- Published: 28 October 2008
- Written by Editor
Andean Resources Ltd.: Release of Cerro Negro Pre-Feasibility Study Results
Andean Resources Limited ("Andean" or "the Company") (TSX: AND)(ASX: AND) has completed its Pre-Feasibility Study ("PFS") of its 100% owned Cerro Negro high-grade gold and silver project in Santa Cruz Province, Argentina. The PFS was completed based on the previously released gold and silver mineral resource estimates at the Vein Zone and Eureka West deposits. Ausenco Services Pty Ltd ("Ausenco") compiled the overall report and supervised the metallurgical testwork and process plant design; Micon International Limited ("Micon") was responsible for the mineral resource estimates; and Mine Development Associates ("MDA") was responsible for the mineral reserves and the mining study. Highlights of the PFS include (all currency in United States dollars):
- Probable reserves of 7.2 million tonnes at 6.4 g/t gold and 75 g/t silver for 1.5 million ounces oz of gold and 17.3 million oz of silver and the PFS excludes the additional inferred resource of 0.7 million oz of gold and 4.9 million oz of silver (based on NI 43-101 and JORC compliant resources announced in October 2007 and April 2008)
- Projected annual production of up to 350,000 ounces of gold per year
- Expected low average cash cost of production of $198 per ounce (after by-product silver credits), making Cerro Negro one of the lowest cost undeveloped gold deposits globally
- Robust internal rate of return ("IRR") of 40% (post tax) on initial capital investment estimated at $281 million with a projected payback of capital in the first two years of production
- Net present value ("NPV") of $246 million
- For the first three years of production, net free cash flow of $170 million per year (post-tax)
- Significant upside remains;
-- to convert 336,000 ounces of inferred gold resources to indicated resources at Eureka to improve potential overall project economics;
-- to optimize gold and silver recoveries from the Eureka ores through additional testwork;
-- to use more cost effective mining methods such as sub-level stoping supported with an improved geotechnical model;
-- further exploration potential at Cerro Negro
Probable reserves of 1.5 million ounces of gold and 17.3 million ounces of silver
Based on Micon International's previously released mineral resource statements at the Eureka West (April 2008) and Vein Zone (Oct 2007) deposits and the geotechnical information provided by Golder Associates ("Golder"), MDA of Reno Nevada, developed mine-plans for the PFS, resulting in the proven and probable reserves at Cerro Negro as shown in the table below:
Grade Probable Reserve
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Deposit Tonnes Gold Silver Gold Silver
(g/t) (g/t) (K oz) (M oz)
------ ---- ------- ------- -------
Eureka underground 2.5 11.6 212 946 17.3
Vein Zone open pit 4.6 3.5 - 526 -
------ ---- ------- ------- -------
Total/Avg 7.2 6.4 75 1,472 17.3
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Notes:
1. The effective date of the mineral reserve is October 27, 2008
2. Mineral resources which are not mineral reserves do not have the demonstrated economic viability. The estimate of mineral resources and mineral reserves may be materially affected by environmental, permitting, legal, title, taxation, socio-political, marketing or other relevant issues
3. Eureka West mineral resources based on a 3 g/t gold equivalent cut-off and up to 15% mining dilution
4. Vein Zone mineral resources were based on a 0.7 g/t gold cut-off with the mineral resource being diluted by the size of the blocks
These reserves were based on Micon's measured and indicated mineral resources only; the inferred resources at Eureka (336,000 oz of gold at 10.7 g/t gold) and Vein Zone (367,000 oz of gold at 2.7 g/t gold) were not included in the PFS analysis.
