Mr. Randy Reifel reports
CHESAPEAKE ANNOUNCES POSITIVE PRE-FEASIBILITY STUDY FOR METATES PROJECT
Chesapeake Gold Corp. is releasing the positive results of a prefeasibility study on its 100-per-cent-owned Metates gold-silver project located in Durango state, Mexico. The National Instrument 43-101-compliant PFS incorporates significant scope changes and updated engineering work as well as updated capital and operating cost estimates since the preliminary economic assessment dated April 25, 2011. Both the PEA and the PFS were prepared by M3 Engineering & Technology of Tucson, Ariz., and other prominent consultants that have recent project development experience in Mexico. All costs are in United States dollars.
Highlights of the preliminary feasibility study:
- Proven and probable mineral reserves of 18.5 million ounces gold, 526
million ounces silver and 4.2 billion pounds of zinc;
- Average annual production for years 2 through 7 of 845,000 ounces gold,
25.1 million ounces silver (1,309,000 ounces gold equivalent (i)) and 190
million pounds zinc at an average gold-equivalent cash cost of $410 per
ounce, net of zinc credits;
- 25-year mine life with average annual production of 659,000 ounces gold,
15.9 million ounces silver (954,000 ounces gold equivalent (i)) and 143
million pounds zinc, making it one of the largest gold and silver mines
in the world, with an average life-of-mine gold-equivalent cash
cost of $489 per ounce, net of zinc credits;
- Average annual net operating income of $976-million in operating years 2
through 7, with cumulative LOM pretax net operating income of $10.7-billion;
- Initial capital cost of $4.36-billion, including $631-million in
contingency costs and excluding sustaining capital costs of $584-million;
- At base-case metal prices, pretax capital payback of 4.2 years and 5.1
years after tax;
- Net present value pretax of $3.90-billion at an 8-per-cent discount
rate, generating an internal rate of return of 20.5 per cent, and after-tax NPV of $2.36-billion and
16.2 per cent IRR.
(i) Gold-equivalent ounces are defined as gold ounces plus silver ounces over 54.0 based on base-case metal prices.
"The completion of the PFS is a major milestone in Chesapeake's development," said Randy Reifel, president of Chesapeake. "We are very pleased that the PFS confirms the Metates project hosts one of the world's largest undeveloped gold and silver reserves in a mining-friendly jurisdiction. The PFS demonstrates the project has excellent economics while meeting the industry's highest environmental standards."
Mineral reserves and mining schedule
The PFS uses as a basis an updated mineral resource estimate prepared by Independent Mining Consultants of Tucson, Ariz., dated Feb. 16, 2012. The IMC resource estimate assumed a gold price of $1,200 per ounce and $24 per ounce silver, and a cut-off grade of 0.35-gram-per-tonne gold equivalent (AuEq). The open pit mineral reserves were estimated within a detailed engineered pit design by using the measured and indicated resources only. As designed, the pit has overall slope angles from 37 degrees to 46 degrees and a LOM waste/ore strip ratio of 1:1.
IMC developed an ore mining schedule that employed an elevated cut-off strategy in the early years (years 2 to 7), which shortened the capital payback period and improved overall project economics. The above-cut-off-but-lower-than-mill-feed-grade ore mined in the earlier years is placed in a low-grade ore stockpile that is processed during the last six years of the mine life (years 20 to 25). The production schedule optimized mining both the intrusive and sediment-hosted ore rock types based on crusher throughput so that the annualized feed rates to be processed ranged from 109,000 tonnes per day to 138,000 tonnes per day after a two-year mine ramp-up to full production. The table presents the mineral reserve for the Metates project based on the mine and plant production schedules. Measured and indicated mineral resources in the production schedule are converted to proven and probable mineral reserves, respectively. The low-grade stockpile is classified as a probable mineral reserve regardless of the original classification of the in situ resource. The mineral reserve amounts to 1.15 billion ore tonnes at 0.50 gram per tonne gold, 14.2 grams per tonne silver and 0.17 per cent zinc (including the low-grade stockpile). Contained metal amounts to 18.5 million ounces of gold, 526 million ounces of silver and 4.2 billion pounds of zinc.
