Results of Operations
Fosterville Gold Mine Performance
Operational Performance
The Fosterville Gold mine produced 66,959 ounces of gold during the twelve months ended December 31, 2008, which was lower than production in the prior year. Upon assuming control of the mine, Northgate temporarily suspended underground mining activities in order to facilitate a review of operating procedures at the mine and provide additional safety training to its mining personnel. Key initiatives were identified to ensure the long-term success of the mine, including a conversion to owner mining from contractor mining that was completed in May 2008. A gold recovery enhancement program successfully demonstrated that substantial gold recovery improvements could be obtained by introducing a heated leach process to the process flow. Construction of the heated leach circuit was commissioned in 2008 and is expected to be complete by the second quarter of 2009.
During 2008, 540,725 tonnes of ore at a grade of 5.39 grams per tonne ("g/t") were milled. Gold recoveries in the milling circuit of 70% were significantly lower than the 77% achieved in 2007. Recoveries were negatively affected by the higher proportion of black shale ore that was processed in 2008. Once the heated leach circuit is commissioned, average gold recoveries are expected to improve to the 90% level.
Total operating costs for the year were A$59,817,000, equating to an overall unit operating cost of A$141 per tonne of ore milled. Mining costs were A$76 per tonne of ore mined and milling costs were A$43 per tonne of ore milled. Unit costs during the year were higher than plan due to the lack of accessible mining areas, which resulted in low ore production from the mine. Mine development rates were improved in the latter half of the year, as ore production is no longer constrained. Unit operating costs are expected to drop significantly in 2009 due to higher ore production and cost reductions associated with the conversion to owner mining.
Net cash cost for the year was $831 per ounce of gold, which was negatively impacted by lower than forecast gold production and one-time charges related to the owner mining conversion and the gold recovery enhancement initiatives currently underway. Now that Northgate has resolved most of the operational deficiencies at Fosterville, efforts will turn to reduce operating costs and lower Australian dollar dominated cash costs per ounce by implementing a business improvement project at the mine. In 2009, Fosterville is forecasting production of 112,000 ounces of gold at a net cash cost of $445 per ounce.
Financial Performance
Fosterville’s revenue from the date of acquisition until December 31, 2008 was $50,255,000 based on gold sales of 58,876 ounces. The cost of sales for this period was $48,433,000 and the depreciation and depletion expense was $11,301,000. The mine recorded a loss from operations for the period of $13,090,000 and utilized $1,971,000 in cash from operations.
Total investment in capital expenditures at Fosterville during the same period was $38,637,000, which includes $15,931,000 for mine development and $9,062,000 for capital leases related to the acquisition of plant and equipment resulting from the conversion to owner mining.
Stawell Gold Mine Performance
Operational Performance
The Stawell Gold mine produced 102,679 ounces of gold during the twelve months ended December 31, 2008, which was lower than in the prior year but consistent with plan. In 2009, production is forecast to be 107,000 ounces.
Since acquiring the Stawell mine, Northgate has initiated and implemented several initiatives to improve the efficiency of the mine. These initiatives include upgraded mine ventilation and cooling systems to improve the working environment and the commissioning of a new fleet of three 60-tonne haulage trucks. These larger trucks will reduce unit hauling costs and enhance the profitability of the Stawell mine.
Approximately 698,396 tonnes of ore at a grade of 5.25 g/t were milled in 2008. Gold recoveries in the mill were 87%, which were on target with plan and consistent with historic ranges. Total operating costs during the period were A$56,350,000 equating to an overall unit operating cost of A$93 per tonne of ore milled. Mining costs were A$62 per tonne of ore mined and milling costs were A$26 per tonne of ore milled.
Northgate submitted an application to the Department of Primary Industries (“DPI”) for a permit to elevate the height of the existing tailings dam by six metres (“m”), thereby extending the capacity of the tailings dam by nine years. In early 2009, the DPI approved this application and capital works have begun for a three-metre lift, which will be completed by mid-2009.
The net cash cost of gold for the year of $555 per ounce was negatively impacted by higher costs for consumables, increased activity in development advance and an unusually high amount of definition drilling to delineate future ore stopes. In 2009, Stawell is forecast to produce 107,000 ounces of gold at a net cash cost of $388 per ounce in 2009.
Underground mine development continued in the Golden Gift (“GG”) production zones during the year and the development advance totalled 5,257 m, which was consistent with plan.
Financial Performance
Stawell’s revenue from the date of acquisition until December 31, 2008 was $73,595,000 based on gold sales of 84,200 ounces. The cost of sales for this period was $46,530,000 and the depreciation and depletion expense was $22,843,000. Earnings from operations before income taxes recorded for the period was $111,000 and the mine generated $22,462,000 in cash flow from operations during the year.
Total investment in capital expenditures at Stawell during the same period was $26,336,000, which includes $14,700,000 for mine development and $5,921,000 for capital leases related to the new fleet of haulage trucks.
Mine Life Extension
In September 2008, after five months of drilling at Stawell, Northgate announced the delineation of an additional 140,000 ounces of gold reserves at a finding cost of approximately $20 per ounce, extending the current mine life by a further 18 months until the fourth quarter of 2011. Reserves were increased in all areas of the mine, through a combination of exploration drilling, resource definition drilling and grade control drilling.
The most significant addition to the mineral reserves and resources originated from the GG6 zone, where 61,000 ounces of reserves and 24,000 ounces of inferred resources have thus far been delineated. Development towards GG6 is scheduled to begin in April 2009.
