Crew Gold Corporation

Source: Energy Digital

Date :6/27/2007 7:22:40 AM

Making it to midsize

It’s a good time to be a gold mining company. Prices are high and prospects are good. But it is a cyclical business, so if it was going to grow to critical mass Crew Gold knew it would have to move fast

Written by John O’Hanlon: produced by Alex Smith

The present-day Crew Gold Corporation was born out of the Vancouver-based Crew Development Corporation in March 2002. CDC was a mixed minerals group that included gold mining among its activities, but the shareholders wanted to focus on gold, so forced a change in both the Board of Directors and the senior management. The new management placed a strategic focus on developing and operating gold and other assets directly owned by the Corporation

In 1999, Crew Development merged with Mindex, a Norwegian company that had nickel mining interests in the Philippines and was led by Jan Vestrum, now President and CEO of Crew Gold. Following the merger, in 2000 it de-listed its shares from the Canadian Venture Exchange and continued to trade on the Toronto, Oslo, Pacific, Frankfurt and Stuttgart Stock Exchanges.

Today Crew Gold is dual-listed on the Toronto and Oslo stock exchanges, and focuses entirely on gold production, though it retains a 41 percent interest in Crew Minerals AS which continues to develop nickel and other metals projects. Crew Gold’s headquarters are no longer in Oslo or Vancouver, but in Weybridge, Surrey.

Growth aspirations

Gold mining companies categorise themselves as junior or senior depending on their annual production expressed in troy ounces (a fraction heavier than the avoirdupois). If it depended on its first producing mine, Nalunaq in Greenland, which is expected to produce up to 100,000 ounces this year, it would remain firmly in the junior category. The senior companies are those producing over a million ounces annually like AngloGold Ashanti formed in 2004 by the merger of AngloGold and the Ashanti Goldfields Corporation, or Barrick, now the world’s largest, which produced 8.6 million ounces in 2006. However Crew Gold intends to establish itself as a mid-tier player, aiming to produce a total of 550,000 ounces in 2007.

However, as the company’s Chief Operating Officer Simon Booth explains, size isn’t everything in the gold mining business. “It is all about margins – how much does it cost you to produce an ounce of gold?” Currently gold prices are around $650 per ounce and in the year to June 30 2006 Crew Gold had average costs of $431 per ounce. That’s a lot higher than the seniors pay, but Simon’s principal objective is to get that cost down, and as we shall see investment in the resources will be directed toward this end. “We have found it easier to attract good people as we have raised our profile in the industry,” he says. “We have a more elegant approach to finance and have developed a supportive shareholder base. They understand where we are heading.”

Going forward, the strategy is fairly straightforward as explained by Brian Spratley, Vice President of Project Development. “We have financed our programme of acquisition from our shareholders and are hoping to fund development increasingly from existing operations.”

Spratley stresses that the company was created out of three critical elements, the right people, the best assets and the right financial structure, “We put together a leadership team that shared a clear view of where we wanted to be in five years’ time.”

Nalunaq

The first priority for the new senior management team led by Jan Vestrum was to complete the development of the company’s asset in Greenland and to get it into production. That was achieved in 2004.

Nalunaq Mountain is in south Greenland, where the climate is mild enough to allow year round operation, though ice has occasionally delayed the ships that take the ore away fro processing. The mine, Greenland’s first, was officially opened on August 25 2004 after nearly ten years of exploration and development, and has been under continuous development. In the year ended June 2006 the company invested $2.5 million in Nalunaq, and in the same period it produced more than 74,000 ounces of gold out of 42,000 tonnes of ore.

But the need for upgraded equipment was slowing down production by the end of last year and further investment this year is addressing that, with the delivery of an additional long-hole drill rig, replacement scoops and larger 20 tonne underground trucks as well as ancillary mobile equipment. The equipment has to be planned so that work on the extension of the mine could be balanced against the need to sustain ore production, says Simon Booth.

The cost of gold production is directly related to the grade of ore mined, and at Nalunaq this key ratio improved by nearly 20 percent during 2006, from 15.9 to 19.5 grammes per tonne. All this had to be shipped off to Spain for processing at the El Valle plaint of Rio Narcea Gold Mines, however the plant was scheduled to be closed at the end of last year, and Crew Gold had to look for an alternative. The production target for Nalunaq is between 80,000 and 100,000 ounces per annum.