METATES MINERAL RESERVE
AuEq
Tonnes (i) Gold Gold Silver Silver Zinc Zinc
Reserve class (000) (g/t) (g/t) (Koz) (g/t) (Koz) (%) (Mlb)
Proven
mineral
reserve
Mill ore 270,291 0.99 0.68 5,883 18.0 156,423 0.17 1,037
Probable
mineral
reserve
Mill ore 574,242 0.78 0.54 9,878 14.3 264,015 0.15 1,886
Low-grade
stockpile 304,328 0.46 0.28 2,691 10.8 105,673 0.19 1,261
Total
probable
reserve 878,570 0.67 0.45 12,568 13.1 369,688 0.16 3,148
Proven/
probable
reserve
Mill ore 844,533 0.85 0.58 15,761 15.5 420,438 0.16 2,923
Low-grade
stockpile 304,328 0.46 0.28 2,691 10.8 105,673 0.19 1,261
Total
proven/
probable 1,148,861 0.74 0.50 18,452 14.2 526,111 0.17 4,185
(i) Gold-equivalent grade is defined as gold (g/t) plus silver (g/t) over
58.4. Overall metal recoveries are 89 per cent gold, 76 per cent silver and
85 per cent zinc. Contained resources may not add due to rounding.
Development overview
The PFS contemplates a conventional truck-and-shovel open pit mining operation with a nominal 120,000-tonne-per-day throughput. Crushed ore will be fed to a conventional SAG and ball mill circuit followed by a single-stage flotation plant to produce a bulk sulphide concentrate. The comminution and flotation circuits are built as two separate lines, each rated at a nominal 60,000-tonne-per-day rate to allow for ramp-up (phase 1) and to decrease operational risks. Tailings from the flotation concentration plant are dry filtered to remove water and then co-disposed with the waste rock in a dedicated storage facility. The sulphide concentrate is transported downhill by a 126-kilometre-long slurry pipeline to the Ranchito site located 800 metres lower in elevation and southwest of Metates. The pipeline will follow an all-weather access road that will be constructed between the Metates and Ranchito sites. Ranchito is situated beside a major limestone resource and proximate to key mine infrastructure, including power, water, transportation and labour.
At Ranchito, the sulphide concentrate is treated in a pressure oxidation plant with subsequent cyandiation and Merrill-Crowe recovery of gold and silver dore. High-purity oxygen to feed the pressure oxidation plant will be manufactured on site in a dedicated plant owned and operated by a third party and provided under an across-the-fence arrangement. Acidic solutions from the pressure oxidation process will be neutralized with ground limestone and lime produced from an on-site quarry and then co-disposed with the cyanide leach tailings in an adjacent storage facility. Zinc will be recovered from the pressure oxidation solutions by solvent extraction/electrowinning (SX/EW) methods to produce SHG-grade zinc ingots. Overall gold and silver recoveries from ore through dore production are estimated at 89 per cent and 76 per cent, respectively. Overall zinc recovery to high-grade ingots is estimated at 85 per cent. The table presents a summary of the operating metrics of processed grades, tonnes mined and metal production.
Payable gold and silver production in the first six years of full production (years 2 to 7) average 845,000 ounces gold and 25.1 million ounces silver per year. The project will produce an average of 659,000 ounces of gold, 15.9 million ounces of silver and 143 million pounds of zinc annually over a 25-year life. Total cash cost per gold-equivalent ounce for years 2 to 7 is $421 with LOM cash cost of $489, net of byproduct credits.
OPERATING METRICS
Years 1-19 Years 20-25 Years 1-25
Operating period Years 2-7 Active mining Stockpile Life of mine
Material mined
Total ore mined from
pit (M tonnes) 454 1,149 0 1,149
Ore to process
(M tonnes) 259 845 304 1,149
Low-grade ore to
stockpile (M tonnes) 195 304 0 304
Waste rock (M tonnes) 371 1,158 0 1,158
Strip ratio (1) 0.82 1.00 0.00 1.00
Average milling rate
(M tonnes/year) 43,204 45,181 48,404 45,954
Average milled grades
Gold (g/t) 0.68 0.58 0.28 0.50
Silver (g/t) 28.8 15.5 10.8 14.2
Gold equivalent (g/t) 1.21 0.87 0.48 0.74
Zinc (%) 0.25 0.16 0.19 0.17
Cumulative metal
production (2)
Gold (oz) (000) 5,068 14,080 2,395 16,475
Silver (oz) (000) 150,539 317,212 80,319 397,531
Gold equivalent (oz)
(000) 7,856 19,954 3,882 23,836
Zinc (Mlb) 1,141 2,507 1,075 3,582
Average annual production
Gold (oz) (000) 845 741 399 659
Silver (oz) (000) 25,090 16,695 13,387 15,908
Gold equivalent (oz)
(000) 1,309 1,050 645 954
Zinc (Mlb) 190.2 131.9 179.2 143.3
Cash cost ($/AuEq oz)
Net of Zn/Cu 421 482 524 489
(1) Strip ratio based on total ore tonnes mined to waste tonnes mined.
