Allied Nevada to benefit from economies of scale with Hycroft-Hasbrouck plan

VANCOUVER — It’s looking like a big year for Reno-based Allied Nevada Gold (AVN-T, AVN-X), with an US$1.2-billion expansion plan underway at its wholly-owned Hycroft gold-silver mine in Humboldt County and a proposed US$78-million heap-leach operation entering the permit stages at its Hasbrouck gold-silver project outside of Tonopah, Nevada.

In its third full year of production Hycroft processed 31 million tonnes of material, including 15 million tonnes of ore on a leach-pad at average grades of 0.37 gram gold per tonne and 9.6 grams silver per tonne. The mine produced 104,000 oz. of gold and 479,400 oz. of silver last year. Allied Nevada’s gold sales totalled 88,191 oz. of gold and 372,000 oz. of silver at adjusted cash costs of US$488 per oz. for total sales revenues of US$152 million.

Hycroft’s 2012 guidance includes between 180,000 oz. and 220,000 oz. of gold production and 750,000 oz. to 850,000 oz. of silver production at average cash costs in the US$475 to US$495 range. According to President and Chief Executive Officer Scott Caldwell, the wide variance in production estimates is due to uncertainties regarding the arrival of new equipment — primarily a third large mining shovel awaiting shipment from Japan. The operation is expected to process 68 million tonnes of material in 2012, including 34 million tonnes of ore at average grades of 0.4 gram gold and 7.2 grams silver.

Allied Nevada expanded Hycroft’s reserves earlier this year after drawing a quantity of lower-grade resources into its open-pit production model,

“Although the new drilling resulted in an increase to overall measured and indicated resources, the reserve increase and final pit are primarily driven by two additional factors,” explains Vice President of Exploration David Flint. “Number one, we completed an update to the slope design during the fourth quarter of last year, resulting in steeper slope angles on the west wall of the pit. Number two, the result of higher recoveries is that lower-grade material within the pit is now considered as economic to process, and therefore has driven a reserve increase.”

Hycroft’s gold-silver reserves increased by 24% in a late-February resource update, and now total 1 billion tonnes grading 0.3 gram per tonne gold and 11.9 grams silver for 12.7 million oz. contained gold and 482 million oz. contained silver. Measured and indicated gold-silver resources increased by 21% and 16% respectively to 940 million tonnes carrying 0.26 gram gold and 7.1 grams silver.

“You’ll notice the silver-gold grade has actually gone down in this resource estimate,” Caldwell points out, “But the actual quantity of our gold and silver ounces have increased quite a bit.”

In order to capitalize on the extra tonnage, Allied Nevada has designed a mine expansion plan worth US$1.2 billion that includes a gyratory crusher, new mill infrastructure to process transitional and sulfide ore, and an upgraded mining fleet.

“The big milestone for us, a real big milestone, is that the team was able to get approval to begin construction on the primary crusher system. That’s the gyratory, the core stockpile, the reclaim chambers, pebble crushers, and that approval was received three months ahead of schedule,” Caldwell says. “We’ve actually already begun the excavation and it is proceeding well. We believe that we will receive approval to begin construction on the mill early next year, and so we see no slippage there at present.”

According to a Preliminary Economic Assessment (PEA), the Hycroft expansion will carry an after-tax internal rate of return (IRR) of 37% with a US$1.6 billion Net Present Value (NPV) at a 6% discount rate. The study projects a 19-year mine life, with average production of 580,000 oz. of gold and 29 million oz. of silver per annum over the first ten years at average-adjusted-cash costs of US$166 per oz. — including a by-product silver credit.

“On the mining side of things, we really focused our mine-planning efforts on maximizing cash flow, hence the NPV of the project,” Caldwell explains, “We weren’t looking for a specific metal target of ounces produced in gold or silver.”

Allied Nevada ramped up throughput levels under the new study, with rates clocking in at roughly 213 million tonnes per annum or 581,000 tonnes per day — a previous study had modeled a yearly-throughput rate of roughly 172 million tonnes. The increased processing model was attributed mostly to the inclusion of a fourth large-electric shovel to transport the extra material,

“Mining rate is large. It’s high, but there are several hard-rock mines world-wide that are moving this type of tonnage or greater, and quite frankly in much more difficult conditions, whether that be rainfall, high elevation, or just logistical conditions,” Caldwell explains. “We’re comfortable with that mining rate, although it is a large mine.”

Allied Nevada has committed US$350 million to Hycroft’s expansion so far, with equipment and supply delivery expected throughout the year.

The original capital expenditure (capex) of US$1.2 billion remains unchanged, though life-of-mine expenditures have increased by US$200 million due to the addition of a new mining fleet in 2016 —including two blast-hole drills, a rope shovel and eight more trucks — as well as larger tails-dam capacity at the end of life to handle additional ore reserves.

On top of an extensive capital expansion at Hycroft, Allied Nevada also filed a PEA on its wholly-owned gold-silver Hasbrouck project in early April.  The proposed development includes a heap-leach operation with a five-year mine life designed to process Hasbrouck and a nearby resource at its Three Hills property.

Hasbrouck’s inferred resource is estimated at 106 million tonnes at an average grade of 0.31 gram gold and 7.8 grams silver, while Three Hills has a reported 5.2 million tonnes grading 0.28 gram gold.

“Our current thinking and what’s reflected in the study is that we don’t have the size of resource to warrant a mill,” Caldwell says. “The idea would be to construct the heap-leach, use that cash to pay for the mill again, if it improves the overall project economics. We’re not looking for ounces; we’re looking for dollars here. So if it doesn’t improve the economics we wouldn’t deploy the capital to build the mill.”

According to the initial PEA, Harbrouck has an after-tax IRR of 60% with a US$98.7 million NPV at a 6% discount rate. Initial capex requirements will be US$78 million, with life-of-mine costs of US$90 million. The low initial costs demonstrate one of the benefits of being a multi-mine producer, as economies of scale begin to come into play,

“Pretty low capital costs and the reason for that is we intend to deploy or move the surplus, the smaller mining fleet from Hycroft to Hasbrouck, once it is replaced by the big fleet that’s arriving on site at Hycroft now,” Caldwell explains.

Under the current model, the Harbrouck operation would produce 135,000 oz. of gold and 540,000 oz. of silver annually at average cash costs of US$555 per oz., including a by-product silver credit.

Allied Nevada is tagging US$7 million for regional Nevada exploration this year and the bulk of that capital will be spent on an expansion of resources at Harbrouck,

“If the program is as successful as we believe it will be, you may see the addition of a small mill,” Caldwell says, “We’re talking 4,000 to 6,000 tonnes per day, in order to process that high-grade material we have out there.”

Allied Nevada has traded within a 52-week range of $28.10 to $45.54 per share on an average daily volume of 211,500 units. The company has a $2.8 billion presstime market cap, with a US$275-million cash balance to end 2011 and an additional US$300 million equipment lease financing in place.


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