Neptune’s Colomac project at mercy of a frozen road

Over the next 12 months, Neptune Resources (TSE) will deliver $25 million worth of equipment to its Colomac gold project in the Northwest Territories.

Having increased its mineable reserves by 50%, the Toronto company, will build a 10,000-ton-per-day milling complex and complete pre- stripping work on its Zone 2 open pit.

When all the development work is complete and the project is brought into production next January, Neptune expects to churn out 230,000 oz gold in 1990 at a cost of about $230(US) per oz. At that point, Neptune will have spent at least $132.5 million, if everything goes as the feasibility study says it will.

In reality however, Neptune’s ambitious plans are a lot more complicated than they look on a projection screen. “Timing is everything on this project,” President Margaret Witte told The Northern Miner after the company’s recent annual meeting.

Since the Colomac property is located in a forested area 137 miles north of Yellowknife, Neptune has just four months in which to ship its equipment along a winter road before the lakes around Colomac begin to thaw. Truck loads

Between now and April, 2,000 truck loads of fuel and equipment will pass along a road connecting the project to Rae Edzo where all- weather highways stop. After that, equipment and personnel must be flown in by helicopter or other aircraft.

The brief trucking season has added to the difficulty of financing a project that would be considered ambitious even if a major mining company was involved.

Unfortunately, Neptune produced its original feasibility study a month after the October 1987 stock market crash. It is facing the unusual problem of having to build an inventory of the equipment needed to keep plant construction going for the rest of 1989.

As a result, Witte will spend the next few weeks trying to tie up a $132.5 million financing package designed to meet all of Neptune’s pre-production costs.

Spokane, Wash., based Gold Reserve Corp. is putting up $15 million in equity financing and arranging a $20-million subordinated loan in exchange for a 33% stake in Neptune. An additional $8 million is being provided by Northgate Exploration (TSE) of Toronto in return for a 20% Neptune stake. Under the same agreement, Northgate is spending $5 million to gain a 35% interest in Gold Reserve. Project loan

Neptune has succeeded in arranging a $90-million project loan from Bank of America Canada. While the Northgate and Bank of America deals are expected to close this week, Neptune cannot touch the bank loan unless the federal government agrees to provide $18 million in loan guarantees. The Northwest Territories government has already agreed to back the project with its own $3 million loan guarantee.

“Negotiations with the Department of Indian and Northern Affairs have reached a very sensitive stage,” said Witte who remains optimistic despite recent cabinet shuffles. Meanwhile, Northgate is providing funds “as they are required” to keep construction on schedule. “No one is saying the project is risk free,” said Northgate President John Kearney who made little effort to conceal his delight at being involved at such a crucial stage in Colomac’s development. “It’s a very aggressive project,” he said.

Neptune received a welcome boost recently when a 45,000-ft in-fill drilling program increased the projects reserves by 50%. As reported (N.M., Jan 30/88), reserves at Colomac have increased to 28 million tons grading 0.056 oz gold per ton from 16 million tons of grade 0.064 oz. Super pit

The latest results should increase the project’s life expectancy to eight years from five and allow Neptune to mine zones 2, 2.5 and 3 in a large “super pit.”

In a bid to keep its debt/equity ratio up, Witte opted for conventional carbon-in-pulp gold recovery methods instead of vat leaching as planned. According to her projections carbon-in-pulp will increase both recoveries and gold production by 15% and 25,000 oz next year respectively.

Using vat leaching methods which involve placing crushed ore in huge basins filled with a cyanide solution, Neptune expected its recovery level to be in the 85% range and gold production to be 175,000 oz in 1990.

In opting for conventional milling methods, Neptune is attempting to reduce the risk factor by using methods which have already proven themselves at other mines. “We are not breaking new ground in any aspect of the operation,” said Witte. Cominco Ltd. (TSE) for example, operated the Pine Point lead zinc mine under the same conditions for over 20 years.

Still, Colomac is a huge project for a junior company like Neptune to be dealing with and as one observer pointed out a $5 hike in the price of oil could have a bigger impact on the project than a similar increase in gold prices. Diesel fuel

The lack of any available infrastructure means that Neptune must build seven one million gallon fuel tanks to hold the diesel fuel needed to drive the 12.5 megawatt power station. The power station and mining equipment is expected to consume 8.5 million gallons of diesel fuel per year, at a cost of approximately $16 million annually.

Work on a 5,000-ft airstrip is expected to be finished by March 1 and temporary facilities are also being built to house 400 employees. “It’s an unusual project in that we are driven by a winter road,” said Ross Burns, Neptune’s vice-president, development.

But its lack of experience in mine operating means that Neptune is also dependent on the expertise of people within the group, analysts say.

Doug Belanger, who was a vice- president of investor relations with Pegasus Gold before he joined Gold Reserve as vice-president, is providing some financial expertise. Pegasus has four gold mines in the United States.

Neptune is also drawing on the know how of Ken Hill, Northgate’s vice-president of operations. Hill is a former general manager of mine development with the Dome Mines group.

Nevertheless, Toronto analysts are playing wait and see with Neptune and Colomac before drawing any hard and fast conclusions. At least one of them is concerned about the project’s remote location and the high energy costs.

“There are a lot of skeptics out there and I’m sitting on the fence until the project is close to being completed,” said Yorkton Securities mining analyst Mike Pickens. He claims to have a lot of confidence in the management team.

“Some investors will be concerned by Neptune’s lack of experience in mining and there is always some risk with low grade ore,” said another Toronto-based analyst who declined to be identified.

“But I think it is a reasonable bet,” he said.

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