McWatters sizes up East Amphi project (December 23, 2002)

Based on the results of a recent feasibility study of the East Amphi gold project, near Val d’Or, Que., McWatters Mining (MWA-T) has budgeted $1 million for exploration in 2003.

The deposit will be drill-tested to the east on to the adjacent Fourax property.

The study, performed by SNC-Lavalin, envisages an underground mine with a reserve of 1.4 million tonnes averaging 4.16 grams gold per tonne. Over a mine life of four years, about 1,000 tonnes per day would be mined.

Of the total reserve, 168,793 tonnes grading 4.67 grams gold per tonne are classified as proven, whereas 1.2 million tonnes at 4.09 grams gold are in the probable category. The figures are based on a cutoff grade of 2.73 grams gold. Dilution is estimated at 15%.

The reserves are found in three zones that reach down to 230 metres below surface and extend laterally and at depth. Inferred resources have already been identified on lateral extensions of zone A and at depth on zone B.

McWatters has budgeted $1 million for exploration at East Amphi in 2003, including drill testing of the deposit to the east on to the adjacent Fourax property.

Initial capital costs for mine construction and infrastructure at East Amphi are pegged at $13.5 million. At a gold price of US$315 per oz., a stand-alone operation at East Amphi is expected to generate a before-tax internal rate of return of 43.6% (33.6% after taxes).

Employing around 100 workers, East Amphi would enter production six months after construction begins. Churning out 48,000 oz. gold annually at a cash cost of US$215 per oz., the operation would add $7 million a year to McWatters’ cash flow.

A ramp extending from the existing open pit would provide underground access. In 1999, McWatters ran a small open pit on East Amphi’s B1 zone to feed the Sigma mill. The pit yielded 120,427 tonnes grading 5.66 grams gold, resulting in 21,915 oz. gold.

Crushed ore from East Amphi would be trucked to the Kiena mill, 26 km to the east. Kiena, which has been dormant since October 2002, would require some $2.5 million worth of modifications to handle East Amphi’s ore.

Gold recovery is pegged at 95%, and gold production over the mine life is projected at 173,980 oz.

Using equipment and parts available at Kiena would save McWatters about $2.5 million at East Amphi.

Similar to Kiena, East Amphi would be mined by long-hole stoping, with stopes measuring 20 metres along strike, 5.9 metres across and 25 metres high. Stopes would be backfilled using hydraulic methods.

East Amphi is subject to two net smelter return royalties: 1% to privately held Lac Properties and 1.5% to zinc miner Breakwater Resources (BWR-T).

In late November, McWatters resumed operations at the nearby and newly expanded gold mill at the Sigma-Lamaque open-pit operation. Idle for almost a year, the mill has returned to a regular full-time schedule, running through 3,000 tonnes of low-grade stockpiled ore daily. The stockpile, set aside for the mill’s resumption, contains 60,000 tonnes of ore averaging 2.5 grams gold per tonne.

Commercial production levels are expected by early 2003. Once the circuit is stabilized, McWatters plans to increase throughput gradually to 4,000 tonnes per day in early 2003. By the fourth quarter of 2003, the mill is expected to hit its design capacity of 5,000 tonnes daily.

In the end, the expansion is expected to boost production to 150,000 oz. per year over the next six years at a cash cost of US$165 per oz. and a total cost of US$212 per oz.

Mining at Sigma-Lamaque currently turns out about 45,000 tonnes of overburden, waste and ore per day.

At last count, Sigma’s in-pit reserves stood at 10.4 million tonnes grading 2.7 grams gold per tonne, based on a cutoff grade of 0.9 gram gold per tonne. Another 10.5 million tonnes running 2.46 grams are classified as a resource.

Earlier this year, a bail-out by the provincial government left McWatters with a 60% stake in Sigma-Lamaque. Quebec government-owned Soquem grabbed the remaining 40% for $15.8 million.

The two have hedged 110,000 oz. of Sigma-Lamaque’s future production. Put options cover 25% of the production at $450 per oz. Another 25% is covered by variable-term obligations to sell at $540 per oz. Delivery obligations under the variable terms increase from zero at average monthly gold prices of $540 per oz. to 25% at prices of $590 per oz. or higher.