Nugget Pond

On October 27 2006 Crew Gold acquired a processing facility in Newfoundland from New Island Resources and immediately put in place a $9 million refurbishment programme aimed at modifying the plant to handle the ore from Nalunaq. This process was complete by March this year, and the plant is no operating at full capacity.

The Atlantic crossing to the new facility is a mere 600 miles from the mine, half the distance to the old Spanish plant, and will provide Crew Gold with quite a few additional benefits. It is a long term solution to the problem of milling the Nalunaq ore that gives Crew control over these processes, the costs and the continuity of production – processing costs alone will be halved over the long term. It also gives the company the option of selling the capacity at Nugget Pond to third party operators on the Eastern seaboard of the USA and Canada, as well as the ability to create a stockpile of ore to ensure continuous gold production.

Lefa - the big mine

In December 2005 Crew Gold acquired Guinor Gold Corporation, which operated the Lefa Corridor gold project in Guinea, for $331 million – the following year it bought the 15 percent holding the government of Guinea had retained. With a potential annual gold output of 350,000 the Lefa mine is the main building block that will take the company into the mid-tier, half a million ounce-plus bracket that it wants to occupy. “Nalunaq was the first step, taking us from being purely an exploration company to the status of a junior producer – by the end of this year we expect to have enough capacity to ensure that we can produce more than 550,000 ounces of gold a year,” explains Brian Spratley.

Without getting too technical, over the eleven years of its operation the Lefa mine had been operating the ‘heap leach’ system to remove the gold from the ore. In this chemicals are passed through the crushed ore then drained off for processing. Crew Gold has so far invested $194 million to convert the mine to a CIP (carbon-in-pulp) system which passes the ground ore through tanks using activated carbon to collect the gold. It’s cheaper, quicker and more efficient, explains Simon Booth, however the conversion was paced to allow the local staff to be retrained.

Gold mining companies have in the past had a bad press for the way they have impacted local communities socially, their HR policies and of course their environmental impact. Accordingly corporate social responsibility has been place very high on the agenda as Booth was anxious to make clear. “We could have pushed the CIP development faster, and got the production levels up quicker, but we decided that we had to give our people there the chance to adapt.”

Lefa, unlike Nalunaq, is an open pit mine, so it does involve disturbing large areas of forested land. Under a Convention de Base, or ‘Foundation Agreement’ that regulates mining activities in Guinea, the government is paid royalties on gold exported and there is a local development tax. Furthermore the mining company is committed to ‘adopt and progressively implement a plan for the effective rehabilitation of the mining areas disturbed or affected by operations.’ To meet this liability Crew Gold set aside more than $1million in 2006 for environmental protection and reforestation. This direct support is backed up by the provision of employment to over 500 residents and a number of initiatives – including a new school and other educational support – that improve their living standards.

The provision of electricity to the town is being undertaken by the Crew Gold in collaboration with the government and another mining company. It has built a clinic and employs doctors and nurses. “The local villages at Lefa used to be just a few huts – now they are a community of 40,000 people,” says Booth.

The Philippines

In 2005 Crew gold acquired the majority of a gold mining company in the Philippines called Apex and with it the Masara gold mine on Mindanao. It had been worked on in the past but not systematically assessed or drilled, and following an independent resource assessment it was concluded that it could have an annual production yield of up to 200,000 ounces. It seems to have been a very shrewd investment: in April, following a programme of drilling in preparation for full scale production, the company was able to announce that there could be as much as 60 percent more gold in the mine than previously thought. It also contains considerable resources of silver.

The historic working on the site and the presence of small scale local miners in the area complicates the environmental picture around Masara, says Simon Booth. These operations aren’t regulated and have polluted the local rivers. However the new operations will meet the most stringent international criteria, with a safe storage facility for the ‘tailings’ – the residual water, which can contain chemicals, notably cyanide, used in the process. “It is so important to get the local community behind you,” he says. “In the Philippines, where we have a track record, people tend to say that as long as Crew is involved they will support the development. We have built a school there, and a cellphone mast, so the local community benefits in many ways.”

In the long term Crew Gold wants to become a million ounce-plus gold company, says Brian Spratley. Current resources and organic growth are expected to take it comfortably to the 700,000 level. In this business, he says, cash flow is as important as the top line figures. But as Jan Vestrum concluded in his introduction to the June 2006 annual report: “I strongly believe the best is yet to come.”