Kinross Gold (TSX: K; NYSE: KGC) is leveraging its expertise as a cold-climate, heap-leach operator with a 24-year operating history in Russia by acquiring N-Mining’s Chulbatkan project in Russia’s Far East.
The Toronto-headquartered gold producer is buying the heap-leach project for US$113 million in cash and US$170 million in Kinross shares.
The open-pit project, 15 km southwest of Udinsk, a settlement on the Amgun River, has similar features to Kinross’ Fort Knox mine in Alaska, the company says, and complements the company’s two existing underground gold mines in Russia — Kupol and Dvoinoye. Chulbatkan is 2,000 km southeast of Kupol.
Kinross evaluated the large, near-surface project for 16 months before pulling the trigger, and estimates that Chulbatkan could be put into production for US$500 million, support a six-year mine life, and recover 1.8 million oz. gold at all-in sustaining costs (AISCs) of US$550 per ounce.
Its calculations were based on an internal analysis using a preliminary block model and a constrained pit using a US$1,200 per oz. gold price. Kinross estimates the project has 3.9 million oz. gold in the indicated category (87 million tonnes grading 1.4 grams gold), and another 80,000 inferred oz. gold (3 million tonnes grading 1 gram gold).
The company is planning an “extensive” drill program to increase the resource and hopes to complete a prefeasibility and feasibility study on the project within the next three years. It estimates a two-year construction period.
Chulbatkan has exploration and mining licences valid until the end of 2037.
On a conference call, CEO Paul Rollinson described the acquisition as “an excellent fit for Kinross,” and said he was “pleased to be adding a high-quality project to our development pipeline.
“The project already has the potential to be a substantial producer with an attractive cost structure,” Rollinson told analysts and investors on the call. “In addition, there is significant upside potential beyond the 4-million resource estimate, as the deposit is highly continuous, and is open along strike and depth. There are also multiple untested high-quality targets within the 120 sq. km exploration licence.”
Kinross says Chulbatkan’s mineral resource estimate is limited by the extent of drilling, with most holes ending in mineralization. The mineralization extends from near-surface to an average drilled depth of 300 metres, and the resource footprint represents less than 1% of the licence area.
“One of the most exciting things about this project is that, on the one hand, the base case alone is a very attractive project — the heap-leach numbers we have put out there,” says Paul Tomory, the company’s chief technical officer. “But most of the holes terminate in grade, and it is truly an open deposit. And we are already building the exploration program for next year, and it will have a very significant component of drilling at Chulbatkan, so it is very prospective and very exciting.”
The company notes in a press release that several structural environments analogous to the Chulbatkan deposit and multiple downstream placer gold occurrences indicate more hard-rock source mineralization in the licence area. In addition, surface rock samples have been collected outside of the resource area that have grades greater than 1 gram gold per tonne.
Due diligence before the acquisition included several site visits, a confirmatory drill program consisting of eight holes, and met testing for characteristics and recoveries.
Having owned and operated four mines in Russia over nearly a quarter of a century, Kinross brings a “well-established team in the region,” as well as a “robust network of suppliers in the country, and strong relationships with several Russian stakeholders,” Rollinson said on the conference call. “Additionally, Khabarovsk, where the project is located, is a mining-friendly jurisdiction and the fourth-largest producing region in Russia.”
The company’s business in the country is run out of its office in Magadan, between its operations at Kupol, Dvoinoye and Chulbatkan.
Rollinson noted that the two closest cities to the project are the state capital of Khabarovsk and Komsomolsk-on-Amur, both of them “significant-sized, industrial bases.
“The site is accessed with an all-season road that gets us most of the way there, and then, beyond that, there are seasonal and logging roads,” Rollinson noted on the question-and-answer portion of the conference call. “Part of the project will be upgrading that infrastructure. But very beneficially to a potential project there, the site is immediately adjacent to a significant river and is accessible by barge. So on a relative basis, this site is significantly more accessible than, say, Kupol is.”
Last year, Kinross spent US$231 million on local goods and services providers in Russia, paid US$77 million in taxes and royalties to the government, and US$87 million in wages and benefits to its employees in the country, 98.5% of whom are Russian.
Mining analyst Farooq Hamed of Raymond James weighed in on Chulbatkan in an Aug. 1 research note. “Comparing the preliminary operating metrics to the initial investment and proposed capex, and factoring in a production time line of five years, we believe Kinross will have to show sizable exploration upside at the asset in the pre-construction period for it to be considered a value-accretive acquisition.”
Last year, the company continued to have success with its drilling programs at Kupol and Dvoinoye, which helped extend the mill life of its Kupol operation by another year, to 2023. Indeed, 47% of the company’s 2018 exploration drill program was in Russia.
“We have had a great success finding ounces through the course of the year, and that goes back several years,” Rollinson said. “It is an underground operation and there is a limit to how far we can get ahead of the curve. But I do like to remind people that when that asset came into our company, the mine life was 2017. And if you look in the rearview mirror each year, we have had very good success in continuing to find ounces as we’re mining throughout the course of the year.”
This year, exploration at Kupol — and at Dvoinoye, 100 km north — is a priority, with a budget of up to US$20 million to continue exploring and delineating high-potential targets, the company states. Part of that budget has also been allocated for exploration of brownfield targets around the mine sites.
The company acquired a 75% interest in the Kupol project in Far Eastern Russia in February 2007, and picked up the other 25% interest from the State Unitary Enterprise of the Chukotka Autonomous Okrug in April 2011. Commercial production started at Dvoinoye in October 2013, and ore from the mine is sent to Kupol for processing.
In 2018, the Kupol and Dvoinoye operations produced a total of 489,947 equivalent oz. gold at a cost of sales of US$582 per ounce.
Kinross produced a total of 2.5 million equivalent oz. gold last year and expects to produce the same amount this year. Production costs of sales per gold-equivalent ounce in 2019 are also expected to be in line with 2018 at US$730, with AISCs of US$995 per oz. sold.