For the last six months, AuRico Gold (TSX: AUQ; NYSE: AUQ) has been sizing up Carlisle Goldfields (TSX: CGJ) and its Lynn Lake gold project in Manitoba.
“It’s definitely early days but Carlisle has already delineated 5 million ounces of resources on their property; they’ve published a preliminary economic assessment; and if you look at some of the highlights it’s pretty impressive,” AuRico’s president and chief executive, Scott Perry, says in an interview. “We just think it’s got a lot of things going for it.”
A preliminary economic assessment of the project in February outlined a twelve-year operation based on two of Lynn Lake’s four known gold deposits with production of 145,000 ounces of gold a year at all-in sustaining costs of US$700 per oz., average open-pit grades of about 2.2 grams gold per tonne, and a price tag of US$185 million.
Among the project’s unique attributes are Manitoba’s extremely low electric-power costs of about 2.6¢ per kilowatt hour, which will have a significant impact on operating costs. “Manitoba has got Quebec trumped,” Perry says. “Electric power costs there are among the lowest in North America.”
On Nov. 11, AuRico subscribed for 70.6 million common shares in Carlisle, or 19.9% of the company, for $5.6 million (at 8¢ per share — a 100% premium to Carlisle’s closing share price on Nov. 10) and signed a joint-venture agreement to earn a 25% stake in the Lynn Lake gold camp for an initial cash contribution of $5 million. AuRico also has the option to earn up to an additional 35% interest by spending $20 million over three years and delivering a feasibility study.
Perry says the timing of the investment is perfect, given the prevailing “low valuations” in the industry, and is also consistent with the company’s strategic focus on high-quality assets in North America. AuRico sold a lot of its non-core operations in 2012 when the gold price was high, he explains, and now that the gold price is under pressure, it’s the ideal time to buy assets that will deliver long-term value.
“You’ve got to buy low and sell high and it was a good time to move on an opportunity like this,” he says. “Our technical team looked at a lot of things, but this is one opportunity where we quickly established a consensus that it has a lot of potential moving forward.”
Lynn Lake’s location in Canada was a big drawing card, too. “One of the things we like about Canada is, if you are conservative or negative on the gold price, you usually do see compensating relief on the exchange rate,” Perry explains. “At the start of the year, the Canadian dollar gold price was $1,300 per oz. and today the Canadian gold price is still $1,300 per oz. That really helps us out at Young Davidson and will also be part of that dynamic at Lynn Lake.”
Under the terms of the agreement, the joint-venture ground applies to Carlisle’s entire 35,000-hectare land package in the Lynn Lake gold camp, which contains four near-surface gold deposits: the advanced-stage Farley Lake and MacLellan deposits (both past producers that are the subject of Carlisle’s most recent PEA and located within a 40-km radius of each other), and the earlier stage Burnt Timber and Linkwood deposits. In addition, there are a number of other gold showings on the Carlisle property, according to the company’s president and chief executive, Abraham Drost.
“We have over 20 gold occurrences that are known in the belt that have had little testing beyond a first-phase of historical exploration that preceded Carlisle’s involvement on the property,” Drost says.
Carlisle envisions building a central mill that would initially process feed from the past-producing MacLellan and Farley Lake deposits. The mill would then reduce the hurdle rate should the company decide to develop ancillary assets like Burnt Timber and Linkwood or any other new deposits discovered on the property, Drost says.
The Farley Lake mine was put into production under previous owners as two small open pits in 1997-99. The pits produced 1.71 million tonnes at a grade of 4.23 grams gold per tonne for 213,124 ounces of gold. MacLellan was previously mined underground between 1987 and 1989 and produced about 144,000 ounces of gold and 432,000 ounces of silver.
As far as the new partnership with AuRico is concerned, Drost says there is “good chemistry” between the two management groups, and describes AuRico’s team as “the right guys for the job.”
“AuRico has a very competent technical group of engineers and geologists [and] run a very lean, low-cost operation at Young-Davidson,” Drost says. “They’re very confident professionals — with personality — so we find that we get along with them very well, which makes things smoother. More importantly, we’re confident they’re going to come up with the right approach to mining Lynn Lake.”
Commenting on the deal in a research note, Brian Quast of BMO Capital Markets noted that AuRico “is acquiring a strategic interest in a prospective mining district with a good location and a meaningful resource for a low price.”
“With the ramp-up at Young-Davidson expected to be completed in late 2016,” Quast continues, “AuRico needs to begin formulating its plan for its next leg of growth.”
In the third quarter, AuRico’s Young-Davidson open-pit/underground mine in Ontario produced 40,538 ounces of gold at an overall cash cost of US$723 per oz., a 17% decrease over the previous quarter. The open-pit mine at Young-Davidson was fully depleted in early June and during the three months to Sept. 30 higher grade underground mill feed was supplemented with low-grade open-pit stockpiled ore to ensure the mill processing facility was operating at peak capacity.
The open-pit stockpile will continue to supplement underground ore feed to the mill processing facility as the underground mine ramps up to targeted levels. For the quarter, AuRico posted underground cash costs of US$656 per oz., an 18% decline from the prior quarter.
Meanwhile, the open-pit mining rate at AuRico’s El Chanate mine in Mexico averaged 94,643 tonnes per day in the third quarter, with cash costs of US$663 per oz.
AuRico expects to become free cash-flow positive before the end of the year.