A new feasibility study of the Horne 5 gold project in Rouyn-Noranda, Que., estimates it could cost C$1 billion to build, Falco Resources (TSXV: FPC; US-OTC: FPRGF) says.
Preproduction construction costs for a large underground gold mine with silver and base metal by-products are estimated at US$801.7 million, including a US$58.5 million contingency, and excluding US$26.7 million of capital outlays to Aug. 31, 2017. Payback would take 5.6 years on a post-tax basis.
The mine would have a 15-year lifespan with average life-of-mine annual payable production of 219,000 oz. gold.
The study put all-in sustaining cash costs (AISCs) at US$399 per oz. net of by-product credits and all-in costs (capex and opex) of US$643 per oz. gold.
At US$1,300 per oz. gold and using an exchange rate of C$1 to US78¢, Horne 5 would generate a US$602 million after-tax net present value at a 5% discount rate and a 15.3% after-tax internal rate of return.
Horne 5 has proven and probable reserves of 80.9 million tonnes grading 1.44 grams gold per tonne, 14.14 grams silver per tonne, 0.17% copper and 0.77% zinc. In all resource categories, the deposit contains 5.5 million oz. gold.
On a conference call, Falco president and CEO Luc Lessard said the feasibility study establishes the Horne 5 project “as one of the best undeveloped gold projects by value and margin in today’s gold price environment.
“It’s a big mine … it’s a VMS system … the thickness is over 100 metres, so for a mining engineer like me, it’s a big piece of cake,” Lessard said enthusiastically.
Horne 5 sits below the former producing Horne mine, which was operated by Noranda from 1926 to 1976, and produced 2.5 billion lb. copper and 11.6 million oz. gold.
The deposit Falco plans to develop is at a depth of 600 metres to 2,300 metres below surface. If all goes according to plan, the mine will use an existing shaft (Quemont #2), which extends to 1,200 metres deep.
The deposit, which remains open, offers attractive exploration potential, given that the best grades the company has located so far are in the deeper portion of the deposit.
“The current mine life is 15 years, however, there’s very good potential to add to the mine life with additional drilling,” Vincent Metcalfe, Falco’s chief financial officer, said during the conference call, adding that underground drilling can be done “with little additional capital down the road.”
Metcalfe points out that the feasibility study reaches a depth of 2,000 metres, and that’s where most of the inferred resource lies. “Some of the highest grade that the company has seen in the deposit is located in the F Zone, which holds about 3.38 grams gold per tonne,” he continues. “So if we are able to go underground and drill the bottom portion of our deposit, there’s a good potential to increase tonnes.”
In addition, with 670 sq. km available, regional exploration looks promising, particularly given that the Horne property includes 14 past-producing mines.
“This project has a high level of attractiveness. The senior producers are looking for long mine life, and Horne certainly has that,” Metcalfe says. “There’s significant potential to increase resources and our AISCs are definitely at the top of our class.”
The project, which Falco acquired for $5 million in 2012, benefits from surrounding infrastructure and is about 1.1 km from Route 101 and 4 km from the Trans-Canada Highway. It is also less than 700 metres from the Horne copper smelter, which treats copper concentrates and precious metal-bearing recyclable materials as its feedstock in producing 99.1% copper anodes.
Lessard emphasizes the project’s location in Rouyn-Noranda, within the city’s industrial park and former mine infrastructure (Quemont and Horne mines), which avoids having to build a fly-in/fly-out camp. He also points to the area’s ample and experienced labour pool, especially those with expertise underground.
The mining engineer has spent nine years in Rouyn-Noranda and has been involved in building a number of mines in the neighborhood. “We have people in place who have good experience in mine building and also mine operations,” Lessard says. “We have known them for 25 years, I would say, because I have built mines with them in the past.” (During the course of his career, Lessard has worked on 11 open-pit and underground mine builds around the world.)
The company expects to use transverse long-hole stoping as the main mining method and forecasts dilution will be below 3%. At steady state, a semi-autogenous ball mill facility would process 15,790 tonnes a day, and processing would include a flotation and thickening section, divided in three circuits to recover copper, zinc and pyrite concentrates. The process plant would produce two concentrates and doré bars. The copper concentrate would have an estimated copper content of 16%, as well as payable gold and silver, and the zinc concentrate would have 52% zinc content.