A Technical Report compliant with National Instrument 43-101 of the Canadian Securities Administrators, outlining in detail these reserve additions, was filed on SEDAR on October 22, 2008.
Kemess South Mine Performance
Operational Performance
Gold and copper production at Kemess in 2008 declined to 185,162 ounces and 51.9 million pounds, respectively, as the grade and tonnes of ore mined declined. Issues encountered, which had a negative impact on production, included power outages by BC Hydro, remediation of the west wall of the pit where localized sloughing occurred, and the collapse of a buried section of the process water line connecting the process water pond to the mill. An insurance claim to recover losses related to the process water interruption has been submitted to Northgate’s insurer, but no settlement amount was accrued at December 31, 2008.
Ore and waste mined from the open pit totalled 28.3 million tonnes in 2008 compared to 42.0 million tonnes mined in the prior year and will continue to decline as waste stripping is reduced towards the end of the Kemess South mine life. However, ore milled in 2008 remained relatively consistent over the prior year as mill feed was sourced from various low grade stockpiles. In 2008, stockpiled ore rehandle amounted to 7.2 million tonnes compared to only 4.0 million tonnes in 2007. The unit cost for mining in 2008 increased to Cdn$2.12 per tonne compared with Cdn$1.76 per tonne in 2007. The unit cost increase was primarily the result of increased haul distances related to the deepening of the open pit, increased prices for diesel fuel and increased maintenance costs for mobile equipment.
Mill throughput at Kemess in 2008 was 46,252 tonnes per day (“tpd”) compared to 48,773 tpd in 2007, as a result of the mine production and mill operational issues previously discussed. Mill availability of 85% continued to be excellent in 2008 and was consistent with the prior year.
Average gold and copper recoveries in 2008 were 67% and 79%, respectively, compared with 68% and 81% recorded in 2007. While gold recoveries were slightly lower than one year ago, metallurgical performance in 2008 was better than plan on the lower grade ore that was milled.
The average unit cost of production at Kemess in 2008 was Cdn$13.51 per tonne milled, which was 3% higher than the Cdn$13.18 per tonne milled recorded in 2007. These unit costs include marketing costs of Cdn$3.14 in 2008 and Cdn$3.67 in 2007, comprised mainly of treatment and refining costs and concentrate transportation fees. The increase in unit cost was due primarily to the lower throughput in 2008, which was mitigated by the decline in 2008 settlement terms for treatment and refining charges. Although total tonnes moved was 23% lower and mill throughput was about the same, site operating costs increased 4% due to higher costs for consumables such as diesel fuel, mill steel, equipment maintenance and labour costs. The net cash cost of production was $271 per ounce of gold produced in 2008, compared with negative $22 per ounce in 2007. The increased cash cost in 2008 was primarily attributable to lower copper prices and gold production.
The Kemess South mine is forecast to produce 173,000 ounces of gold and 53.8 million pounds of copper during 2009 at a net cash cost of $517 per ounce.
Financial Performance
Revenue generated from the Kemess mine in 2008 was $304,042,000 compared with $407,734,000 in 2007, excluding the effects of mark-to-market adjustments on Northgate’s copper hedge book. Revenues declined due to lower metal sales, which were only partially offset by higher metal prices. Metal sales in 2008 consisted of 168,504 ounces of gold and 49.6 million pounds of copper compared with 259,182 ounces of gold and 69.7 million pounds of copper in 2007.
During 2008, the price of gold on the LBM averaged $873 per ounce and the price of copper on the LME averaged $3.14 per pound. Net realized prices for sales during the year were approximately $884 per ounce of gold and $2.78 per pound of copper. Since Northgate’s metal pricing quotational period was three months after the month of arrival (“MAMA”) at the smelting facility for copper and one MAMA for gold, the realized prices reported differ from the average annual reference prices. The realized price calculation incorporates the actual settlement price for prior period sales, as well as the forward price profiles of both metals at December 31 for unpriced sales. Also, while Northgate had not hedged any of its 2008 copper production, forward sales contracts for copper related to 2007 production that were settled in early 2008 also had an impact on the realized price. The average market prices for gold and copper in 2007 were $696 per ounce and $3.23 per pound, respectively, while realized prices were $594 per ounce and $3.11 per pound. All of Kemess’ gold and copper sales during 2008 were sold at market prices compared to 2007, when a significant portion of Kemess’ sales were hedged at lower than prevailing prices. The cost of sales in 2008 was $215,971,000 compared with $226,933,000 in 2007. Metals sales declined significantly in 2008, but cost of sales fell only modestly in 2008. This was a result of higher site operating costs and a stronger Canadian dollar through most of the year, which were offset by reductions in concentrate treatment and refining charges.
Depreciation and depletion expenses were $32,912,000 in 2008 compared with $33,954,000 in 2007. While fewer tonnes of ore were mined out of the Kemess South pit, the mill processed a similar volume of ore as low grade stockpiles were drawn down to feed the mill. The depreciation and depletion expense for 2008 reflects the recognition of depreciation, which had been capitalized in ore stockpiles. The amortization of most of Kemess’ mineral property, plant and equipment is based on the unit-of-production method, as ore is mined from the Kemess South pit.
Exploration expenditures during 2008 were limited to $498,000 compared with $3,369,000 in 2007 as the mine approaches the end of its reserve life.
Capital expenditures decreased to $8,076,000 in 2008 compared to $13,741,000 in 2007. The most significant capital expenditure in 2008 was $4,018,000 relating to the construction of the tailings dam.