(2) Overall metal recoveries are 89 per cent gold, 76 per cent silver and
85 per cent zinc.
Power supply, water and closure
A positive development in the PFS is a change to a dedicated natural-gas-fired 520-megawatt-capacity power plant owned and operated by an independent power provider. Trade-off studies indicate the power plant will be located northwest of the Ranchito site and adjacent to a newly constructed gas pipeline financed by the Mexican government. Power will be delivered to the project through existing power lines to a substation located 40 kilometres from the Ranchito site. Based on an average fourth-quarter 2012 natural gas price, the delivered cost of electric power to the project is 6.12 cents per kilowatt hour. About 40 per cent of the delivered power cost is tied to the natural gas price. While the Mexican government has committed to the construction of the gas pipeline, and the company is confident an independent power provider will be willing to build the power plant, these developments are outside of the company's control, and there can be no assurance that either or both will be built, the failure of which could have a significant impact on the Metates project.
The natural topography of the Metates mine site facilitates an integrated waste management plan that will significantly reduce long-term environmental risks, final reclamation and closure costs. The proposed waste rock and dewatered tailings storage design allows for concurrent LOM reclamation and reduces water demand by over 60 per cent compared with conventional tailings facilities. The water conservation practices employed at both the Metates and Ranchito locations allow for the project to be generally self-sufficient using site surface water storage and locally sourced groundwater. After the pit has been mined, the tailings from the processed low-grade ore stockpile will be backfilled and contribute to a sustainable, long-term pit lake.
Capital costs
The initial capital costs (including contingency) are estimated at $4.36-billion. The capital investment reflects outsourcing the dedicated oxygen plant and natural-gas-fired electric power plant. Scoping changes associated with the filtered integrated tailings storage, SX/EW plant and improved engineered modifications to the processing circuit account for about $600-million of the capital increase since the PEA. Initial production will commence at the nominal rate of 60,000 tonnes per day during operating year 1 (phase 1 initial capital) with additional capital being spent to increase production to the nominal 120,000-tonne-per-day rate in operating year 2 (phase 2 initial capital). The table presents a summary of the capital costs.
SUMMARY OF INITIAL CAPITAL COSTS
Phase 1 Phase 2 Total
($ 000) ($ 000) ($ 000)
Metates site
Mining equipment and mine development $ 144,348 $ 276,653 $ 421,001
Crushing, grinding, flotation $ 264,103 $ 113,187 $ 377,290
Concentrate pipeline (1) $ 222,564 $ 222,564
Tailings dewatering and stacking (1) $ 187,634 $ 45,832 $ 233,465
Other $ 58,337 $ 25,002 $ 83,339
Subtotal $ 876,986 $ 460,673 $ 1,337,659
Ranchito site
Pressure oxidation and oxygen supply $ 406,501 $ 174,215 $ 580,715
Limestone mining $ 750 $ 23,454 $ 24,204
Limestone crushing and lime production $ 115,787 $ 49,623 $ 165,410
Precious metals recovery $ 31,187 $ 13,366 $ 44,552
Zinc recovery $ 167,564 $ 71,813 $ 239,378
Tailings and residue disposal (1) $ 111,696 $ 12,337 $ 124,034
Other $ 44,210 $ 18,947 $ 63,157
Subtotal $ 877,695 $ 363,755 $ 1,241,450
Infrastructure
Access roads and civil works $ 130,882 $ 56,092 $ 186,974
Electric power $ 65,868 $ 28,229 $ 94,097
Water supply (1) $ 128,549 $ 4,164 $ 132,713
Other $ 114,901 $ 46,466 $ 161,368
Subtotal $ 440,201 $ 134,952 $ 575,152
Total direct field cost $ 2,194,881 $ 959,380 $ 3,154,261
Total indirect field cost $ 39,418 $ 16,893 $ 56,311
Total constructed cost $ 2,234,299 $ 976,273 $ 3,210,572
EPCM fee, commissioning and
spare parts $ 279,848 $ 119,935 $ 399,782
On-site constructed cost $ 2,514,147 $ 1,096,208 $ 3,610,355
Contingency (2) $ 344,368 $ 147,586 $ 491,955
Owner's cost $ 81,155 $ 34,781 $ 115,935
Working capital $ 140,000 $ 140,000
Total capital cost $ 3,079,670 $ 1,278,575 $ 4,358,244
(1) Includes contingency and EPCM (engineering, procurement and construction
management) costs.
