TORONTO (miningweekly.com) – NYSE- and TSX-listed McEwen Mining chief owner Rob McEwen has plenty of faith that the gold price will, within the next two years, head north of $2 000/oz and even cross the $5 000/oz mark in the not too distant future.
In an interview with Mining Weekly Online, McEwen said that while there was a lot of sentiment out there that the gold price would go lower, he believed the price of the yellow metal would go much higher.
McEwen pointed to historical precedents where governments debased their currencies through monetary expansion in excess of their sustainable debt loads, which caused the currency to devalue relative to assets such as gold.
In the past, these happened in isolated cases, but were more commonplace these days, as many countries and regions, including the US and the European Union, were concurrently pumping cash into their economies to keep them buoyant.
In some cases, as in the US, debt was reaching unprecedented levels at around $17-trillion. He said it worked well when interest rates were low, but should rates climb to about 5%, the debt service costs alone would be about a trillion dollars, which would crowd out other essential public services.
When confidence in a currency is lost, political casualties result and investors move to physical assets to preserve value. The strong demand for physical gold from the East was also a positive pulling factor.
Gold rebounded in recent weeks, but at around $1 274/oz, the price is still selling for well below the $1 889/oz it fetched in 2011.
MEXICAN RESOURCE INCREASE
Faced with lower gold and silver prices and challenging capital markets, miners were being forced to look closer at low-cost alternatives to grow profitability, prompting McEwen Mining to expand its existing El Gallo 1 mine, in Mexico.
The company on Wednesday announced it had increased the National Instrument 43-101-compliant measured and indicated gold resource for El Gallo 1 by 38% to 691 523 oz.
Gold grades rose 3% for a total resource of 13.9-million tonnes grading 1.54 g/t, after taking into account mining depletion.
McEwen said output from the fully owned mine would be increased from 3 000 t/d to 4 500 t/d. This, along with improvements in the grade, was expected to lift gold production from an estimated 27 300 oz this year, to about 37 500 oz in 2014 and 75 000 oz in 2015.
By focusing on expanding its existing operation, McEwen said the capital cost of about $5-million was significantly reduced and would be funded internally, with no need for debt or equity financing.
The expansion would focus on installing additional pumps and carbon columns, enlarging the spare parts inventory, expanding the heap leach pad and upgrading the process plant. The mining rate could also be increased, as required, by using the current mining contractor.
The expansion plan was expected to take nine months to implement and the heap leach pad expansion was expected to be complete in 12 months, while the existing capacity on the current heap-leach pad could potentially accelerate the ramp-up. The expansion was expected to require re-permitting before it could become operational.
McEwen said the main driver behind the expansion was the new central zone discovery. Highlights from recent drilling in the zone included 5.7 g/t gold over 23 m and 3.9 g/t gold over 21 m, which had expanded the mineralisation at the mine and increased management's confidence.
With the planned expansion at El Gallo 1, McEwen said it would review the potential to process ore from the El Gallo 2 silver project at the current heap-leach facilities. The two sites are located about 5 km apart.
The review would focus on silver recoveries (early column tests returned between 45% to 62% silver), transportation, crushing and processing costs. Although this would reduce recoverable silver, it would eliminate about $180-million in capital expenditures (capex).
McEwen said the company was looking at using a common production base, trucking in silver ore from El Gallo 2.
“The capital cost of a heap leach operation is about 20% the cost of a mill. So rather than spending $180-million, we’re looking at a cost of about $20-million, which is about 10% of the cost of the mill. We wouldn’t be producing the 90% silver that we were projecting, but we would be getting 60% by spending 20% of the money,” he explained.
Getting only 60% of the metal would be a good trade-off, owing to improving the project’s internal rate of return and reducing the capital requirements, which could allow the company to fund most of it internally.
McEwen said, despite recently lowering its total expected 2016 gold-equivalent output by 22% to 225 000 oz/y, it did not make that big a difference from the 290 000 gold-equivalent ounces it planned to produce, considering the improved rate of return and the significantly reduced capex.
“It doesn’t have a huge impact, but it makes production expansion affordable,” he said.
An updated El Gallo 2 resource estimate was expected in early August.
GOOD TIMING FOR MINE CONSTRUCTION
McEwen added that now was a good time to think about building mines, because costs were coming down, as there were not many new significant projects under construction.
McEwen Mining is progressing its Gold Bar project, in Nevada, with permitting being about halfway through the three-year process.
The project, which holds about one-million ounces in its compliant resource, is expected to be a rather straightforward heap-leach operation, using a single-stage crusher. Capex for the Gold Bar project, depending on how the company dealt with waste stripping, would be in the range of $30-million to $50-million, with all-in costs of about $850/oz.
McEwen said he hoped the project would be permitted in 2014; however, authorities had made it more onerous to bring an above-ground power line to site, wanting the company to instead dig and bury power lines at significant cost. The reason for this was that power lines were seen as perches for predators of the endangered sage grouse, which could force the company to rather use on-site generators to power the project.
Once operational, the Gold Bar mine would contribute about 50 000 oz/y to the company’s production by 2016.
Meanwhile, McEwen Mining had engaged BMO Capital Markets to sell the high-grade Los Azules project, in Argentina, which ranked among one of the most significant undeveloped copper projects in the world. However, no buyer willing to pay a fair price for a project had been forthcoming.
McEwen said that if the company could sell the property for the right price, all the company’s capex requirements for its projects would be accounted for.
However, Los Azules’ $3-billion construction cost, the low current copper price and the capital control measures in Argentina were question marks hanging over the project’s head.
A preliminary economic assessment was expected in the third quarter.