Commissioning New Mines
Inflation challenges cost and schedule management
Getting from development into production is an arduous task in any environment. Throw in runaway inflation on essentials like energy, labor, and machine parts, a curtailed supply of cement and explosives, and it is possible that the industry will surpass previous figures that show more than four out of five mining projects come in late and over budget, according to a study conducted by McKinsey & Company. In May of 2022, IAMGOLD revealed a cost blowout of 90% at its Côté gold project in Ontario. Similarly, Argonaut’s Magino gold mine in Ontario substantially increased its cost projections from C$510 million to C$800 million in December of 2021. A new management team has since been brought in to secure financing and ensure the project progresses on schedule and on budget, but all of this comes after significant dilution to investors. Despite the cost overruns and challenges that needed to be overcome, Argonaut’s new management team, led by president and CEO, Richard Young, underscored that the company is still scheduled to produce first gold in Q3 of 2023. That will move the needle for Argonaut because when the mine reaches full production it will average 142,000 oz/y for the first five years. Currently the company has four operating mines in Mexico and the US, and produces 200–230,000 oz/y (2022 guidance). The Magino project will not only bring on Argonaut's fifth operating mine but it will nearly double their overall production. "As Magino is completed the Company is pivoting from an investing phase to a free cash flow generating phase, which means that we should be able to operate and grow the business without further dilution,” Young affirmed.
Building in Newfoundland
Another key development in 2022 was Toronto-based Marathon Gold’s decision to move forward with construction on its Valentine gold project in Newfoundland. When completed, this is anticipated to be the largest gold mine in Atlantic Canada. The decision to go forward was made in part because it had gone through a full federal and provincial environmental assessment. “Following the completion of the EA process, we felt it was important for the company to make a statement as much for the investment market as for the stakeholders and all supporters that had been advocating for the project,” Matthew Manson, President and CEO of Marathon Gold commented.
Further justifying Marathon’s decision to greenlight Valentine is the compelling geology on the property. It is a big bulk tonnage deposit with a different deformational style, different host rock, and it is at a different scale than other assets in Newfoundland. Marathon is currently sitting at 5 million oz in all categories and about 1.85 g/t. The existing mine plan is two pits and Berry will be the third, with reasonable expectation of adding additional pits, and potentially underground in the future. Fortunately for Marathon, inflationary costs have begun to come down, potentially assuaging some of the cost pressures and making it a more favorable time to construct a mine. “What we need to think about as mine developers is delivery times, pricing, order books, cycles of availability of labor and forward curves of diesel. All those things are improving,” Manson observed.
“Magino is a low cost, long life gold mine with potential to further expand the +4 million ounces resource base both through open pit and underground exploration. Mill optimization could create a pathway to a top 10 gold producer in Canada.”
Richard Young, President & CEO, Argonaut Gold
Applying Lessons Learned
One of the benefits of observing the challenges and struggles of fellow development operations is that up-and-coming projects can preemptively act to mitigate risk. Generation Mining is methodically going about ticking off those risks as it approaches construction on its Marathon project. Three of the biggest challenges mine development hopefuls face are permitting, financing, and social license that includes benefit agreements with nearby First Nations. Generation Mining is progressing on all three of those fronts, and notably secured financing in the form of a C$240 million dollar stream with Wheaton Precious Metals, and a consortium of banks looking to fund up to C$500 million. The company also highlighted that it hopes to further mitigate risks by completing 75% of its detailed engineering before starting construction. “This is important because several projects were negatively impacted by not taking this step,” Generation Mining president and CEO, Jamie Levy explained.
Generation Mining chairman Kery Knoll points out that another important factor in de-risking a project lies in building a strong and experienced team. “The key is to employ people who have built and worked on successful mines in the past. We have people who have been through this process several times, and they know how to adapt to challenges because there are no cookie cutter projects,” Knoll commented.
Generation’s prudent approach has paid off thus far in 2023, as it released and updated feasibility study at its Marathon project, that, despite the inflationary environment, is still expected to generate robust economics, with an after-tax net present value, at a 6% discount rate of C$1.16 billion and internal rate of return of 25.8%, based on a long-term price of US$1,800/oz for palladium and US$3.70/lb. for copper.
Article header image courtesy of Marathon Gold