to get a permit to drill that area,” Downie says. “It’s a very prospective-looking target and it could be a sizeable deposit if it works out. The indications from historic drilling are a strike length in excess of hundreds of metres and widths of up to 100 metres in this porphyry. It isn’t a high grade porphyry, but it is broad, so it’s a pretty exciting target and we expect to start drilling in the primary area there in March or April this year.”
Premier has $70 million in cash and investments and a $5 million debt payment due in June 2014.
At the time of writing, the company, which is headquartered in Thunder Bay, was trading at $1.98 per share within a 52-week range of $1.28-3.79.
Canaccord’s Kratochwil raised his target price on the stock after news of the PEAs from $3.50 per share to $3.75 per share. In a research note, the analyst said he believes that the economics “compare favourably to recent studies issued for Blackwater (IRR 9.3% at $1,300 per oz.), Rainy River (IRR 11.3% at $1,300 per oz.) and Magino (IRR 18% at $1,250 per oz.).”
Killeen of CIBC has a 12-18 month target price of $4 per share and notes that “with a strong balance sheet and assets located in North America, Premier should trade at a premium to its non-producer peers.”
At Cantor Fitzgerald, Rob Chang has a 12-month target price of $3.85 per share.
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