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May 18, 2009

Allied Gold Starts To Prepare For Additional Production From Sulphide Ore


Charles Wyatt



Mark Caruso, chairman and chief executive of Allied Gold was at Indaba earlier this year when we last made contact. Everything was very much alright with the world and he was rushing off to lunch as the presentations had finished. His only problem at the time was that he could not find a cab. Allied had been producing gold from its Simberi open pit mine on the Tabar islands of Papua New Guinea since February 2008 and during that time debt had been reduced to a low level and his company had easily kept to its hedging agreements. The costs at Simberi were mostly in Aussie dollars so he described the situation as a ‘perfect storm’ as the gold price was up and the Aussie dollar down to US$0.66. The result was that gold in Australia was worth a near record of A$1,450/oz.
That was then and now is now. A look at the share price chart of Allied Gold shows that it topped A50 cents at the end of March and is now down to A36 cents. So why, if everything was going so well is the share price moving in the wrong direction. The answer, as often in mining, is that a problem was encountered which could not be anticipated or avoided. In a word - rain. Rain like you would not believe. In the March quarter rainfall at Sorowar, which is the deposit which provides most of the ore for processing, hit 3300 mms. The average for the whole year between 2005 and 2008 is 4000 mms and the average for this same period in the March quarter is less than 500 mms. In other words in those three months it rained nearly as much as it usually rains in a whole year and Pigiput fared little better as rain in the quarter amounted to half the average annual rainfall.

The result was bound to affect production, though not as much as might have been expected, given that it would have been well nigh impossible to transport ore between the pit and the plant. In fact 17,510 ozs of gold were produced which was down by 16 per cent on the December quarter, but about the same as September. This result says something about the forward thinking of management as a stockpile of around 70,000 tonnes of ore had been stockpiled at the Pigiput processing facility ahead of the traditional wet season and this mitigated the problem. Lower production aided by a stronger Aussie/PNG dollar meant higher cash costs at A$644/oz, but gold was sold during the quarter at A$1,253/oz so Allied was in no financial pain.

In fact it strengthened its finances significantly during the quarter by paying off its US$25 million project financing facility 21 months early and raising A$30.7 million by a placing which brought in some new and impressive shareholders. The company is still left with some of the gold hedging demanded by the banks. The hedge book has been restructured so that the remaining 60,000 ozs of gold committed at US$700/oz can be delivered in 2010 and 2011 with more than 50 per cent of the annual 84,000 ozs of gold production geared to the current gold price. This means that by 2012, when production from the sulphides is due to come on stream, Allied will be totally freed from hedging unless some new programme is introduced by the capex lenders.

Mark Caruso has just been in London to keep shareholders abreast of events and make sure they appreciated that production this quarter would mark time with the March quarter at around 17,000 ounces. This quarter will see a couple of days of down time as fine tuning continues, but this is par for the course as the recovery plant has only been operating for just over a year. The problem of a build -up of gold in the gold recovery circuit has been met by slowing down the plant, but it brought with it two benefits as there was a sharp increase in gold sales to 23,391 ozs and production should be more consistent in future. Mark also had two good bits of news for shareholders. First an updated resource estimate can be expected next month for the Pigiput sulphide ore which should push the total from both deposits in terms of both oxide and sulphire ore up towards 5 million ounces. Second, a pre-feasibility study is being carried out on potential development of the higher grade sulphides, particularly at Pigiput. If everything lives up to expectations production from both types of ore could approach 200,000 ozs by the end of 2011.

With cash flow now being generated the focus is being switched back to exploration and Allied Gold prides itself on its independence by operating its own rigs. A fifth rig has now been mobilised and this will be involved in extension and infill drilling at Pigiput. The aim is to acquire sufficient data to enable yet another resource estimate to be completed by to autumn as development of the sulphides becomes a priority. The 270 sq kms Simberi project is still underexplored and the potential is underlined by the fact that it is only 60 kms north west of Lihir in a prolific gold area. Mark is also at pains to point out that Barrick Gold is continuing to earn its interest in the neighbouring Big Tabar and Tatau islands and more assays results are expected from drilling next month. Busy time all round.