Annual production of up to 350,000 ounces of gold per year
MDA developed a mine-plan to mine the Eureka West deposit at a nominal rate of 2,000 tonnes-per-day ("tpd") using conventional underground mining methods and to mine the Vein Zone deposit at a nominal rate of 2,000 tpd using open pit mining methods as shown in the table below:
Cerro Negro Mine-Plan 2011 2012 2013 2014 2015 2016 Total
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Eureka
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Ore (tonnes) 677.7 674.7 675.1 502.7 2,530.2
Gold grade (g/t) 11.5 14.1 13.0 6.7 11.6
Silver grade (g/t) 243 259 203 120 212
Gold Contained Oz 251.5 305.2 281.5 108.1 - - 946.4
Silver Contained Oz 5,291 5,616 4,408 1,946 - - 17,261
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Vein Zone
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Ore (tonnes) 672.3 675.3 674.9 847.3 1,350.0 410.0 4,629.8
Gold grade (g/t) 3.1 3.7 4.6 4.3 2.6 3.8 3.5
Silver grade (g/t) - - - - - - -
Gold Contained Oz 66.8 80.3 99.4 116.9 112.0 50.1 525.5
Silver Contained Oz - - - - - - -
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Total Cerro Negro
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Ore (tonnes) 1,350.0 1,350.0 1,350.0 1,350.0 1,350.0 410.0 7,160.0
Gold grade (g/t) 7.3 8.9 8.8 5.2 2.6 3.8 6.4
Silver grade (g/t) 121.9 129.4 101.5 44.8 - - 75.0
Gold Contained Oz 318.3 385.6 380.9 225.0 112.0 50.1 1,471.9
Silver Contained Oz 5,291 5,616 4,408 1,946 - - 17,261
The 4,000 tpd, or 1.35 million tonnes-per-annum, processing plant will be located close to the Vein Zone deposit, and a 19km road will be constructed from the Eureka portal to the crusher stockpile. Ore grade material from both deposits will be stockpiled at the crusher pad and blended before being fed to the mill.
Mining in Vein Zone will be with open pit methods in two phases with a 90 tonne truck fleet. The Eureka deposit will be mined with conventional cut and fill underground methods along the length of the vein and in a transverse fashion perpendicular to the vein where vein thickness permits. The underground mine will be accessed via a decline.
Initial metallurgical testwork, overseen by Ausenco, and completed by Process Research Associates Ltd at its laboratory in Richmond, Canada ("PRA"), determined gold grade-recovery relationships, which when applied to the mine production schedule, indicate a recovery at Vein Zone of approximately 97% and at Eureka West of approximately 90%. The silver grade-recovery relationship at Eureka West, based on the initial metallurgical samples taken in late 2007, predicts a recovery of approximately 67%, based on the mine production schedule. Further metallurgical testwork is required to optimize both gold and silver recoveries using more representative samples from the Eureka West deposit -- the current testwork was based on a sample compiled from the first five discovery holes, which were of significantly lower grade than the deposit average. In addition, optimization of reagent concentrations is needed in light of the sensitivity of Eureka silver extraction to cyanide concentration. Based on these metallurgical recoveries the following production schedules were developed for Cerro Negro:
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Gold Production (K oz) 2011 2012 2013 2014 2015 2016 Total
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Eureka 227 275 254 98 - - 855
Vein Zone 65 78 96 113 109 48 508
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Total Gold Production 292 353 350 211 109 48 1,363
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Silver Production (K oz) 2011 2012 2013 2014 2015 2016 Total
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Eureka 3,552 3,778 2,938 1,259 - - 11,527
Vein Zone - - - - - - -
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Total Silver Production 3,552 3,778 2,938 1,259 0 0 11,527
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For both Eureka West and Vein Zone, only previously released indicated resources were used for the purposes of the PFS economic evaluations. Based on using these indicated ounces only, Eureka is anticipated to be depleted after four years, leaving the remaining production for the last two years from Vein Zone open pits only. However, Andean is confident based on excellent conversion rates from the previous drilling that the 336,000 ounces of gold in the inferred mineral resource category at Eureka West are likely to be upgraded into the indicated category once infill drilling as been completed and thereby potentially extending the life of mine in this area. Resource drilling on the 721 Vein, Eureka Main Vein, and the Eureka West veins during the 2008/09 drill season is also expected to further add potentially minable ounces to the mineral resource base. In addition, further extensions are likely as the Eureka West veins remain open to the west, and the potential remaining on the rest of the 4km long Eureka vein system to the east remains to be evaluated by detailed exploration. Silver grades were not estimated for the Vein Zone deposit in the October 2007 Mineral Resource estimate, as silver does exist within the Vein Zone deposit, but at a very low ratio (approximately 1:2 Au:Ag) when compared to Eureka West (approx. 1:10). Hence, silver production effectively ceases within the cash flow analysis with the completion of underground mining at Eureka West.
