With less money around for investment, mining companies have to look to new ways of working to expand their business
Gold mining has been a part of life in the Tapajos region of northern Brazil for many decades, but modern-day miners must move with the times to stay in business.
Before the credit crunch, investors were happy to fund exploration projects with generous prospects of jam tomorrow, but now they want to eat their jam today.
“We are seeing a strong movement in investor appetite away from blue-sky exploration stories into more production-based activities calculated to generate cashflow,” says Clive Line, finance director of AIM and TSX-listed mining and exploration company Serabi Gold.
“Suddenly cashflow is king, and investment funding for small exploration companies will be harder to come by over the next 12 months. The businesses that survive will be those that can make themselves self-sufficient.”
For the past three years Serabi has been exploring 53,000 hectares in the Jardim de Ouro region of Tapajos. The company has good prospects of delivering on its objective of establishing resources of 1.5m ounces of gold capable of sustaining future production rates of 70,000-75,000 ounces a year, but more cash is needed to fund the next phase of exploration.
Given the post-recession cash squeeze, what Serabi really needs is the equivalent of a gold mine in its back garden – which is exactly what it has.
From late 2003 until the end of 2008 the Palito mine, which is Serabi’s primary asset, was in operation producing more than 110,000 ounces of gold, but when further working capital was needed it became a victim of the global financial crisis and the mine was temporarily suspended.
Serabi’s current management always intended to reopen Palito when the time was right – and it believes that time is now.
“We have commissioned an independent Preliminary Economic Assessment on re-opening Palito and are hopeful it will demonstrate that with better mining practices and with current gold prices (almost double their 2008 levels), Palito producing a modest 20,000 ounces per year can provide more than good cash flow to help fund the company’s future exploration activity”
The Palito mine and the related infrastructure has been well looked after during its few dormant years and the processing plant was operating until 2010, so the cost of restarting production should be relatively low, says Line. “Selective” mining techniques, which involve minimising the mining of waste in order that high-grade ore is delivered for processing, will ensure that unit costs are minimised.
Serabi’s exploration projects in Jardim de Ouro have deliberately been located close to Palito to enable ore from potential satellite mines to be processed at the existing plant, creating significant economies of scale. Two promising discoveries have been made at Currutela and Piaui during 2011, each about three kilometres from Palito. In time they could add further production of at least another 40,000 ounces a year. Initial indications also suggest that the gold-bearing mineralisation extends from Palito to Currutela, which would significantly increase Serabi’s current gold resource inventory.
Investors’ growing appetite for cashflow also reflects a dwindling appetite for risk, so Serabi is deliberately minimising its operational risks. The Palito mine has already demonstrated that high recovery rates (more than 90 per cent) are achievable, and the company is considering bringing in Peruvian or Bolivian contractors with extensive experience of this type of mining operation.
Local infrastructure is good and is being further improved. The company already has all the necessary licences and permits, and because the existing and proposed mines will be primarily underground, their environmental footprint and impact will be relatively small.
“Last year delivered good exploration success that fits our long-term strategy of growth and we now hope to back this up with a cost-effective reopening of the Palito mine to generate cash flow,” says Line.