The pyrite concentrate will need “a finer liberation” to achieve improved gold recovery by cyanide leaching. Reground pyrite concentrate would be leached along with the pyrite flotation tailings in separate leaching circuits, followed by carbon-in-pulp (CIP) circuits.
Both pyrite tailings and pyrite concentrate streams from flotation would be used as paste backfill in the new mine workings. Excess volumes would be disposed of in existing historic openings, until the old mine openings are filled. The water freed from the underground workings from the consolidated tailings would be recovered, recycled and pumped back to the process plant.
Tailings would be stored in old underground openings either in the form of slurry or paste backfill during the first two years of operations. Paste backfill would be used for the rest of the mine life. The rest of the tailings would be stored in a tailings management facility on surface. (Falco has already found an old tailings management facility about 11 km from Rouyn-Noranda, and is in discussions with the current site owners.)
Dewatering could take 25 months and construction another 18 months. The company expects to start commissioning the process plant in the first half of 2021, with full mine production in the first half of 2022. Falco could finish the project’s environmental impact assessment before year-end.
Glencore (LON: GLEN) has a 2% net smelter return royalty on all of the metal produced.
Osisko Gold Royalties (TSX: OR; NYSE: OR) owns 13.2% of the project, and the streaming company’s chairman and CEO, Sean Roosen, is also Falco’s chairman. The Quebec government directly holds a 5.2% stake in the company, while crown corporation Caisse de dépôt et placement du Québec holds 1%.
Metcalfe says he expects Falco will spend US$100 million advancing the project in 2018, and as for project financing, the company has several options.
“There are a lot of various pools that can be accessed both on the equity and debt front,” he said in response to questions from analysts on the conference call. “At the moment, over the next six to 12 months, getting a deal done with Osisko is our primary focus … there’s already a rights between Osisko and Falco to put in a stream financing.”
In addition, he says, the Quebec government has a long track record in mine builds. “We’d like to get the government as involved as possible,” Metcalfe said.
Management also says that while it considers the results of the base case in the feasibility study as “excellent,” it anticipates future trade-off studies could evaluate alternate development scenarios that might be used to lower initial capital requirements and increase revenue in the early stage of the life-of-mine.
These include more exploration at depth; assessing whether larger underground stopes can be used; determining whether the leach and CIP circuits should be replaced by carbon-in-leach circuits; and looking at whether pre-assembled steel structures, pre-cast foundations and pre-made buildings can lower capital costs and shorten construction.
Pierre Vaillancourt of Haywood Securities has his “buy” rating on the company. “The project return is competitive, and, in some respects, superior to comparable operations,” such as Goldex, Young-Davidson and LaRonde, he said after the feasibility study results were announced. “However, production is four years away, and we recognize that the stock could be under pressure in advance of financing for a project that will cost over $1 billion to build.”
Michael Siperco of Macquarie Research has his “outperform” rating on Falco but trimmed his target price on the stock to $2 from $2.15 per share.
“While the results of the updated study are mixed versus our expectations, we believe the scarcity of large, long-life projects in good jurisdictions with good existing infrastructure should justify premium valuations for assets like Horne,” Siperco says in a research note.
“The backing of the Quebec government and financial institutions, along with largest shareholder Osisko Gold Royalties [a likely partner for a stream transaction], help to mitigate potential financing risks.”
Andrew Mikitchook of BMO Capital Markets increased his target price on the stock to $2 from $1.90.
“We are adding four years [19 million tonnes] representing our assumption that there is room around and below the existing resource to convert both inferred ounces, as well as to add new mineralization to the mine plan,” he said in a research note. “The feasibility announcement noted additional high-grade zones of mineralization that were not included in the mine plan due to insufficient drill spacing, including the HG_F zone with 2.8 million tonnes of 3.38 grams per tonne in inferred.”
Raymond James’ analyst Tara Hassan increased her price target on the stock from $2 to $2.10 per share. “The Horne 5 project is competitively positioned to be advanced to production or be attractive as an acquisition target, given the rarity of large-scale, long-life, and low-cost projects in safe jurisdictions,” she said in a note to clients. “With Falco trading at a discount to developer peers, but being led by a top team, we reiterate our view that there is an opportunity for a market re-rating.”
At press time, Falco was trading at $1.09 per share within a 52-week range of 77¢ (December 2016) to $1.65 (April 2017).