Huge Mineral Reserves Could Recoup $2.46B Capital Cost in Three Years of Production
Paul West-Sells says it's the most exciting project he's worked on during a long and successful career in the international mining industry. The president and chief operating officer of Western Copper and Gold is talking about his company's massive Casino Mine project in an isolated region of Canada's western Yukon Territory.
Proven reserves of precious metals abound in the rolling hills of the semi-arid site, 380 km northwest of Whitehorse. New estimates of recoverable minerals include 8.9 million ounces of gold and 4.5 billion pounds of copper. In its first four years of full production, starting in 2019, annual output is projected to be 399,000 ounces of gold, 245 million pounds of copper, 15 million pounds of molybdenum and 1.8 million ounces of silver.
Western Copper and Gold thinks it has figured out a way to extract this earth's treasure at a rate, and at a price, that will reap rich rewards. Investors seem to think so, too. Recent developments, including the release in early January of a strikingly positive feasibility study, saw company shares rise above $1.50 from just 80 cents a month earlier.
If West-Sells' vision proves true, the Casino mine would have an enormous impact on life in Yukon, and its benefits would be felt much further afield. Lives would be changed. Business opportunities undreamt of among remote First Nations communities would materialize. Politicians, particularly in Yukon, would see a substantial boost to public revenues.
Brad Cathers, Yukon Minister of Energy, Mines and Resources, said Western Copper and Gold's feasibility study was a "clear indication that Yukon is a preferred destination for mineral investment, and that our invest- ment climate remains attractive and robust."
Stressing the importance to the people of Yukon of a clean environment, Cathers said: "We're confident our environmental assessment and permitting regime provides conservation of the environment and sustainable development and will do so in the context of the Casino project." But Cathers also noted: "We can expect challenges related to the success of this project such as population growth, housing demand and effects on local infrastructure such as roads."
Yukon has permitted three new mines since 2007, creating more than 750 direct new jobs and numerous in direct jobs. Yukon's GDP growth was among the highest in Canada in 2011. "There is no doubt that the development and operation of Casino will have a monumental effect on Yukon," Dale Corman, Chairman and CEO of Western Copper and Gold, said when an independent report on the cumulative economic effect of the Casino mine was published early last year.
The report estimated that construction and operation of the mine would contribute $9.8 billion to Canada's GDP, create 55,000 full-time equivalent positions and gen- erate $2.8 billion in wages and salaries. Just building the mine alone would boost GDP in Yukon by a staggering 19 percent - income that would continue throughout the 22- year projected life of the mine, with annual revenues to the territorial government amounting to $371 million each year.
But the impact of the mine will go beyond mere balance sheets and into the everyday lives of Yukoners. Dale Corman says additional benefits will include training and educational opportunities, and increased support for local development and infrastructure. Over the past two years, Paul West-Sells has made a personal commitment to support the aspirations of First Nations communities in the area, spending time with local chiefs and councils explaining the Casino project.
The company's task is made somewhat easier by the fact that Yukon has settled most land claims with First Nations, whose rights have been clearly defined. "When we go forward through the environmental assessments, our duties to consult and engage with First Nations are very clearly laid out," says West-Sells. "It is important for us to ensure the First Nations understand the project and have input into it."
He looks forward to "exciting possibilities" involving local high schools training young people to catch the economic waves Casino will trigger. "This is a big mine," he says. "It will employ a large number of people." In fact, the mine is expected to employ around 1,600 during construction, and around 600 when production hits its peak.
But there will be other, different opportunities. "Rather than just having a job at the mine, we can train people for opportunities to contract into the mine, or to set up small businesses to support various aspects of the mine," says West-Sells. "We can start to look at bringing that kind of training into high schools very early."
Whitehorse businessman Jason Rayner, first vice- chair of Yukon Chamber of Commerce, says the spin-off benefits for the economy are that, for each person a mining company employs, an average of 1.25 positions are created inthe private sector for support services.
