High on Tibet

SITE VISIT

Shigatse, Tibet Autonomous Region, China — With the Chinese government looking to use Continental Minerals’ (KMK-V, KMKCF-O) Xietongmen copper-gold deposit as a template for future foreign mining deals in Tibet, there’s a lot riding on the junior’s successful advancement of the project to production.

Recent large-scale infrastructure initiatives undertaken by the Chinese government have opened up the remote region to prospective development by both domestic and foreign firms.

Continental looks to tap into the Tibetan mineral potential to feed the region’s voracious appetite for metals driven by sustained economic growth.

“Five years ago, I would not be talking about this project — there was no rail, there was no road, there was no electricity. It all happened in the last five years,” says Continental president and CEO Gerald Panneton.

“What makes this project economic is that between 2000 and 2005, they (the Chinese) built a railroad between the town of Golmud and Lhasa, and it is to be extended all the way towards the project,” Panneton continues. “What this does, because of the existing rail system that you have in China, is give you access to all the smelters.”

Continental Minerals entered its Chinese venture in early 2004 with an agreement to earn a 60% interest in the project for payments of US$2 million plus spending of US$8 million over three years. The agreement was finalized in early 2005 following Canadian and Chinese regulatory approvals.

“The two discovery holes drilled in November 2003 were the two first holes drilled on that deposit. It took us one year to negotiate the deal, to secure the project within the WFOE (wholly foreign owned enterprise) structure,” Panneton says. “So imagine, we started drilling in April 2005 and by April 2007 we will have a feasibility study completed — two years, 55,000 metres of drilling.”

Xietongmen is situated just on the north side of the Indian and Asian continental plate suture in south-central Tibet. It occurs in a southeast-northwest corridor of porphyry-style copper-gold mineralization occurring as disseminations and quartz stockworks within an intermediate volcaniclastic rock suite adjacent to a diorite porphyry intrusive. A 4-km-long zone of potassic, silicic and sericitic alteration marks the area.

A recent update to the measured and indicated resource increased the tally to 219.8 million tonnes grading 0.43% copper, 0.61 gram gold per tonne and 3.87 grams silver using a 0.15% copper cutoff grade; giving the deposit about 2.1 billion pounds contained copper and 4.3 million ounces contained gold.

Continental’s estimate is based on 200 vertical holes (about 47,000 metres) drilled on 50-metre centres over an area of about 1,200 metres northwest-southeast and 600 metres northeast-southwest. The mineralized zone averages about 180 metres but some sections are as thick as 300 metres.

Xietongmen shows good uniformity of copper-gold grade throughout and contains a supergene enrichment zone that will be mined in the first year under the open-pit development plan. The supergene blanket comprises about 7% of the deposit by tonnage but contains higher-grade chalcocite and covellite mineralization that will allow for the first year of production to return almost two years of modelled average annual revenue, accelerating the payback period.

Looking to fast-track development, the company has conducted all major technical reports in both English and Chinese to meet dual layers of regulatory requirements. A mining licence is anticipated by the end of the year with the submission of the Chinese version of the feasibility study scheduled to be complete shortly as part of the mining application process.

Assuming a positive feasibility study by mid-year and bankable feasibility following the signing of all contracts, Continental reckons project construction could begin by mid-2008.

Based on a modelled 40,000-tonne-per-day operation, the company projects it will recover about 50,000 tonnes (110 million lbs.) copper, 200,000 oz. gold and almost 2 million oz. silver annually.

Panneton estimates capital spending at the project to come in at between $300 and $400 million, with the mining fleet alone at around $65 million. Fortunately, a lot of heavy equipment is now manufactured in China including Terex haul trucks and tires, making procurement a little easier and less costly.

“Logistics are good, you can drive to the project, and you have hydro power, which is cheap,” Panneton says, estimating the price at about 5 to 7 per kilowatt hour.

The local grid has about 75 megawatts of surplus power available, allowing for Xietongmen’s expected requirement of around 65 megawatts. The company is looking at bringing that power to the project on a pair of separate lines, to provide a level of redundancy, at a cost of about $6 million. Most of the regional grid is powered by a number of hydroelectric generating stations.