(2) A 20-per-cent contingency has been applied to an adjusted on-site
constructed cost of $2,459,773,000.
All capital spent after year 1 (except for year 2 for mining equipment) is deemed to be sustaining capital and is estimated at $584-million. The capital costs include $631-million in overall contingency and $116-million in owner's costs. Working capital is estimated at four months of average operating expenses during year 1. The capital pricing for the PFS is current to fourth-quarter 2012.
Operating costs
Mining costs were prepared on a year-by-year basis by IMC. The LOM mining costs per tonne moved an average of $1.33 per tonne at Metates and $1.56 per tonne at the Ranchito limestone operation. The process costs are estimated to be $3.49 per tonne for the Metates operations and $6.34 per tonne for the Ranchito operations, with overall general and administrative and support costs estimated at 63 cents per tonne. The pressure oxidation circuit, including the oxygen plant, limestone and lime production, are the single largest area of operating costs for the project. Close proximity to a high-quality limestone resource and relatively low-cost electric power contribute significantly to the project's financial performance. Average LOM gold-equivalent cash costs are estimated at $10.11 per tonne or $489 per ounce net of byproduct revenue from zinc and copper production. A summary of the operating costs is shown in the table.
SUMMARY OF OPERATING COSTS
LOM average LOM $/AuEq oz
cost/ore tonne production
Metates site
Mining (per tonne material equals $1.33
including rehandle) $ 3.02 $ 145.67
Crushing, grinding, flotation $ 2.78 $ 134.09
Concentrate thickening and transportation $ 0.25 $ 11.88
Tailings dewatering and stacking $ 0.45 $ 21.79
Other $ 0.03 $ 1.27
Subtotal $ 6.51 $ 314.70
Ranchito site
Pressure oxidation and acid neutralization $ 0.74 $ 35.69
Oxygen supply $ 3.13 $ 151.01
Limestone mining, crushing and lime production $ 1.20 $ 58.07
Precious metal recovery and refining $ 0.63 $ 30.67
Zinc and copper recovery $ 0.47 $ 22.77
Tailings and residue disposal $ 0.17 $ 8.32
Subtotal $ 6.34 $ 306.53
Support
General and administrative $ 0.27 $ 13.17
Water supply $ 0.31 $ 15.15
Other $ 0.05 $ 2.19
Subtotal $ 0.63 $ 30.51
Total operating cost $ 13.49 $ 651.74
Net zinc and copper credit $ 3.38 $ 163.18
Cash cost ($/AuEq oz) net of Zn/Cu credit
(1) $ 10.11 $ 488.55
(1) Based on mine-site costs excluding costs such as transport and refining.
Financial results
The PFS demonstrates strong project economics and high leverage to gold and silver prices. The financial results were developed for three different metal price assumptions, including the base case, the United States Securities and Exchange Commission metal pricing guidance (LME three-year historical rolling average prices), and spot prices. The SEC and spot prices are from Dec. 31, 2012.
The financial analysis for the base case indicates a pretax NPV of $3.90-billion at an 8-per-cent discount rate, a 20.5-per-cent IRR and payback of 4.2 years. On an after-tax basis at an 8-per-cent discount rate, the NPV is $2.36-billion with a 16.2-per-cent IRR and a payback of 5.1 years. The project is expected to generate $10.7-billion of LOM pretax net operating income. The financial results are presented in the table.