Although the life of the Casino mine is initially set at 22 years, West-Sells says the "inferred" resource could keep the mine going for 50 years, meaning economic opportunities spanning multi-generations. Before all this happens, however, there are government permits and licenses to be secured, a task that will fully occupy the company over the next three years. West-Sells is optimistic that, provided the company gets its homework right, there will be negligible opposition.
"Yukon is a mining friendly area," he says. "Yukoners understand the positive effects of mining. But, there are going to be lots of questions and it weighs on our shoulders to ensure that people understand that our commitment is to absolutely minimize the impact of Casino on their environment.
This is a world-class mine that is going to be built and operated in a world-class manner." There are also some world-class challenges. First among these is power. There is none. The Casino mine is prohibitively distant from Yukon's power grid. Even if it were not, the grid couldn't match the need. Casino will consume more power than Yukon Energy's current total output.
Initially, Western Copper and Gold considered a coal- fired generator. But January's feasibility study revealed a different strategy, likely to become increasingly popular in North America, given the abundance of natural gas.
Company vice-president of engineering Cam Brown has outlined plans for a $209-million, 170-megawatt, on-site power plant fuelled by natural gas, asserting that it will provide a "robust, efficient and economical power supply" at a bargain rate of 9.5 cents per kilowatt/hour.
Liquefied natural gas for the plant will be hauled on heavy trucks from Fort Nelson, B.C., a city that has become a natural gas hub for a huge area of northwestern Canada. The 16-hour journey of some 1,225 kms is mostly along existing highway, but the final 120km stretch to Casino today is just a dirt road. Western Copper and Gold will spend $100-million upgrading this track to an all-season highway. Even the massive 350-tonne haulage trucks are expected to run on natural gas, using a technology still under development.
The new road is only one component of a total initial capital investment in the project estimated at $2.46 billion, including the power plant. Other major expenditures are for mining equipment and mine development ($454 million), a concentrator ($904 million) and a heap leach operation ($109million).
As huge as the required investment is, Casino is such a rich prospect that the capital costs could be recouped within three years of the start of production.
West-Sells points to the feasibility study indicating a 20.1 percent after tax internal rate of return (IRR) and an after tax net present value of $1.83 billion, using an eight-per-cent discount rate. The numbers are based on long-term metal price projections of US$3 per lb copper, US$14 per lb molybdenum, US$1,400 per oz gold, and US$25 per oz silver.
Could these numbers change dramatically enough to jeopardize the Casino project? West-Sells thinks not. "Typically, you look at a 15-per-cent IRR for a project to be considered robust," he says. "We have a fair bit of breathing space if we see a pullback in commodity prices. But I certainly don't believe we are going to see gold below $1,400, or copper below $3, any time soon."
Assuming all its projections are on track, and all necessary permits are secured, Western Copper and Gold still faces the challenge of raising the billions of dollars needed to build its mine. A pre-Christmas deal involving an unnamed company put $32 million in Western's bank account in exchange for a future share of royalties.
As a result, says Dale Corman, "we have sufficient financing to take us through basic and detailed engineering and permitting. We don't expect to have to raise money on this project until it's time to build it, or have someone else build it. We're not expecting to have to do any serious financing from now through 2016."
As importantly, the pre-Christmas deal sent a powerful message to investors: "It helps to affirm the tremendous value of the project," says West-Sells. "They (the undisclosed company) don't get paid unless the project goes into production." At some point, however, the company will face financial reality.
"Our primary focus is to get this project into permitting," says West-Sells. "Parallel to that, we will begin to look very seriously at how we can finance it. There are several options. One is to sell to a larger, better-financed company. Another is to bring in a strong partner. A third option is to build a heap leach initially and slowly ramp up production. But that's not the way we want to go, and I would be surprised if we took that route."
West-Sells says investors should be impressed by the fact Casino now has a feasibility study with proven economics at "very conservative" long-term prices. "As we bring the project closer to getting built, we can expect to start seeing higher valuations. That's why it's an exciting time for investors. They have an opportunity, with the pullback in the market, to get in on a project that is trading at a very low multiple to where it should be.
"The Casino project really is an exciting project. Yukon is a great place to be and to work, and I think this mine is going to be a great asset for the North."