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Minera IRL reports progress at flagship gold project; infill drill returns "excellent intersections"

Progress is continuing towards a bankable feasibility study on Ollachea, which will be then used as the basis for raising project finance

Minera IRL (LON:MIRL, CVE:IRL) passed another important milestone recently as work began on a 1.2 kilometre tunnel at its flagship Ollachea gold project in Peru.

This will provide access to explore the highly prospective strike to the east of the main deposit, which thus far has only been drilled from surface.

It will also allow access to the Minapampa orebody, providing valuable practical mining experience ahead of production, which is scheduled for 2014.

Progress is continuing towards a bankable feasibility study on Ollachea, which will be then used as the basis for raising project finance. 

To that end, project managers AMEC and Coffey Mining revisited the site last month.

Separately, Minera unveiled the latest results from its infill drilling campaign on the project, which unearthed “excellent gold intersections” and reinforced the “continuity of Minapampa”.

The best intersections included 20 metres at 10.2 grams per tonne and 31 metres at 5.58 grams.

Ollachea has 1.4 million ounces of gold in the indicated category and a further 1.2 million ounces is inferred.

City analysts say the Peruvian project is a potential company maker and helps explains why they attribute valuations in the range of 117-124 pence a share to Minera – well in excess of the current 72 pence share price.

Initial projections are for an internal rate of return of over 20 per cent with $430 per ounce operating costs and nine years of life based on current reserves but Chamberlain is optimistic the mine will operate a lot longer.

The estimated returns are based on a gold price of $1,100 per ounce, which may look conservative in the current climate, but it is not out of line with assumptions other companies are making, said chairman Courtney Chamberlain in recent interview.

“At anywhere near the current plus $1,700 the economics look fantastic for Ollachea,” he added.

Minera is currently spending about $4 million per year on development, which will rise now it has committed to the full feasibility. 

The capital cost of the full mine development is currently estimated at $170 million, which will be met through debt funding and if possible more equity, though new shares will “need stronger stock markets and share price than we have at moment”, Chamberlain said.

Earlier this week Minera’s Don Nicholas gold development project in Patagonia received a major boost as the company unveiled a long awaited feasibility study.

The pivotal report confirmed the viability of a 350,000 tonne per year open pit mining operation that would produce an average of 52,400 ounces of gold and 56,000 ounces of silver each year.

It will cost around US$55 million to build and operating costs are estimated at US$528 an ounce, giving a margin of more than US$1,000 an ounce at current gold prices.

Gold production is expected to start at the end of next year and based on the current resource profile the mine will have a life of 3.6 years.

Assuming a fairly conservative gold price of US$1,250, the mine would be worth US$44.7 million before-tax and would have a 34.6 per cent internal rate of return (IRR). 

Meanwhile, modelling a higher gold price of US$1,500 – which is still around US$200 an ounce below current levels – the study values the project US$82 million before tax and gives it an IRR of 56.3 per cent.

More work is needs to be done before Minera finalises its funding plans for the mine development. This could be a mix of debt and equity – stock markets permitting.