Cerro Casale: The capex estimate goes up again, what a shockah

Back in April, IKN posted this note that showed how the estimates for cap-ex for the 75% Barrick (ABX) owned Cerro Casale bigbadmutha project in Chile had risen from U$1.4Bn in 2004 to U$5.25Bn. So here we are just three months later and according to today's ABX NR, capex is shifted up to a cool U$6Bn. Here's the updated chart on the white elephant.

Back in April your humble scribe wrote,

"So anyway, it's now been fixed at $5.25Bn and it's hardly likely to change again from that number, is it? After all, they wouldn't underestimate and then revise upwards later on purpose now, would they?".

Be clear, this sentiment applies equally to the new U$6Bn number.

Cerro Casale: Capex increase, what capex increase?

News out of Barrick (ABX) this week was that the estimated capex needed to build the now infamous Cerro Casale gold mine in the uplands of Chile has moved up to a cool $5.25Bn (with a B). That's quite a move and it's hardly the first change of number seen at the project, either, as witnessed by this chart you humble scribe ahs cobbled togethe after doing about 10 minutes' worth of simple Googling:

Find sources for these numbers here, here, here etc. So anyway, it's now been fixed at $5.25Bn and it's hardly likely to change again from that number, is it? After all, they wouldn't underestimate and then revise upwards later on purpose now, would they?

Kinross (K.to) (KGC) in LatAm and that old deja vu all over again feeling

 Oh, that's impressive. Bugger all PPS growth in a major gold miner over five 

years during the biggest baddest bull run for gold....like...ever

Last night we had news out of Kinross:

QUITO, March 30 (Reuters) - Canada's Kinross Gold (K.TO: Quote) will invest $1.1 billion in Ecuador's Fruta del Norte gold project until 2016 and could begin digging an underground mine next year, a company executive said on Wednesday.
Dominic Channer, a vice president of the Toronto-based firm, said gold production could begin at the site in 2014.
Kinross says Fruta del Norte has proven and probable mineral reserves estimated at 6.8 million ounces of gold and 9.1 million ounces of silver, and that it should produce 410,000 gold equivalent ounces on average each year during yada yada continues here

All glorious thrusting stuff from Kinross and it immediately reminded your author of another Reuters news story he'd read....back in April 2007.

Kinross Gold expects Cerro Casale development- CEO

(Reuters) - Kinross Gold Corp. (K.TO) expects to develop the big Cerro Casale gold and copper deposit in Chile, with remaining questions centering on when and how, not if, the company's chief executive said on Wednesday.
The Canadian miner acquired a 49 percent stake in the property when it acquired Bema Gold earlier this year. It is one of the world's largest undeveloped gold and copper deposits, with estimated reserves of 23 million ounces of gold and 6 billion pounds of copper.
"I think realistically if it takes a year to get sorted out on the plan, then it takes two years in construction, so you start thinking about it in production terms 3-4 years out," CEO Tye Burt told Reuters in yada yada continues here.

Golly gosh, Cerro Casale must be producing gold and selling it at $1400+/oz now, right? We're almost exactly four years on from that "3 to 4 years out" prediction from Kinross CEO Tye Burt, after all.

What's that you say? Surely not! They sold a chunk to Barrick and only own 25% now, you say? And still no build decision made on Cerro Casale? That's strange, because it's hardly likely that the CEO of a world class gold miner would SPOUT UTTER BULLSHIT TO FOOL HIS AUDIENCE,  is it? 

But this time at Fruta del Norte it's different. Of course. Oh yes yes yes yes.

The Cerro Casale 43-101 technical report

Cerro Casale is the big gold project 75% owned by Barrick (ABX) and 25% owned by Kinross (K.to) (KGC). Yesterday Kinross published its 43-101 compliant technical report on the project. After a brief scan, here are a few line items:

• Capex is put at a cool $4.184Bn
• Base case ($800 gold and $2/lb copper) IRR comes in at a horrid 5.5%
• IRR using U$960/oz gold and U$2.40/lb copper is still at meagre 9.9%
• If you want to go with current spot prices as your base (a very dangerous hobby), then $1,200/oz gold and $2.80/lb copper gives you a 14.7% IRR...feeling lucky, punk?
  
• The project is very opex-sensitive. Annual operating costs are slated at an impressively large $778m with the 43-101 model indicating a 10% rise in opex taking a third away from net cash flow.

People, don't hold your breath on a build decision for this thing. It might give Exeter (XRC.to) holders food for thought, too.

Cerro Casale capex and those dubious neighbour plays

Any professional analysts at the Can'o'corn feeling stupid about pumping the Exeter Caspiche story yet? Cerro Casale is just down the road from Yale's dog of a project, remember. Same rocks, same grades, same lack of water, same altitude...same same same. (Hint to Mr Z; Next time you go on a site visit make sure you leave the comfort of the deluxe hotels and spend more than four hours at the mine site.

