Fiscal Year 2008 - CEO's Letter to Shareholders
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Stephen J. Kay
President & Chief Executive Officer
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September 26, 2008
What a year it has been! In the financial markets we have seen the demise of such venerable institutions as Bear Stearns, Lehman Brothers, and Washington Mutual and the bailout by the US Government of AIG and US secondary mortgage institutions Freddie Mac and Freddie Mae. A further proposed bailout (US$700 billion) by the US Government would be the largest in US history and will inject massive liquidity into the market by the US Government taking over the so-called “toxic” mortgage-based assets on the books of distressed financial institutions.
Volatility in the financial markets has also impacted the commodities. We have seen record oil prices hitting almost US$150 per barrel in 2008 and gold reaching an all-time high (US$1,011) in March, with silver at almost US$21 on the same day. Indeed during the week of September 15th 2008, gold had its largest ever one-day increase followed by its largest ever one-day decrease.
Since the peak prices for precious metals in March, we have seen prices of virtually all commodities and equities slide drastically, with the primary reason being the strengthening (some would say artificially and probably temporarily) of the US dollar. With the anticipated US Government bailout, many economists have predicted a weakening of the US dollar, which historically has correlated with an increase in the price of the precious metals.
Because of the volatility that exists in the current market environment, investors’ appetite for shares of most junior resource companies has essentially all but dried up, at least in the short-term. Equity raisings by junior resource companies, with the exception of a few Canadian flow-through share financings, are few and far between. It is likely that many of the smaller companies will not survive this market downturn. Memories of the 2000-2001 “meltdown”, when most of the junior companies disappeared, are a major worry for many companies and investors alike.
International Minerals Faring Better Than Most Junior Resource Companies
So what about International Minerals’ achievements this year? Well, it certainly has been a “mixed bag”.
The Company’s stock price was caught in the down-draft of the broader market issues and precious metal price volatility. Our current share price is essentially where it was two years ago compared to the TSX Venture Exchange Index, which, during the same two-year period has plummeted 36%, and the S&P/TSX Global Gold Index and the Dow Industrial Average, both down about 7% over that same period.
We believe, however, that our efforts and significant accomplishments of the past fiscal year and our future plans will bear fruit in the future for our shareholders. We fully expect our stock price will recover strongly in the coming months as the financial markets stabilize and we see an expected resurgence in gold and silver prices, with investors embracing gold and silver (both physically and as equity investments) as safe alternative “currencies”.
In terms of our financial health, I am pleased to report that the Company is in the enviable position of having a strong balance sheet with cash and short-term investments of over $60 million at fiscal year end June 30, 2008, with expected cash dividends commencing in 2009 from our growing 40%-owned Pallancata silver mine in Peru.
Despite the temporary suspension of all exploration activities in Ecuador in April by a Mining Mandate implemented by the National Constituent Assembly, we have completed much of the environmental permitting process for the proposed development of the Rio Blanco gold-silver project and also completed a preliminary feasibility report for the Gaby gold project.
Lifting of this suspension of exploration and mining activities in Ecuador is pending the expiry of the Mining Mandate in mid-October and the approval of a new mining law, which is expected later in October, with both these events assuming a positive result in a Referendum on September 28th to approve a new Constitution for Ecuador. Key considerations in the proposed mining law include the mechanism of a proposed sliding-scale royalty (3%-8% Net Smelter Return) and the impact of a 70% windfall revenue tax, which would remove 70% of the price upside potential in any projects. The market and the mining companies in Ecuador still require clarification of these critical issues. Please see the Company’s “Management Discussion and Analysis” (MD&A) for the 2008 fiscal year for a detailed discussion of the issues related to the Mining Mandate and the pending new mining law.
A brief update on the Company’s key projects is provided below:
Pallancata Silver-Gold Mine, Peru
In last year’s Letter to Shareholders, I announced that the Company had “officially” become a precious metal producer following the commencement of underground production at Pallancata in Peru, which is owned 40% by the Company and 60% by the mine operator, Hochschild Mining plc (“Hochschild”). As a reminder, Hochschild built the mine at no cost to the Company – quite a unique deal in recent mining history.
Pallancata has become a great success. Following the almost doubling of reserves in August 2008, Pallancata is now one of the top-two primary silver mines in Peru in terms of silver reserves.
With the planned ramp-up of mine production to approximately 2,000 tonnes per day scheduled to be completed by calendar year-end 2008, Pallancata will become one of the top-10 largest primary silver producing mines in the world, producing an estimated six million ounces of silver annually (40% to the Company). This is quite an achievement considering that production commenced only a year ago. Hochschild are to be complimented on their aggressive development of Pallancata.
From start-up in September 2008 until the end of the current fiscal year (June 30, 2008), Pallancata has produced (on a 100% project basis) over 2 million ounces of silver and almost 8,000 ounces of gold at a total cash cost of about US6.00 per ounce of silver (about US$3.50 per ounce assuming only mining, processing and mine G&A costs). Both costs per ounce of silver are net of by-product gold credits.
The Company realized net earnings from Pallancata for the fiscal year ended June 30, 2008 of approximately US$4.2 million. Because of the use of cash flow for funding of the ongoing aggressive capital expansion program at Pallancata, to date there have been no cash dividends distributed to the joint venture partners. Cash dividends are expected to commence, however, in the first half of calendar year 2009.
Rio Blanco Gold-Silver Project, Ecuador
The required environmental and production permitting for the proposed Rio Blanco underground mining operation was expected to be completed in mid-2008 but was delayed by the suspension of activities caused by the Mining Mandate. Detailed engineering, however, has been completed and the Company’s best estimate of timing for production start up is sometime in 2011, subject to the new mining law, permitting and the raising of additional financing for the project.
