May 25, 2010

Rusoro Plans To Be Producing Over Half A Million Ounces Of Gold Per Year By 2012, Providing President Chavez Can Offer A Decent Gold Price

By Charles Wyatt

The name Rusoro means Russian Gold, and it is important to take this on board at the outset, as the Agapov family, which set up Rusoro, has been operating in Venezuela since 2002. Venezuela under Hugo Chavez is not the easiest country in which a North American company can operate, as several, such as Gold Reserve Inc and Crystallex, will attest. In his old fashioned socialist way, however, Hugo likes the Russians and it is clear that he visualises Rusoro playing a role as a quasi state mining company. The company has kept to all its promises and is now looking at producing at a rate of over 500,000 ounces of gold before the end of 2012. This is quite a stride from 2009, when it produced 150,460 ounces at a cash cost of US$338 per cent, and that was done at virtually half the cost at which the company had mined in 2008. Last year, it’s true, production fell a little short of expectations. And it was this shortfall that presumably has led, in part, to the fall in the share price from around C60 cents back in December to the present C24 cents.

Last year also Rusoro completed a scoping study to evaluate the potential for expanding its Choco 10 gold mine and the nearby Increible 6 deposit, and the results of this study certainly gave support to the 500,000 ounce target. The study showed that an additional 15,000 tonnes per day processing capacity, taking the total up to 20,000 tonnes per day, would boost production to an average of 558,200 ounces per year at an average cash cost of US$331 per ounce over a 12 year mine life. The cost of such an expansion is estimated at around US$208.5 million, with a further US$30.8 million in contingencies. The study also anticipates that this sum could be paid back in 2.1 years, and shows that at a gold price of US$850 per ounce the project has a net present value of US$749 million at an eight per cent discount rate. The internal rate of return should be 120.7 per cent after tax.

Not bad, especially when the gold price is now US$1,185. Andre Agapov points out that there aren’t many gold projects in the world that compare with it in terms of production, low costs and length of mine life. He reckons that the expanded Choco10-Increible will be in the Top 25 in the world, and that that will do no harm to the reputation of Rusoro in Venezuela. The definitive feasibility study is due for completion before the end of next month, and this will doubtless be even more positive as the capital spending programme will have been optimised.

In the meantime, Rusoro has just announced positive results from a pre-feasibility study on the combined San-Rafael and El Placer project (SREP), production from which will also feed into the Choco 10 mill. This high grade deposit has a resource estimate of 639,000 tonnes grading 19.41 grammes per tonne for 399,000 ounces in the indicated category at a cut-off of eight grammes per tonne, as well as another 525,500 ounces inferred at a grade of 23.16 grammes per tonne. The probable reserve is 1.157 tonnes grading 10.1 grammes per tonne using the completed mine plan designed to exploit the indicated resources. It is comparatively small beer as the SREP deposit is only expected to produce 319,456 ounces over a six year mine life, with a peak production rate of 76,000 ounces in 2014, but the life of mine cash cost will be only US$324 per ounce.

Useful cash flow nonetheless, as net income from the project, after tax, should amount to US$51.9 million over the period, and those numbers were worked out using a gold price of only US$950 per ounce. The cost of putting SREP into production has been estimated at US$47.1 million, and the payback is only three years. It will be an underground operation, and Rusoro has been developing the mineralised zone for two months already, shipping the ore to the Choco mill for processing, in order to glean information on the continuity and metallurgy of the zone.

Last year Rusoro sold 104,036 ounces of gold at US$696 per ounce, well below the world price. In January of this year President Chavez introduced changes to the exchange rate policy by devaluing the Bolivar from 2.15 to the US dollar to 4.3 to the dollar, which increased the value of the company’s gold inventory in local terms, according to Andre Agapov. The aim was to stimulate the economy and it certainly helps that Rusoro is now allowed to use a significantly improved 30 per cent of proceeds from exports to cover foreign costs.

Whether this means that it can export 30 per cent of gold production to get the world price has yet to be tested. At the moment President Chavez demands that it is sold to the Central Bank of Venezuela at a massive discount which means that though the company expects to produce 142,000 ounces from Choco and Isidora this year it will only get around US$613 per ounce. Hardly the way to treat a partner. Andre Agapov tactfully says that some of the uncertainty has now been dissipated, but the time will come when Hugo Chavez has to face the fact that he is strangling the goose before it starts to lay the big golden eggs. No use doing feasibility studies at US$950 gold when that is not within a country mile of what you are going to get. Mr Chavez and Mr Rudd of Australia should take some lessons in the practicalities of running mining businesses.