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FISCAL
YEAR 2008 – LETTER TO SHAREHOLDERS
Below is a letter written by President and CEO Stephen Kay
of International Minerals, discussing the fiscal year 2008. The
letter was filed with our Annual Information Form on www.sedar.com.
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 and CEO
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