Message to our Shareholders

 

Fiscal 2016 was a dark year which ended in promise. We started the year with the SP/TSX Venture Composite Index continuing its painful decline reaching an all-time Index low of 484 in January 2016 from its buoyant highs of 2,464 in 2011. Mining companies continued their focus on cost reduction slashing exploration budgets and deferring capital projects while exploration / development firms, such as Atacama, continued to hunker down to wait out the unprecedented bear market. Then in early 2016, the sector started to see a glimmer of hope with the gold price coming off its seven year low in December 2015 and maintain a steady rally. Now, as we write this letter, the gold price is around $1,350 per ounce, mining and exploration company equity prices have increased significantly and the precious metals indexes are the best performing indexes in 2016. It appears that we have seen the beginning of the end of the brutal five year bear market which devastated our industry.

As we noted in our 2015 Letter to Shareholders, the key to managing the bear markets is preservation: “the preservation of capital and the preservation of key assets so as to capitalize on the next upswing in gold prices.” At Atacama, we have done, what we consider, an excellent job of preserving our inherent value. Over the past few years, we kept expenditures low with key management personnel deferring salaries so that we could preserve our cash position and keep dilutive equity raises to a minimum such as to maximize the value of our Cerro Maricunga oxide gold deposit for our shareholders.

The Cerro Maricunga deposit, located in Chile, is a world class oxide gold deposit representing one of the largest undeveloped oxide gold deposits in the world with proven and probable reserves of 3.74 million ounces of gold in 294.4 million tonnes of ore at a grade of 0.40 grams per tonne gold. The inherent value of the deposit is clear and the costs to maintain the project going forward are minimal. The next major expenditure is related to a feasibility study which we would like to commence in late 2016.

Our August 2014 Prefeasibility Study revealed the economic potential of Cerro Maricunga outlining a 280,000 ounce per year heap leach project (first 8 years of production) with a 13 year mine life and an after-tax IRR of 25% and NPV5% of US$410 million. These figures were derived from a $1,350 per ounce gold price which over the past few years may have seemed aggressive but now, with gold prices back in the $1,350 per ounce range, appears reasonable.

The PFS outlined initial capital costs of $398.9 million, including $46.5 million in contingencies, for the construction of an open pit mine and heap leach processing facility that would produce 2.96 million ounces of gold. At current $1,350 per ounce gold prices, Cerro Maricunga has an undiscounted net present value of $852.4 million.
The 2014 PFS highlights included:

  • Average annual production over the first 8 years of 281,000 gold ounces
  • Average life of mine cash costs of $683 per ounce
  • Payback on initial capital of 3 years
  • Strong total operating cash flows of $1.27 billion

Cerro Maricunga has a number of positive technical features which drive the strong economics. A high 80,000 tonnes per day mining rate combined with a low strip ratio, 1.76 to 1, keeps costs low. From a processing view, the PFS envisions heap leaching which, combined with relatively soft rock, further keeps costs to a minimum.

While the 2014 PFS showed robust project economics at $1,350 per ounce gold, the figures should continue to improve as the input costs in Chile have declined significantly over the past few years. Fuel and electricity prices are both down approximately 40% and the Chilean peso has devalued approximately 10%.

Our focus going forward is to reduce the upfront capital requirements of Cerro Maricunga. We are considering eliminating the secondary and tertiary crushers and associated infrastructure along with moving the processing facilities closers to the open pit and changing from a heap leach operation to a valley fill leach. These changes alone have the potential to eliminate $130 million from the initial capital costs delineated in the PFS. Further, implementing a stage development plan could also positively impact initial capital requirements. Determining the impact of these potential capital reductions will be the focus engineering work over the remainder of fiscal 2017.

Last year, we announced the acquisition of a small copper mine north of Santiago. The operation, which produced 40 tonnes of high grade copper gold silver concentrates a month, was leased from Los Vilo’s S.A. which is owned by Atacama’s Chairman. With the sector’s improvement over the past few months, we have returned the property and are now preparing to focus on moving Cerro Maricunga forward.

We must thank all our Directors for their input and commitment to Atacama Pacific. It is unfortunate that Steven Butler has had to leave the board due to his recent employment at a financial institution. We will miss Steven’s dedication and input and wish him all the best in his new position. Joining the board this year is Robert Suttie who brings significant financial acumen to the board with his long history as a CFO with a number of junior explorers. We look forward to his contributions.

As we come to a close, we again thank our employees and consultants who have worked with us over the past years to move Cerro Maricunga from an exploration concept to one of the largest undeveloped oxide gold projects in the world. Further, we thank all of our shareholders and stakeholders for your continued patience, dedication and support over the past 12 months. We trust your patience will be rewarded as the markets continue to improve and Cerro Maricunga’s value is appreciated.

Sincerely

Carl B. Hansen
President and CEO
July, 2017