Oh, then there's that dubious Volcan under Andina Minerals (ADM.v). Same place. Then those utter criminals at Capella (KPS.v). Same place. As mentioned many times before not all gold ounces are the same, so check out below what Kinross and Barrick have suddenly discovered! My, doesn't it remind you of that Noront Ring of Fire thing from a couple of years ago.......

Via the Financial Post:

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A key development project for mining giants Barrick Gold Corp. and Kinross Gold Corp. has run into massive capital cost escalation, raising more doubts from experts that it will get built any time soon.

The project in question is Cerro Casale, a huge, low-grade gold-copper deposit in northern Chile. Kinross filed a technical report this week that pegged the construction cost of the project at a whopping US$3.6-billion.

That is an increase of 86% over the last estimate of about US$2-billion, made in August, 2006.

"This number is obviously going to have pretty big implications," said Dundee Securities analyst Paul Burchell, who used to work at Cerro Casale.

"It suggests to me that a project difficult to justify five years ago is probably more [difficult] today."

Experts are also concerned with the aggressive pricing assumptions made in the Cerro Casale study. Kinross is using a gold price of US$725 an ounce and a copper price of US$2 a pound, which is actually higher than the current copper price.

"It's a tough project economically because of the capex and the prices required to make it work. In this market, it will probably be deferred," said David Whetham, a resource fund manager at Scotia Cassels.

CONTINUES HERE

Related Posts
All gold resource ounces are not the same (Cerro Casale)
Steve Saville, you're wrong about Andina Minerals (ADM.v)

All gold resource ounces are not the same

Cerro Casale: Mucho altitude, mucho prettiness

So on with the show, mineheads. From time to time , normally via mail (but sometimes it's addressed on blog), the subject of in situ gold ounces comes up chez Otto. This is fresh in my memory because a couple of days ago I had an exchange with one reader who questioned the amount of in situ gold ounces held by Troy Resources (TRY.to) compared to its share price valuation and my recommendation and price call (this person had bought the NOBS report and follow-up questions, which is always good to see).

Now this is a big subject, but the general statement that "all gold resource ounces are not the same" is something that holds up in all discussions on the subject. As an example, let's look at this report on Kinross and CEO Tye Burt's Conference Call today, specifically about the Cerro Casale gold project in Chile.

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"........In the previous resource and reserve estimate, the reserves stood at 23-million ounces of gold and six-billion pounds of copper. However, based on "re-engineering and optimisation decisions", the proven and probable gold reserves have been reduced by 800 000 oz, Burt said. The updated reserves were calculated at a $725/oz gold price and $2/lb copper price. "Obviously that is above today's spot copper price, but I would say, based on the prefeasibility work that we have done with Barrick, and the current technical view, that it does have positive economics at those numbers," he said. Optimisation work under way for the full feasibility study would also likely improve the economics, "and of course we are looking at ways that we can lock in some of the commodity prices", Burt said....."

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So, history and technicalities of Cerro Casale aside, note that Tye Burt is saying that there's 23 million ounces of gold there but they're having to re-do, re-think and get all smart and busy on the engineering just to make the project feasible with gold at $725/oz and cu at $2/lb. That's twenty-three million ounces, folks! If you have to get the smartest mining engineers in the world together and bang their heads together for years on end until finally they work out a way they might....MIGHT... be able to build a profitable mine there's a lesson to be learned by us mortals, no? An ounce of gold up there clearly isn't the same as an ounce of gold in one of those Mexican heap-leachers.

To repeat and be totally boring: Does that sound easy mining like, say, Yanacocha to you? Does that sound like a low cash cost per ounce project? Does that sound like low capex in the pipeline? Nope, me neither. That's because all gold resource ounces are not the same.

To return to the heights of Chile for one more paragraph, that's my problem with places like ADM.v at Volcan and that dreaded XRC.v thing called Caspiche. For example, pumpers of ADM.v will tell you "it has 10m oz, dude". Sometimes they'll even tell you something more accurate and tell you it has under 5m of recoverable ounces so far outlined. But what they won't tell you is the enormous engineering, logistical and price barriers between Miner X and the possibility of getting those ounces (mostly very deep, too) out of the ground and into a bank vault in Switzerland. And when I say "they", that most definitely includes some of the better-known newsletter writers and also people sitting in offices in Canada with CFA after their name that write touchyfeely client reports promoting these companies.

Finally, believe it or not but this isn't just my little pet peeve; due to the nature of the game I speak to geologists on a regular basis and one highly respected professional in the field who knows the Chilean heights very well has told me on more than one occasion that in his opinion Cerro Casale will never be a mine. He's not bearing a grudge or with skin in the game or similar; he just says it as a rockdude wearing his hardhat.

OK, rant over. Thank you for bearing with me.