Our recent interview with Bob Quartermain was very popular, so we decided to continue the series with a look at Banks Island Gold (V.BOZ), which, being close to small-scale, but high-grade production is not a typical exploration company. We sat down with CEO Ben Mossman to explain what he’s working on and why.
L: Ben, tell us a little bit about Banks Island Gold and what you are up to. It's a little exploration company with big dreams.
Ben: Well, I think that for us it's not a dream; it’s going to be a reality soon.
L: Good comeback.
Ben: We have two projects. Our first is called Yellow Giant. We are putting that into production on a small scale this year. We have a full-scale camp, we've finished the roads, mine portals on three of the mineral zones, and are assembling our processing plant right now. Now that we've raised the money we needed to finish building the mine, we’re going underground and will achieve production by the end of the year.
It is on a small scale right now, but the property has a lot of potential for more discoveries, and it had only been drilled to 100 meters below surface on four zones. The current resources were found by Falconbridge in the 1960s - very little work has actually been done on it. We were confident that we'd find more gold, so we purchased our own diamond drill last year, and we have our own crew out there. They are drilling full time and have already hit new high-grade gold zones well below previous intersections in the Kim zone, including three meters of 9.4 g/t gold, and 12.7 meters of 9.8 g/t gold before that.
L: So little Yellow Giant is already getting bigger?
Ben: Yes. Last year we drilled 6,000 meters in the main zones - those were infill drilling or verification holes, because the historical data was fairly old. We needed a good metallurgical sample for designing the mill as well. Our crews are very productive and cost efficient and are achieving a minimum of 3,000 meters per month. We will be putting out a steady flow of drill results over the coming months and year, and expect to show that all the zones are bigger than previously known with the end goal of outlining a major deposit.
L: You're supposed to wave your arms when you say that: "It’s thiiiiiis big!"
Ben: Yeah, well, we've stepped down our last holes to 200 meters depth, and we hit gold. If those intercepts keep coming, it could make the resource a lot bigger very quickly.
L: That could be a game-changer for you. One of the criticisms of Yellow Giant is that it isn't a giant. It's high grade, it's right near surface, but it's small. Your drilling could change that in the near term.
Ben: Yes, it could.
L: "Could" being the operative word.
Ben: Yes. We don't know for sure, but the early results have already shown that the known zones run deeper than previously intersected, and there are many showings scattered over an area nine kilometers long that have never been drilled.
L: I remember kicking rocks on some of them - literally. Big chunks of quartz, gaudy with pyrite, just like where you have good gold grades. But no drilling nor even trenching was done.
Rocks kicked by your analyst on Banks Island last year. That's mostly pyrite (iron sulfide), not gold, but in this deposit, pyrite and quartz correlate well with gold. Seeing so much of this material in undrilled areas across the property was one reason we were willing to speculate that Yellow Giant might one day live up to its name. Check out the company's Yellow Giant photo gallery.
Ben: The prospectors who found the first zones basically did about twelve months' work in an area of 5,000 - with no roads at the time. They were flying in on float planes and using backpack drills to sample, so Yellow Giant has never really seen anywhere near the exploration that the many showings deserve.
L: But you're an engineer, not a geologist. How do you know where to look?
Ben: Well, Dirk Meckert, our chief geologist, knows what he's doing - and the drill results are bearing him out. We think the mineralization is structurally controlled; there is definitely a pattern which is becoming clearer to our team. And remember: the grades are very high. Our resource averages 23 grams per tonne gold in the Measured and Indicated categories, so doesn't take a lot of that to make it big - or profitable.
L: I remember Dirk predicting which sections of drill core would run when I was on site last year, and I remember that when we finally got the assays, he was right. But I notice that the average grade in the new drill holes, though high, is well below the 23 g/t of your M&I resources, and some of the deeper hits in the Kim zone were pretty narrow. Would that still work?
Ben: The Kim zone is a bit different than the other zones at Yellow Giant. In general the grades are lower at Kim as the mineralization is spread over a greater width. However, the ground conditions and mining widths are ideal for high-production mining at Kim. On a cost per tonne basis, we expect the Kim zone to be superior to the other zones with the most obvious potential for resource growth in the short term. Keep in mind that this is still a very early stage of drilling. The Kim structure is over a kilometer long, and we are only drilling at 200m depth. I expect that we will be drilling on the order of 60,000 meters here over the next three years, just to properly test the Kim structure - more if we are successful in extending the deposit further to depth.
L: Meanwhile, you're assembling your dense media plant, you have a buyer for your concentrate, you have mine portals in and are tunneling - can you say how long before you start processing ore?