Average cash cost of production of $198 per ounce
Since only 12% of the expected gross revenue is silver, Andean has adopted the approach of considering silver as a by-product credit, per current gold industry practice. Cerro Negro cash operating costs were determined by combining the estimated direct cost elements of mining, processing, general and administrative and refining costs as shown in the table below:
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Estima
ted Operating Cost/Tonne Units Avg
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Underground mining costs $/tonne $29.40
Open pit mining cost $/tonne moved $1.82
Processing cost $/tonne $20.87
G&A $/tonne $5.55 or
$7.5M/yr
Refining and shipping costs $/oz Au $10
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The current estimate for underground mining costs adopted a conservative approach that assumed back filling the mine with cemented rock backfill, even though Golder believes that sub-level stoping without backfill is possible with the competent volcanic rocks in the footwall and hanging wall. Further geotechnical drilling and modelling will be completed during the next 6 months, to determine if sub-level stoping methods without backfill would be practical.
For the Vein Zone deposit, an open pit design was developed that had a strip ratio of 5.6 tonnes of waste to every tonne of ore based on an economic cut-off grade of about 1 g/t gold.
All these costs are credited with the silver by-product revenue to obtain a net cash cost of production, to which is added the provincial and federal royalty obligations are added, resulting in total cash cost of production shown in the table below:
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Cash Cost ($/oz) 2011 2012 2013 2014 2015 2016 Avg
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Net Cash Cost 67 60 75 285 456 317 141
Royalties (Fed+Prov) 60 60 58 53 46 48 57
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Total cash cost of prod'n 127 120 133 338 502 365 198
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When the Eureka West Veins are proposed to be mined, the cash cost of production is very low as a direct result of the high gold grades and the significant silver credits. Once the measured and indicated resource at Eureka West has been mined out, the cash cost of production at Cerro Negro increases reflecting the lower grade Vein Zone deposit and the absence of a silver credit. However, if the Eureka mine life is extended through successful exploration and infill drilling and upgrading of the inferred resources, the lower cash cost environment would likely be extended into the future correspondingly.
Robust internal rate of return (IRR) of 40% on initial capital investment of $281 million
The Cerro Negro project has been evaluated using a discounted cash flow analysis on a project stand alone, 100% equity basis. Cash inflows consist of annual revenue projections for the remaining mine life. Cash outflows such as capital, operating costs and taxes are subtracted from the inflows to arrive at the annual cash flow projections. Annual net cash flow (NCF) projections are then discounted for time and risk and summed to arrive at a discounted net present value (NPV).
Metal price assumptions used for the PFS were $800 per ounce for gold and $13 per ounce for silver, being the average of five leading investment banks' forecasts. The cash flow analysis uses 'constant dollars', reflecting current mineral industry practice. The base date for the capital and operating cost estimates is the 2nd quarter of 2008 (2Q08) with an estimated accuracy of +/-25%.
PriceWaterhouseCoopers ("PWC"), reviewed the cash flow model and incorporated the following Argentinean taxes: 35% corporate income tax, 5% export tax, and a 2% provincial royalty.
After-tax net present value (NPV) results for various discount rates and the project internal rate of return (IRR) are presented in the table below:
Cerro Negro NPV and IRR
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After Tax Units Millions
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NPV - 0% discount rate US$ 339
NPV - 5% US$ 246
NPV - 8% US$ 203
Internal Rate of Return % 40
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These returns are based on the measured and indicated resources only and on
an initial capital estimate of $281 million shown in the table below:
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Initial Capital Millions
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Process plant 113
Mining 46
Offsite infrastructure 39
Onsite infrastructure 11
Owners costs 16
Tailings Storage 6
Indirects 45
Other 5
Total 281
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In its PFS estimate of capital costs (taken as at 2Q08) Ausenco has recommended a 15% additional contingency be included given the size, scope and location of the project. However, Andean believes that in the current market which has seen a significant softening for the prices of many raw materials (eg steel and energy) and other capital cost inputs relevant to the PFS, it has excluded any contingency from its detailed financial analysis. However, were such a contingency included, each additional 10% of capital contingency would add $28 million to the capital estimate and would reduce the project NPV by $20 million.
Ausenco has designed a 4,000 tpd processing plant that is estimated to have a capital cost of $113 million to treat ore from both Vein Zone and Eureka West deposits using conventional processing technologies. The process plant design incorporates the following unit process operations:
- Single stage crushing with a jaw crusher.
