VANCOUVER — With this year’s uptick in gold prices, AuRico Metals (TSX: AMI; US-OTC: ARCTF) is in a better position with its royalty portfolio, which includes five operating mines and redevelopment potential at the past-producing Kemess copper-gold complex, 250 km north of Smithers, B.C.
The company expects between $8 million and $9 million in after-tax royalty income this year, and it has released a feasibility study on a proposed underground mine at Kemess.
“We’re still very much a hybrid company, and we feel that we have two valuable assets in the royalty portfolio and at Kemess. Right now we’re happy to participate in both sides of the business,” president and CEO Chris Richter said in an interview.
“But we’ve been clear since the beginning that at some point it may prove strategic to split the assets up” he added. “We’re advancing both strategies, so we’re looking at expanding the royalty business, even as we get ready to move through the environmental review at Kemess.”
The new Kemess mine plan takes advantage of existing infrastructure that’s worth $1 billion on a replacement basis, and focuses on reserves at the Kemess underground (KUG) that total 107.4 million tonnes grading 0.3% copper and 0.54 gram gold per tonne for 630 million contained lb. copper and 1.9 million contained oz. gold.
The proposed development would require $450 million in preproduction capital expenses and produce 47 million lb. copper and 106,000 oz. gold annually at co-product cash costs of US$1.28 per lb. copper, or US$639 per oz. gold.
Assuming a base case of US$2.50 per lb. copper and US$1,250 per oz. gold, the study generates an after-tax net present value of $289 million at a 5% discount rate, along with a 12.6% internal rate of return.
AuRico is looking to permit a 25,000-tonne-per-day processing plant — around half the rate the mine operated at between 1998 and 2011, when it generated 750 million lb. copper and 3 million oz. gold from the Kemess South open pit.
“It’s the capital allocation that sets Kemess apart, and it’s an element that might get overlooked,” Richter said. “Our overall capital expenditure number compares well with other copper-gold opportunities out there, but, critically, our investment will not be on processing facilities or infrastructure, because we already have those in place. The lion’s share of what we’ll spend money on is underground development, and that’s simply lower-risk capital.”
The current mine plan doesn’t incorporate the more recently discovered Kemess East deposit, which lies 6.5 km north of the Kemess South facilities. AuRico drilled nearly 28,000 metres at the site last year.
The company has updated the resource for the Kemess East deposit, which hosts 39.2 million indicated tonnes grading 0.4% copper and 0.5 gram gold. Inferred resources total 109.6 million tonnes of 0.4% copper and 0.38 gram gold. AuRico sees a “high-grade core” at Kemess East of 31.7 million inferred tonnes of 0.5% copper and 0.63 gram gold, and 19.2 million indicated tonnes grading 0.5% copper and 0.72 gram gold.
“Kemess East is completely separate for the time being. We’re excited about the potential, and there’s a lot of material with promising copper and gold grades. We could definitely look at mining down the road,” Richter said.
KUG hosts measured and indicated resources of 246 million tonnes of 0.2% copper and 0.42 gram gold for 1.2 million contained lb. copper and 3.3 million contained oz. gold.
“Our measured and indicated resources at KUG again speak to upside. We’ve limited the quantity of reserves in our underground mine plan because the tailings storage solution involves the historic Kemess South open pit. We view that as the path of least resistance in terms of permitting, and the government and First Nation are supportive of that scenario,” he added.
AuRico submitted its environmental assessment application for the KUG project to B.C. regulators a month ago, and Richter hopes the government will reach a decision by the fourth quarter. Meanwhile the company has $2 million in pre-existing flow-through dollars for more drilling at the site this year.
“There’s definitely target generation work going on for us, because the Kemess region remains an exciting area for discoveries. The infrastructure gives us a big head start, and other companies are conducting quite a bit of exploration in our neighbourhood,” Richter said.
AuRico has traded within a 52-week range of 47¢ to 90¢ per share, and shares have risen 19% to start the year en route to a 75¢-per-share close on March 29. The company has 131 million shares outstanding and finished 2015 with almost $7 million in working capital.
AuRico has negotiated a credit facility with Macquarie Group for up to $15 million to support potential royalty acquisitions, and expects to be free cash flow positive by 2017.
“The view on copper in the short-term is fairly negative. We certainly hear that message, but we’re also fortunate at spot prices that Kemess is more of a gold play,” Richter said. “And every single one of our underlying royalty assets has gained in value year-on-year. The various updates on the reserve and resources are heading in the right direction, so we’ve been fortunate.”