Mt. Milligan decision threatens property market

Junior companies seeking to vend copper-gold porphyry projects to senior companies may face a tougher marketing challenge now that Placer Dome (TSE) has written off its $266-million investment in the Mount Milligan project north of Prince George, B.C.

Along with the writedown, the major decided not to develop a mine at Mount Milligan “at this time,” because the economic return would not be sufficient to justify the $500-600-million capital investment required to develop the property (T.N.M., Feb. 10/92).

Several juniors have put similar deposits on the block, the most prominent being the Fish Lake and Kemess South

deposits, both in British Columbia. But mining analysts now expect the Mount Milligan writedown will have a sobering effect on senior companies looking at acquiring these or similar projects.

“Senior mining companies about to invest in these projects will now certainly want a long engagement before going to the altar,” said Andrew Muir, a Vancouver-based mining analyst for Pacific International. “The writedown of Mount Milligan, along with the many mine failures and writedowns over the last few years, will remind the majors of the geological and engineering complexities of mineral deposits and the need for detailed assessment before commitment.”

But Jeffrey Franzen, a former director of Continental Gold, is of the view that porphyry copper-gold deposits in British Columbia will continue to interest majors seeking to

replace declining reserves. Franzen is part of the Robert Dickinson-Robert Hunter team which sold Mount Milligan and which is currently trying to vend the Fish Lake and Kemess South deposits.

Contrary to expectations, the share prices of companies involved in Fish Lake and Kemess South rebounded quickly from a selling flurry by nervous investors immediately after Placer Dome’s Mount Milligan decision.

Taseko Mines (VSE) closed at $11.75 at presstime, a modest decrease from its recent high of $12.25. And the company is proceeding with

plans to raise $10 million in two tranches in order to con-

tinue work at Fish Lake.

The first phase will be exploration-oriented and will involve a $5-million, 75,000-ft. drill program with three rigs aimed at stepping outwards in all directions to better define the deposit. “The objective is find the limits of the mineralization so we can design an open pit with an acceptable stripping ratio,” Franzen said.

At last report, Fish Lake was estimated to contain preliminary reserves of 600 million tons grading 0.32% copper and 0.016 oz. gold per ton in a cylindrical-shaped deposit.

As operator and 60% owner of the Kemess South deposit further north in the province, El Condor Resources (VSE) considers itself well financed to start advancing the project to the feasibility, engineering and permitting stages. The company’s share price closed at $4.45 at presstime, in a 52-week range of $2.50 to $4.80. Partner St. Philips Resources (VSE) also held its ground at about $2 from a recent high of $2.35.

El Condor (managed by the Dickinson-Hunter team) recently reported that the Kemess South deposit hosts preliminary reserves of 252 million tons grading 0.23% copper and 0.019 oz. gold per ton. This compares to an estimate of 240 million tons grading 0.018 oz. gold and 0.224% copper calculated by Rio Algom, technical adviser (and shareholder) of St. Philips.

In a recent interview with The Northern Miner, Franzen conceded that the economic viability of Fish Lake and Kemess South will continue to be debated by industry skeptics, particularly in view of Placer Dome’s Mount Milligan decision and current metal prices.

Credibility appears to have become a sensitive issue for the Dickinson-Hunter group because Placer’s latest minable reserve estimate for Mount Milligan (329 million tons grading 0.22% copper and 0.013 oz. gold) did not match a preliminary evaluation at the time of acquisition in 1990 when minable material was estimated at 313 million tons grading 0.2% copper and 0.017 oz. gold. Both reserve estimates include the Main Mount Milligan deposit and the lower-grade Southern Star deposit.

“We don’t know how Placer Dome arrived at a 0.017 oz. gold grade,” Franzen said, adding that Continental’s 1989 annual report and other documents quoted preliminary reserves (calculated by third parties) of 440 million tons grading 0.014 oz. gold per ton and 0.2% copper for the Mount Milligan and Southern Star deposits. Franzen also said Placer Dome evaluated the project for about six months before its buyout.

A Placer spokesman said the initial estimate was based on 406 drill holes, while the more recent estimate was based on more than 800 holes, or about double the data available at the time of acquisition.

Perhaps the biggest disappointment to Placer Dome, however, was that its work did not prove up any “blue sky” exploration potential it may have initially hoped the property had.

Copper and gold prices also declined since the acquisition, and Placer Dome’s decision came as no surprise to most mining analysts. The news did not appear to affect Placer Dome’s share price which held at about $12 in a 52-week range of $10.75 to $17.75. But the major has come under fire from mining analysts for its deal-making and risk management performance over the past year, particularly relating to Mount Milligan and Eskay Creek. Placer Dome is continuing to re-examine its current assumptions on Mount Milligan — gold grade, mining plan, capital and operating costs and environmental issues — in order to enhance the economics of the project. Mount Milligan ore is tough and hard with a high work index, and part of the increase in capital costs (from $440 million) reflects considerable investment that would be necessary to meet power requirements (both gas-fired turbines and backup hydro lines were considered). The increased costs also reflect increased grinding requirements in the large mill (the highest capital cost item) which was to feature at least three parallel grinding circuits.

And finally, Placer Dome spokesman Hugh Leggatt said environmental issues added to initial cost estimates, because of various technical concerns relating to tailings disposal and the high standards for permitting now required by the new Mines Act.

“Mount Milligan won’t be developed in the next several years but we’re not prepared to say we’ll never develop a mine,” Leggatt said. “We’re expensing it like an exploration property because we won’t see any immediate cash flow.”