Uncertainty clouds Cerro Casale start-up

Uncertainty over mining royalties and energy costs is the main obstacle in the way of Canada's Placer Dome (NYSE: PDG) giving the green light its US$1.65bn Cerro Casale copper-gold project in northern Chile, a company executive told BNamericas. "More than actual electricity prices or a royalty, the problem right now is uncertainty," said Placer Dome's executive VP for the United States and Latin America, William Hayes. Hayes said it was not possible to ask Placer Dome's board for project approval without a clear idea of the costs involved and that it would be "very difficult" to make a start-up decision until the current royalty debate was over. "You have to have a clear picture. And you have to have the confidence that that clear picture is going to remain. That is the whole problem here: clouding the issue with uncertainty," he said. Both royalty and increased energy costs, particularly acute in northern Chile due to restrictions on gas supplies from Argentina, are significant issues for a marginal project like Cerro Casale, said Hayes. "Cerro Casale is a large value, low-grade project so it does not have much margin for cost increases. That is the issue," he stressed. Hayes said that the deposit's grades of 0.3% copper and 0.7g/t gold required the movement of approximately 900,000t/d of earth to mine. Cerro Casale's feasibility study was completed in 2000, it secured water rights in 2001 and approval of its environmental impact study (EIS) came in 2002, but the project remained on hold due to low metals prices. It was taken off the back burner in November 2003. "We were waiting for improved gold and copper prices. Now we have them, but unfortunately we have uncertainty over royalties and gas," said Hayes. The Chilean government has said it will introduce a royalty bill that proposes a sliding scale 0%-3% charge on gross sales, depending on operating margins. The bill had been expected to go to congress in May but, due to problems ironing out tricky constitutional issues, its publication has been delayed. It is now expected in June. The 2000 Cerro Casale feasibility study envisaged an open-pit mine producing annually approximately 975,000oz of gold and 130,000t of copper over 18 years based on a measured and indicated resource of 25.4Moz of gold and 2.90Mt of copper. An updated feasibility in the first quarter of this year pushed capital costs up from the original US$1.43bn to US$1.65bn and total operating costs from US$203/oz to US$225/oz. Placer Dome and its JV partners are now looking at optimizing the mining, milling and metallurgical parameters of the project, but Hayes said these changes would be "secondary" and would not influence a development decision. "We are looking at making the pit walls steeper, running two processing lines instead of three, that kind of thing," he said. Placer Dome holds 51% of the project, Canada's Bema Gold (TSX, Amex: BGO) has 24%, and Bema's subsidiary Arizona Star Resource 25%. Placer Dome is currently in talks with a small group of banks on financing for Cerro Casale and is due to release a statement on June 30 to its JV partners as to whether the project can be financed. If no decision is made by that date, the statement can be postponed for a further three months. Under the deal, Placer Dome has to arrange US$1.3bn in financing, including US$200mn in equity and the rest in third party and subordinated debt, with the interest (adding up to about US$200mn, according to Hayes) paid by the project. The three JV partners would share equally the balance of the capital costs. Also known as Aldebarán, Cerro Casale is located at an altitude of 3,800m in northern Chile's Region III. Placer Dome's Chilean assets also include 100% of the Zaldívar copper mine and 50% of the La Coipa gold mine in Regions II and III, respectively. An interview with William Hayes on Chile's royalty debate is published in this week's "Perspectives" section for BNamericas subscribers.