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Message: International Minerals Eyes Ecuador for Growth
International Minerals Eyes Ecuador for Growth
By Eric Pratt
MidasLetter.com
Wednesday, April 15, 2009
MidasLetter.com
Wednesday, April 15, 2009
International Minerals Corp. (TSX:IMZ) is one of those ‘below the radar’ companies that quietly goes about putting profitable mines into production with a minimum of fanfare. The company currently has a forty percent interest in the Pallancata Mine in southern Peru in partnership with Hochschild Mining PLC (LSE:HOCM).
The Pallancata Mine is one of the world’s top ten primary silver producers. By end of 2008, the mine saw production ramped up to 2,000 tonnes per day from 500 tonnes per day when it first saw production in September 2007.
Direct, onsite costs for Q4 2008 were $4.48 per ounce of silver produced (net of gold byproduct credit) compared to $3.15 per ounce in the prior quarter, the increase due primarily to lower average grade of material processed and a lower gold byproduct price during the quarter. Total cash costs (as defined by the Gold Institute) were $6.80 per ounce of silver produced (net of gold byproduct credit) compared to $5.77 per ounce in the prior quarter.
Stephen Kay, Chief Executive Officer and President of IMZ, said, “The Pallancata Mine is now one of the world’s top ten primary silver mines. In 2009, the mine will expand again from 2,000 tpd to a planned 3,000 tpd by calendar year end to produce approximately 7 million ounces of silver and 25,000 ounces of gold in 2009. IMZ’s 40% attributable share would be approximately 3 million silver ounces and 10,000 gold ounces at projected total cash costs of around $6.50 per ounce silver, net of gold byproduct credit. This compares to full year 2008 production of 4.2 million silver ounces and 16,162 gold ounces (some 1.7 million silver ounces and 6,500 gold ounces attributable to IMZ.) Pallancata continues to demonstrate upside potential in both profitability and growth.”
Not to be dismissed as a one mine operation, the company has a pipeline comprising the Rio Blanco development project, the Gaby feasibility project and some exploration properties, with the next production startup expected in 2012 at the Rio Blanco gold-silver project in Ecuador. A full feasibility study has been completed, and construction of the mine has been delayed by the introduction of new mining legislation passed in January 2009 in Ecuador, which while generally positive, has raised some questions pertaining to the government royalty and the windfall tax. Essentially the new law welcomes foreign ownership of mining projects in Ecuador with a yet to be defined minimum 5 percent royalty on sales, but a ‘windfall tax’ provision of 70 percent is also enshrined in the legislation. The windfall revenue tax is calculated as 70% of any metal price above a negotiated base price multiplied by the number of metal units (ounces, pounds etc) produced. The base price is proposed to be determined on the economics of each project on a case-by-case basis.
At the PDAC conference in Toronto in March, Ecuador’s Deputy Minister of Mines and Petroleum Jose Serrano spoke positively that mining will have a significant role in Ecuador and be advanced in a responsible manner under the Constitution and laws. The regulations of the new mining law are currently being developed by the Ministry and expected by June, following which the Ministry has up to four months to implement the new regulations. The type of royalty and the windfall tax may be addressed in the new regulations or in negotiations with the government for an exploitation contract.
IMZ remains cautiously optimistic that a reasonable solution will be arrived to facilitate the profitable development of modern, environmentally responsible mining in Ecuador. Ecuador is the next frontier of gold, silver and copper mining, and is in minds of investors with Kinross’ recent billion-dollar acquisition of Aurelian for its Fruita del Norte gold project.
Rio Blanco, which is at the permitting stage pending the implementation of the new mining law and regulations, is an an epithermal gold-silver vein deposit that extends discontinuously for over 3km in a north-south direction, from the Loma Larga area in the north to the Migsiguigshi area in the south, with a surface expression ranging from 750m to over 1,000m in width. In vertical extent, the overall epithermal system with high-grade values spans over 500m from elevations in the Dorada area at around 3,400m to the Alejandra North Vein to the north at about 3,900m.
IMZ expects that the Rio Blanco project has an initial mine life of 7.5 years with upside to add resources and reserves. When built as an 800 tpd operation, Rio Blanco is estimated to produce an average 71,000 ounces of gold per year at cash costs of approximately $295 per ounce of gold, net of a silver byproduct credit. As a high-grade, underground mine, the reserve grades are 8.8 g/t gold and 62 g/t silver. Mining and processing at Rio Blanco promise to be straight forward with an average mining width of 9 m, applying efficient long-hole stoping mining followed by conventional milling.
The company also has the Gaby Project as a call option on higher gold prices as it is a very large, low grade porphyry deposit.
The Gaby Project, which the company bills as one of the largest undeveloped gold resources in the world at an estimated 10 million ounces, requires a gold price of US$850 per ounce to achieve break-even status economically, which suggests the company will not advance development significantly until gold trades consistently over US$1,000 per ounce. Pending final feasibility, the earliest start of production at Gaby would be in 2014.
Results from a preliminary feasibility study showed that, while Gaby is currently uneconomic at a $650 gold price per ounce, it is highly leveraged to higher gold prices. According to the most recent technical document, the mine is estimated to produce 330,000 ounces of gold per year at a cash cost of US$670 per ounce. Itsmeasured and indicated resources total of 6.9 million ounces of gold and an additional inferred resource of 2.9 million ounces, making it one of Ecuador’s largest gold deposits.
The Main Gaby deposit comprises a “U” shaped zone of gold mineralization measuring approximately 1,800m in length and up to 300m in width with gold mineralization intersected over a vertical extent exceeding 500m.
If the mining law issues are resolved favorably in the next few months as is widely expected, IMZ could be one of the great success stories out of South America. Ecuador is quickly running out of reserves of capital. Since its currency is the U.S. dollar, the impoverished nation can’t just print money, and recent statements by its President Rafael Correa, suggesting the nation would not honor its debt obligations and the current global credit squeeze, means borrowing money to stay viable may be difficult.
All of this means that pressure will increase to get mines into production and attract foreign investment from mining and exploration that will provide a steady stream of revenue to Ecuador’s coffers. The government can’t ignore the fact that excessive windfall profit taxes will thwart their own economic salvation.
IMZ is headed by Stephen J. Kay, the former founder and president of GD Resources Inc., a highly successful smelter of precious metal by-products from U.S. gold mines. From 1983 to 1985, Mr. Kay worked with Amselco Exploration (BP Minerals) where he was involved in the discoveries of the Colosseum and Yellow Aster gold mines, both in California. During his 10 years with Gold Fields Mining Corporation until 1983, he was responsible for the initial drilling of the three-million ounce Mesquite gold mine in California.
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