Ben: We expect to commence underground mine development and have the Dense Media Separation Plant commissioned by the end of September. We will be producing concentrate by October and reach full production of 73,000 tonnes per year in January 2014, when the first long-hole stopes from the Bob zone are mined.
L: So, not to put you on the hot seat here, but your preliminary study assumed $1,360 gold, which is back in the money at the moment, but was above spot not so long ago… Are you sure the project is still profitable?
Ben: There is a sensitivity study in the 43-101-compliant technical report on the project. Gold can go down to $1,000, or even $800, and Yellow Giant would still make a profit. Yellow Giant was designed as a low-CAPEX high-return project. This is a trade-off that increases operating costs. Once we are generating cash flow, we can make further improvements to the cost structure. This would include increasing concentrate grades by adding secondary processing circuits, asset purchases instead of rentals, and optimization of costs through experience gained at site. Past that point, you have to increase production or grades to maintain profitability. In a small mine, a lot of the costs are fixed costs, so you rely on the margin from the high grade. At the moment, the throughput is planned for just 200 tonnes a day. However, the mines and plant are scalable, so they would require fairly limited capital to achieve significantly higher production rates.
L: Which makes the drilling you're doing even more important.
Ben: Yes, the exploration program is very important. We have been successful in achieving a very favorable cost structure for our exploration drilling, which increases our chances of discovering new mineral resources. Starting on a small scale also has some unique advantages for mine permitting. It is quick to get in production because of the relatively simple permitting for a small operation. As mining progresses, our company gains credibility, a good reputation with regulators, and collects very important environmental data which allows more timely permitting of future larger scale operations than a typical "greenfields" project.
L: You can show the regulators: "Look, we are doing no harm."
Ben: Exactly. It makes it simpler to permit a larger scale mine.
L: Okay, so that's Yellow Giant. What about Red Mountain?
Ben: Red Mountain is a much larger project that’s had a lot of money spent on it. It was developed by major mining companies in the '90s, including Lac Minerals, Royal Oak, and Wheaton River. We have an option to purchase it from Seabridge Gold, and this summer we are focusing on engineering work to bring the project into production once Yellow Giant is established.
When we first took it on, we envisioned an 1,800-tonne-per-day mine, which was a good project with a good return. But the capital cost was $163 million, which is tough in today's market, so we are looking at ways to reduce capital costs and increase the return on investment. That means mining on a different scale and accessing the ore in different ways. The drill results we just announced from Red Mountain are important because they confirm high-grade mineralization where we expected to find it from the historical data, but also because they support our theory of different grade envelopes.
L: I saw that: 6.3 g/t gold over 52.5 meters is a great hit.
Ben: Yes. But what's more important is that we think we can put a smaller mine into production, and take some of the higher-grade core without rendering the lower-grade halo of gold uneconomic in the future. You will notice that the two holes we drilled this year showed the continuous core of the zone has grades ranging from 22 g/t to 32 g/t gold. This is very high margin material and would let us generate serious cash flow at the same time as developing a much larger operation. The larger intercept over 53 meters shows the scale potential of Red Mountain, and our operation at Yellow Giant will provide veteran employees to put the project into production quickly and efficiently.
L: I had been expecting you to put off any serious work on Red Mountain until after you got to cash flow at Yellow Giant, but you're going ahead full speed-do you have enough cash for that?
Ben: Well, we had a $1.5 million property payment on Red Mountain due last month, but Seabridge has agreed to push that payment back until January of 2014. In exchange we gave them 250,000 shares. It's not strictly in the agreement that we have to advance it, but the reality is that we have to show the value of the property to raise the payment. We know it is a great property. The work we're doing should make it a more financeable project.
Ben Mossman checks his maps by the snow-buried portal on Red Mountain - a project that does live up to its name. More important, the project has already some development work in place, and even some mining equipment left behind that could be refurbished. A fresh look at the economics of the project on a smaller scale should produce some excellent numbers. This video recently produced by the company showcases the drilling at Red Mountain.
L: That's interesting. I wasn't worried about Yellow Giant, because I know you have built mines before and I believe you can get the job done there. But I have to say I was worried about the Red Mountain property payment, and having maybe more on your plate than you could deal with. But Red Mountain was always the big upside in the BOZ story; it’s already a much bigger project, with clear indications of larger resources within reach. I'm glad to hear that you’re moving ahead. One piece at a time.
Thanks for the update, Ben. We appreciate your insight, and wish you good luck with your work on both projects.
Ben: Thank you; my pleasure.
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