- A coarse ore storage bin to provide surge capacity between the crushing and grinding processes.
- Comminution circuit, using a SAG mill followed by a closed circuit ball mill grinding to a P80 of 63 um.
- Gravity recovery of free gold from the cyclone underflow to produce a gravity concentrate. Intensive leaching of gravity concentrates.
- Conventional leaching circuit consisting of six agitated and air sparged leach tanks in series, providing 72 h residence time.
- Four stage CCD circuit to provide recovery of pregnant solution and tailings washing.
- Merrill Crowe circuit to recover gold and silver from solution.
- Cyanide destruction of tailings stream using the SO2/air process.
MDA estimated the combined underground mine at Eureka West and the open pit mine at Vein Zone to cost about $46 million in initial capital. Of this initial capital, $33 million is related to mine equipment purchases. For the upcoming Bankable Feasibility Study, Andean will consider eliminating this $33 million capital investment by using a mining contractor.
An additional $36 million of sustaining capital was estimated with the majority of the investment related to underground mine development. The key infrastructure items needed for the Project include:
- a 27 km gravel access road from the nearby San Jose project to the project site;
- water supply from a series of wells;
- a power study completed by Technolatina of Argentina recommended building a power-line from the town of Las Heras for $17 million to provide power with an estimated unit cost of about $0.08 per kWhr.
- .an accommodation camp;
- administration offices, an assay laboratory, a gatehouse, fencing, workshops, warehouses, and
- site communication and fire protection systems
Significant Upside Remains
The areas of focus during the Bankable Feasibility Study will be designed to unlock the upside of the current project economics include the following:
- Conversion of the inferred resource at Eureka West to indicated resources in order to extend the mine-life and ensure the low cost nature of the project continues into the future (see attached longitudinal section).
- Increase existing resource at Eureka West with exploration drilling. Since the Eureka West veins were discovered only 18 months ago, Andean geologists believe that the exploration potential is significant. The Eureka West veins remain open to the west and the Eureka Main vein has about a 4km strike length of outcrop exposure that needs to be drill tested to the east. - Further metallurgical testwork using more representative samples of the Eureka West deposit may improve metallurgical recovery.
- Further geotechnical drilling and modelling may allow for a lower cost underground mining method.
Sensitivity Analysis
In order to determine the greatest risks and opportunities to the project (before the addition of new ounces to extend the production schedule), the following variables were determined likely to have the most impact:
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10% change in: NPV Impact Millions
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Gold price 60
Capital costs 20
Operating costs 15
Silver recovery 7
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In order to mitigate the impact of higher capital costs, Andean plans to review several available used processing facilities as part of the Bankable Feasibility Study; to review the impact of contract mining versus owner operated mining; and to use the current volatile economic environment to obtain quotes lower than the current engineering estimates used in this PFS.
Since gold price has the greatest impact on the project economics, the project NPV and IRR are shown below at different gold prices:
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Flat Gold Price ($/oz)(1) IRR NPV Millions
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$700 31% 171
$800 40% 246
$900 49% 321
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1: gold to silver ratio maintains a ratio of 1:61 as
gold price is changed
2: A 5% discount rate was used in the sensitivity
analysis above
Next Steps
The Andean Board has reviewed the current PFS and has approved management's recommendation to move forward and complete a Bankable Feasibility Study and the Environmental Impact Assessment for Cerro Negro. This work will begin immediately.
Exploration continues with two drill-rigs onsite focusing on expanding the high-grade resource in order to further improve the project economics. The first set of drill results will be released in November.
The full NI 43-101 Technical Report for the PFS will be filed on SEDAR within 45 days, and posted to Andean's website www.andean.com.au.
Notes:
Consultants
The pre-feasibility study is based on technical information generated by a number of independent consulting firms and Andean in conjunction with the independent consulting firms engaged to provide specific technical expertise, including:
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Component Responsibility
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Geologic Interpretation and Resource estimate Micon International
Geology Andean Resources
Environmental Baseline and Compliance Vector Engineering
Mine planning and reserve statement MDA
Geotechnical Golder Associates
Hydrology Hidroar
Metallurgy and Process Plant Design Ausenco
Tailings Storage DE Cooper & Associates
Infrastructure Andean and Ausenco
Power supply Technolatina
Financial modeling Andean and PWC
Legal and Regulatory Andean
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About Andean Resources
Andean Resources is a successful Australian-based exploration company listed on both the Australian and Toronto Stock Exchanges (trading symbol: AND). Andean's major asset is its 100% owned Cerro Negro Gold Project in Southern Argentina. Andean's corporate objectives remain driven by commercial and social outcomes -- to expand contained gold resources at Cerro Negro that will support an economically robust and environmentally responsible mining operation as a platform for future growth.