Initial capital costs at Rio Blanco were estimated in a January 2006 feasibility study (based on a long-term gold price of US$475 per ounce) at approximately $64 million with cash operating costs of approximately US$190 per ounce of gold. With costs in labor, energy, steel and other consumables having escalated rapidly, and expected to continue to rise, cash operating and capital costs will be much higher than originally estimated. We are currently updating the cost estimate at Rio Blanco and expect to issue these numbers before the end of calendar year 2008. We expect, however, that the project economics at Rio Blanco will remain relatively strong when using an updated long-term gold price of US$750-$800 per ounce.
Following the expected lifting of the suspension of exploration activities in Ecuador, drilling will continue at Rio Blanco with a view to expanding the reserve base of over 600,000 ounces of gold and 4 million ounces of silver.
Gaby Gold Project, Ecuador
As at Rio Blanco, exploration activities at Gaby are currently suspended by the Mining Mandate. Gaby is still one of the largest undeveloped, open-pittable gold deposits in South America and offers our shareholders significant leverage to higher gold prices.
In February 2008, the Company announced the completion of a Preliminary Feasibility Study at Gaby, including its first National Instrument 43-101 compliant resource estimate. Although the Company cannot report mineral reserves at this time for Gaby at the base-case gold price of US$650 used in the study, it must be noted that the gold resources at Gaby have grown significantly since the original prefeasibility studies were completed in late 1997.
While the results of the Preliminary Feasibility Study for a 20,000 tonnes per day mining operation show that Gaby is currently unprofitable at the base-case gold price of US$650 gold, the study did indicate that the project’s economics are significantly leveraged to higher gold prices.
Currently at Gaby, the Measured and Indicated Resources (on a 100% project basis) total 308 million tonnes at an average grade of 0.63 grams per tonne (“g/t”) gold and 0.1% copper, containing approximately 6.2 million ounces of gold and 284,000 tonnes of copper. The copper, however, is not considered by the Company to be recoverable at consensus long-term copper prices of around US$1.50 per pound.
In February 2008, the Company signed an option agreement to acquire the remaining 50% interest in the Papa Grande property that was not previously owned by the Company. This acquisition raised the number of Measured and Indicated Resources attributable to the Company in the overall Gaby Project from an estimated 3.8 million to 4.6 million contained ounces of gold (224 million tonnes at an average gold grade of 0.64 g/t).
Currently the Company is finalizing an optimization study for Gaby, evaluating significantly higher process plant throughput rates with the goal of enhancing the project economics and ultimately, if warranted, completing a final feasibility study in late 2009. In addition, following the lifting of the suspension of activities in Ecuador, drilling will continue at Gaby with a view to expanding the resource base and upgrading of Inferred Resources. With its large gold resource, Gaby remains a key project in the future growth and development of the Company.
Pacapausa Silver-Gold Project, Peru
Pacapausa is a joint venture with Southwestern Resources and Hochschild that borders the Company’s Pallancata Mine. Following the buy-out of IAMGOLD’s original 25% interest in the joint venture, Pacapausa is now held 50% by the Pallancata Mine holding company (Minera Suyamarca S.A.C., owned 40% the Company and 60% Hochschild) and 50% by Southwestern Resources.
In May 2007, results from a first-phase drilling program included a drill intercept of 10.8m grading 212 g/t silver and silver mineralization was encountered in all 11 drill holes. A 1,500m drilling program is planned by Suyamarca before the end of calendar year 2008 to follow-up on these encouraging results.
Urbaque Gold-Silver Project, Peru
The Urbaque property is contiguous with the Pallancata Mine property and the Pacapausa property.
The Company has the option to acquire a 51% interest in Urbaque from Barrick by completing 9,000m of drilling over a three-year period. Barrick has a one-time back-in right to increase its interest from 49% to 60%, and become operator, if the Company has established a total mineral resource in excess of two million ounces of gold.
Results from an initial 2,400m core drilling program completed in November 2007 included a near-surface drill intercept of 30m at 0.9 g/t gold. A 2,000m drilling program is planned before the end of calendar year 2008 to follow-up on this encouraging drill intercept.
Fiscal Year 2009 Objectives
The Company is bullish about the future outlook for gold and silver prices but as we do not try to predict precious metal prices, the Board of Directors and management remain fiscally conservative and prudent in managing the Company in any precious metal price environment. All of our employees, the Board of Directors and senior management are committed to building value in our Company for the benefit of our shareholders.
During fiscal year 2009, the Company's exploration and development efforts are expected to focus primarily on:
· Expanding mine production at the Pallancata Mine, working with our partner, Hochschild. Pallancata is expected to produce significant cash flow for the Company in the second half of fiscal year 2009;
· Obtaining required environmental and production permits for the construction of a gold-silver mining and processing operation at Rio Blanco. The Company hopes to complete permitting in the first quarter of calendar year 2009, pending the approval of a new mining law, and commence construction about three months later, subject to additional financing;
· Optimizing the tonnage throughput, expanding the resource base and upgrading of Inferred Resources at Gaby.
· Follow-up drilling at the Pacapausa and Urbaque properties in Peru under the joint venture agreements with Southwestern Resources and Barrick respectively;
· Seeking near-production or production projects and/or corporate acquisitions to supplement our pipeline of advanced projects and to increase our cash flow; and
· Additional strategic joint venture alliances, such as that with Hochschild at Pallancata and Pacapausa, in order to advance projects with reduced additional cash outlays by the Company.
On behalf of the Board of Directors, I want to thank the Company’s employees and consultants for their efforts during the year and the Company’s loyal shareholders for their continuing support in the current challenging financial climate.
Sincerely,
Stephen J. Kay
President & Chief Executive Officer
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