Ownership consolidation

In late 2006, Continental completed a merger with its joint-venture partner Great China Mining to unify and expand its landholdings in the Xietongmen area. Great China had held a 40% stake in the project. Just over 36.1 million shares were issued to shareholders of the over-the-counter-listed entity to close the deal.

The company’s land position was boosted in a further deal with Great China to acquire three additional claim packages surrounding Xietongmen; Continenental paid US$3.25 million plus 1.5 million units of Continental for the land, totalling 109 sq. km.

Exploration has identified at least two other large mineralized occurrences (Langtongmen and Newtongmen) on the now-expanded land package.

With an eye towards expediting mining permits and development capital, Continental recently aligned itself with the major Chinese smelting group Jinchuan. The firm has entered into an agreement to provide equity and capital financing, a concentrate offtake facility and will provide other mine-building support at Xietongmen.

The agreement sees Jinchuan purchasing 10 million Continental units at $1.80 apiece for gross proceeds of $18 million. Units will be comprised of a common share plus a warrant exercisable to purchase 0.8 of a share at $2.25 for six months and then at $2.75 for another three months.

Jinchuan will also assist in arranging 60% of the required capital for mine development in the form of debt financing, and directly contribute 30% of the capital through debt or equity financing and provide infrastructure, construction and technical support. The major smelting firm has also entered into a concentrate offtake agreement under terms to be disclosed in “due course.”

The deal satisfies the government’s requirement that the company demonstrate it can raise sufficient capital funding before a mining licence is issued.

Panneton describes negotiations as “a little bit more difficult” in China.

“If you have a product in Chile you have about twenty smelters that want your product and you can deal.” And although China is “the hungriest place for copper,” Panneton says there’s not as much room to negotiate treatment and refining charges as in Chile.

“Because I am away from the coast and I cannot export my concentrate outside of China, it is a limitation, but at the same time they want our product and they’re going to be there to help me build it.”

As all the Chinese smelting groups are state-owned, the deal provides the government with indirect involvement and equity participation in development and mining of Xietongmen.

Preliminary transportation costs are estimated at about $31 per tonne from site to smelter with the concentrate grade expected at 25% copper, 30 grams gold and almost 300 grams silver.

Once development costs are recouped, the project will be subject to a 15% tax rate for five years after which it rises to 30%.

Politics

During a recent site visit by The Northern Miner, it was apparent the Chinese government ha
s been active on a number of large-scale infrastructure developments in the region, particularly those that are transportation-oriented. Aside from the recently completed railway and its expansion plans, the “Friendship Highway,” which is expected to provide a trade and transportation corridor through Nepal and into India, is also being upgraded.

As an “autonomous region,” Tibet is entitled to retain the production royalties from Xietongmen. Royalties of 3% and 2% are payable as net smelter royalties from gold and copper, respectively. In China’s other provinces, the royalty would go to the central government.

Continental has actively recruited technical professionals from the local community of Shigatse as well as from the region’s capital, Lhasa. Proposed mining operations would draw from the local labour pool.

Full environmental studies have included community involvement and participation. The company says there has been no opposition from any of the local communities.

The mining plan calls for a tailings impoundment in a valley just east of the Xietongmen deposit. It would be a zero-discharge, closed system and any acid generated would be buffered using material from a nearby lime deposit.

Fighting the fact that its stock has been tagged with a “heavy discount” due to the project’s location in China, Continental recently received a vote of confidence from the market. A recently planned $20-million equity financing was increased twice due to oversubscriptions, rising to $37.5 million. The deal saw just shy of 22.5 million units issued at $1.65 apiece to top up the company’s treasury.

A sister Hunter Dickinson company, Taseko Mines (TKO-T, TGB-X), participated in the private placement under rights assigned in a previous financing; it now holds a 6.9% interest in Continental.

With shares trading at around $1.95 at presstime, Continental posts a $221-million market capitalization based on its 113.4 million shares outstanding. The stock has traded in a 52-week range of $1.31-$2.96.