Centenario’s Franke bigger but more costly (March 03, 2008)

VANCOUVER–In the sand of Chile’s Atacama desert, Centenario Copper (CCT-T) is quietly moving the Franke deposit towards a December 2008 production date.

A new technical report has updated the project’s reserve estimate, mine plan, operating and capital costs, and financial analysis. Despite setbacks involving cost creep and the recent steep devaluation of the U.S. dollar against the Chilean peso, the numbers for Franke still look solid.

The copper porphyry deposit now hosts proven and probable reserves of 31.7 million tonnes grading 0.83% for 578 million lbs. of contained copper. The new estimate incorporates the results from an additional 30,680 metres of infill reverse-circulation drilling completed in late 2007.

Compared to the last resource estimate, from August 2007, the overall copper grade has decreased 0.12% because increased drilling density within the pit footprint showed high-grade zones to be less continuous than previously thought. The decrease in grade means an increase in operating costs, as the plant will need to process 14% more ore each year to maintain 30,000 tonnes in annual cathode production.

With the increase in reserves the mine plan is now laid out over 7.6 years, with total copper production up by 41 million lbs. to 501 million lbs. On average the strip ratio is 1.23 to 1.

Life of mine cash operating costs rise by US12 per lb. to US94 per lb., using a base case long term copper price of US$1.50 per lb. The change reflects the terms of the long-term contracts Centenario has since signed covering some 77% of projected operating costs, including contract mining, spent ore removal and transport, acid supply, power, and water.

Leaching costs have also risen in recent months due to an increase in the cost of spent ore removal and transport as well as a 21% increase in the cost of acid, due to an 8% increase in acid consumption and a 12% increase in the projected cost of sulphuric acid.

Capital costs have also increased. Initially estimated in August at $145 million, the number had already been adjusted in November to $162.4 million based on design modifications and Centenario’s decision to award most contracts on a fixed price basis.

The latest report bumps the capital cost up another $9.3 million to $171.7 million, after the signing of many of those contracts. The increase also includes a budget overrun allowance of $4.8 million and an escalation allowance of $4.5 million.

Franke now boasts an after-tax net present value (NPV) of $83 million, using an 8% discount rate, which gives a 2.8-year payback period. That is based on Centenario’s average hedged copper price of US$2.80 per lb. for 25.5 million lbs. in 2009 and US$2.75 per lb. for 49 million lbs. in 2010, and a flat US$1.50 per lb. copper price for un-hedged lbs. over the life of the mine.

The project’s NPV goes up to $310 million using 2009 to 2012 copper price forward curve with flat US$2 per lb. copper price thereafter.

In terms of project development, there are currently some 315 workers on site; that number is expected to peak at 650 in June. Massive earthworks activities are now complete for the wet and dry areas. Work is continuing at the leach pad and leach pond areas, with completion targeted for April.

The primary, secondary, and tertiary crushers have been built and are on-route to site, expected to arrive in mid-March. Centenario is going to pipe seawater 66 km to the project; the steel pipe for that line is also in transit.

Centenario was founded in 2004 but only went public on the Toronto Stock Exchange last October. In advance of listing the company closed an offering of 16 million special warrants at US$5 a piece for net proceeds of US$74.9 million.

The company intends to become a mid-tier copper producer by acquiring and developing mid-scale copper projects, then enhancing the scale and value of principle projects by incorporating smaller satellite resources.

The Franke project is an example of one such project.

Centenario also holds the nearby Pelusa property, which it thinks is highly prospective for developing additional leachable copper resources for Franke. Cententario’s third property, Pan de Azucar, is under consideration as a possible nucleus for a second property cluster.

A second item of news was Centenario’s initial resource estimate for Pan de Azucar in Chile.

An initial 34 hole, 6,100-metre drill program on the Carrizalillo Hill area of the property informed an estimate that pegged initial resources at 35.8 million inferred tonnes grading 0.47% copper, 0.2 gram gold per tonne, 2.1 grams silver per tonne, and 0.011% molybdenum. The deposit remains open to the north and at depth, as well as under cover to the west.

Within that resource, 14.3 million tonnes grading 0.43% is leachable oxide ore. Secondary and primary sulphides, the potentially flotable portion of the deposit, make up the remaining 21.6 million tonnes at 0.5% copper, 0.21 gram gold, 2.1 grams silver, and 0.014% molybdenum.

Centenario’s team believes there are two north-south trends of mineralization on the site, which they have named Carrizalillo Hill East and Carrizalillo Hill West. The East zone is a contact between andesitic volcanics and a monzodiorite, with intercepts of higher grade gold and copper mineralization within a background of lower-grade material. In the West area, a strong hydrothermal signature suggests the potential for a porphyry system under cover.

Centenario says the first drill program was restricted to only a small portion of the prospective ground on the property. Management believes there is potential to increase the resource significantly.