Qualified Persons
The Eureka West Mineral Resource Estimates were carried out by Reno Pressacco, P.Geo., a Senior Associate Geologist with Micon International Limited, a Qualified Person as defined by NI 43-101, and independent of Andean Resources, who has read and approved this news release.
The Vein Zone Mineral Resource Estimates were carried out by Dave Laudrum, P.Geo, a Senior Associate Geologist with Micon International Limited, a Qualified Person as defined by NI 43-101, and independent of Andean Resources.
The metallurgical testwork and subsequent design of the processing facility was carried out by Paul Messenger, MAusIMM, of Ausenco, a Qualified Person as defined by NI 43-101, and independent of Andean Resources, who has read and approved all references to metallurgical testwork and design in this release.
The mining study and subsequent design of the Eureka West and Vein Zone mines was carried out by Neil Prenn, P.Eng and principal of MDA, a Qualified Person as defined by NI 43-101, and independent of Andean Resources, who has read and approved all references to the mining study in this release.
The information in this Report that relates to exploration results is based on information provided by David Shatwell who is a Fellow of the Australian Institute of Geoscientists. Mr Shatwell has extensive experience relevant to the style and type of mineralization and deposits under consideration, and to the activity undertaken, to qualify as a Competent Person as defined in the 2004 Edition of the "Australian Code for Reporting of Mineral Resources and Ore Reserves" (the J.O.R.C. Code). Mr. Shatwell consents to the inclusion in this Report on his work in the form and context in which it appears.
Micon International will be preparing a comprehensive NI-43-101 technical report summarizing the Cerro Negro Pre-Feasibility Study within 45 days, which will then be filed on SEDAR.
Forward Looking Statement
Information set forth in this document includes forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond Andean's control, including but not limited to: statements of the Cerro Negro deposit's economic potential; information included in the pre-feasibility study such as capital and operating costs, projected production summaries, gold and silver prices and financial analysis; the execution and outcome of current or future exploration activities; significant fluctuations in metal prices; general market and industry conditions; and other factors detailed in the Company's filings with the Ontario Securities Commission.
The Cerro Negro Pre-Feasibility Study was prepared to broadly quantify the project at Cerro Negro's capital and operating cost parameters, and to further the development of the project. It was not prepared for use as a valuation of the Cerro Negro deposit, nor should it be considered to be a final feasibility study. The information contained in the Pre-Feasibility Study reflects various technical and economic conditions at the time of writing. These conditions can change significantly over relatively short periods of time. The achievability of life of mine plans, budgets and forecasts are inherently uncertain. There can be no assurance that the potential results contained in the Study will be realized.
Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Andean's actual results, programs and financial position could differ materially from those expressed in or implied by these forward-looking statements.
Cautionary Note To U.S. Investors
This document uses the terms "measured" and "indicated resources". We advise US investors that while those terms are recognized and required by Canadian regulations, the US Securities and Exchange Commission does not recognize them. US investors are cautioned not to assume that any part of all of mineral deposits in these categories will ever be converted into reserves.
To view a map of the "Eureka West Longitudinal Section", please visit the link below:
http://media3.marketwire.com/docs/lamatildeformation.pdf
A.C.N. 064 494 319
Contacts: Andean Resources Limited Krista Muhr Director, Investor Relations (647) 330-1478 Email: This email address is being protected from spambots. You need JavaScript enabled to view it. Andean Resources Limited Morrice Cordiner Director 02 9276 1245 Email: This email address is being protected from spambots. You need JavaScript enabled to view it. Website: www.andean.com.au
SOURCE: Andean Resources Ltd.
mailto:This email address is being protected from spambots. You need JavaScript enabled to view it. mailto:This email address is being protected from spambots. You need JavaScript enabled to view it. http://www.andean.com.au