FINANCIAL RESULTS SUMMARY
Metal price assumptions Base case SEC Spot
Gold ($/oz) $ 1,350.00 $ 1,487.85 $ 1,657.50
Silver ($/oz) $ 25.00 $ 28.80 $ 29.95
Zinc ($/lb) $ 1.00 $ 0.95 $ 0.92
Copper ($/lb) $ 3.00 $ 3.67 $ 3.57
Pretax economic indicators
NPV at 5% ($ 000) $ 6,433,559 $ 8,378,689 $ 9,983,471
NPV at 8% ($ 000) $ 3,897,737 $ 5,293,106 $ 6,427,731
IRR (%) 20.5 24.3 26.9
Payback (years) 4.2 3.6 3.3
After-tax economic indicators
NPV at 5% ($ 000) $ 4,269,995 $ 5,732,271 $ 6,884,176
NPV at 8% ($ 000) $ 2,364,310 $ 3,422,033 $ 4,235,054
IRR (%) 16.2 19.4 21.5
Payback (years) 5.1 4.4 4.0
Cumulative net operating income
Total all metals,
years 2-7 ($ 000) $ 5,857,431 $ 6,798,422 $ 7,493,169
Total all metals,
life of mine ($ 000) $10,662,623 $13,438,549 $15,697,861
Opportunities and next steps
The PFS has incorporated a number of improvements and scoping changes that have materially improved the project's economics over the PEA. Going forward a number of additional opportunities have been identified that could further enhance the viability of the Metates project, including:
- Further evaluation of electric power supply options including
discussions with the CFE and independent power providers to secure long-term natural gas supplies and electric power;
- Evaluation of a staged development option where the capital to finance the
expansion from the 60,000-tonne-per-day (phase 1) to 120,000-tonne-per-day (phase 2) ore-processing rate is financed out of cash flow;
- Assessment of alternative technologies for the production of high-purity
oxygen with potential savings in both capital and operating costs;
- Optimization of the layout of site facilities at both the Metates and
Ranchito sites to minimize capital costs and enhance operating
efficiencies;
- Appraise the opportunities for liquefied natural gas to fuel the mine
haulage and rolling fleet;
- Continued improvements to water utilization and conservation and their
full integration into a site-wide water-balance model stressing water
supply options, water storage and transport.
Chesapeake is sufficiently financed to advance the Metates project toward completion of a full feasibility study. Chesapeake plans to undertake additional engineering design and metallurgical studies to further derisk the project. In addition, Chesapeake will move forward with early-stage engagement of various stakeholders to secure development-related agreements and permits with particular emphasis on infrastructure advancement.
Technical report
A National Instrument 43-101 technical report will be prepared by M3 and filed on SEDAR within 45 days following the date of this release. The report will consist of a summary of the PFS. Doug Austin, PE, senior vice-president of M3, and Dr. Art Ibrado, QP member, MMSA, project manager with M3, are qualified persons responsible for the scientific and technical information in this news release in accordance with NI 43-101. Michael Hester, FAusIMM, vice-president of IMC, is the qualified person responsible for the reserve estimate and mine planning in this news release in accordance with NI 43-101. Gary Parkison, CPG, vice-president, development, of Chesapeake, is the qualified person who supervised the preparation of the technical information in this release. All of the above-qualified persons have reviewed and approved the data contained in this release.
The PFS was prepared by several leading independent industry consultants, as shown in the table.
Resource Development Inc., Hazen Metallurgical test work and
Research Inc., Sherritt interpretation, processing design,
Technologies, Hydromet Ltd., ALS and costing for gold and silver
Metallurgy Pty. Ltd. recovery
Zincobre Ingenieria SLU Engineering design and costing for
zinc and copper recovery
Paterson & Cooke Concentrate and water pipelines,
tailings filtration and placement
Ausenco Vector Engineering Inc. Site investigations and design of
waste management storage facilities
Schlumberger Water Services USA Inc. Surface and groundwater
investigations, water balance
Call & Nicholas Inc. Pit slope stability investigations
and design
InterraLogic Waste rock storage and mine closure
planning
Siemens Industry Inc. (Pace Global) Electrical power supply, planning
and costing
Air Products and Chemicals Inc. Oxygen plant support and costing
We seek Safe Harbor.
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