Quadra Mining To Buy Centenario Copper

VANCOUVER — Patience has paid off for Quadra Mining (QUA-T, QADMF-O). The Vancouver-based company, which has been quietly stockpiling cash from its Robinson copper-gold mine in Nevada, waiting for the right time to add to its production portfolio, made its move in early February.

Quadra is acquiring Centenario Copper (CCT-T, COPRF-O) in a friendly, all-share deal announced in February. In December, Quadra’s Carlota mine in Arizona produced its first copper cathode; now, with Centenario’s primed-to-produce Franke copper mine in Chile added to the mix, Quadra has positioned itself as a mid-sized copper-focused producer with a healthy balance sheet and a strong exploration portfolio.

The deal has Quadra issuing 0.28 of a share for each Centenario share, which represents a 6.6% premium in terms of both companies’ 20-day volume-weighted average trading prices and a 12.9% premium over Centenario’s closing price on Feb. 6. When the transaction is complete, Quadra will have some 80 million shares outstanding, of which more than 80% will belong to original Quadra shareholders.

The boards of both companies have unanimously approved the deal and a special committee of Centenario independent directors deemed the deal the best option for the company. Directors and officers holding almost 17% of Centenario’s shares have agreed to support the transaction. To pass, at least two-thirds of Centenario’s shares have to be voted in favour of the deal, which is expected to close by May.

The new Quadra will boast an additional 70 million lbs. copper in annual production, an increase of 30%. Now the company expects to produce 275 to 300 million lbs. copper per year and all from low-risk jurisdictions, namely the United States and Chile. And Centenario’s Franke copper mine lends itself to possible future synergies in developing Quadra’s nearby, advanced-stage Sierra Gorda copper-molybdenum-gold project.

It all happened because Centenario’s principal asset had, of late, become its main concern. The company is almost finished building the Franke mine, a solvent extraction-electrowinning (SX-EW) heap-leach copper project in the Atacama Desert of northern Chile, but in mid-November announced a US$26-million funding shortfall. The company tried to access the needed funds by repurchasing a portion of its outstanding 2010 copper hedge contracts for US$26 million, but the funds remained in an escrow account. Access to the account required Centenario to complete an updated development plan for Franke, while also continuing to meet the terms of the existing Franke credit facility.

As Centenario was finalizing the updated development plan, Quadra approached. And the merger presented Centenario with an opportunity to restructure or refinance its existing loan and resolve its financing shortfall.

Quadra and Centenario estimate that an additional US$25 million is needed to bring Franke into production. To get things moving on that front, Quadra, as part of the merger agreement, is loaning Centenario US$3.5 million and subscribing for 10.2 million shares at 80¢ apiece, for a total investment of US$10 million.

The new mine plan has also been completed. The big change is that plans now call for 75% of the mine feed for the first two years to come from the China deposit, an oxide resource 6 km from the Franke processing plant. The China deposit not only adds tonnage to the total resource at Franke, it consumes significantly less acid than the ore at Franke and thus reduces operating costs.

Together, Franke and China host oxide leachable measured and indicated resources of 48.6 million tonnes grading 0.77% copper. China is also home to a mixed and secondary sulphide resource totalling 17.1 million measured and indicated tonnes grading 0.53% copper, but non-leachable ores are not yet incorporated into the Franke mine plan.

The addition of China boosts life-of- mine copper cathode production by 93 million lbs. or 19%, to 594 million lbs. Over the 8.6-year mine life Franke is expected to produce 69 million lbs. copper a year at an average cash cost of US$1.29 per lb. The facility will process 13,200 tonnes of ore daily. The plant, which is essentially complete, save final pre-commissioning activities, cost US$239 million.

Quadra’s flagship mine is the Robinson copper-gold mine in Ely, Nev. The company recently amended the Robinson mine plan, boosting annual production for 2009 and 2010 while achieving considerable savings by altering the mining sequence.

Specifically, mining will now transition from the existing Veteran pit to a small satellite pit, called Kimbley wedge, in 2010 and then to Ruth at the end of that year. The Ruth pit will be mined in two stages so that dewatering is deferred. And the Veteran extension will be deferred until the Ruth pit is complete, which significantly reduces stripping requirements for 2009 through 2011.

Quadra now expects to produce 140 million lbs. copper at Robinson in 2009, up from its previous guidance of 130 million lbs. Gold production will decrease to 100,000 oz. from 125,000 oz. The company expects the cash cost per lb. copper, net of gold credits, to average US$1.30. In 2008, the mine produced 159.7 million lbs. copper and 137,628 oz. gold by milling 13.8 million tonnes of ore grading 0.68% copper and 0.46 gram gold per tonne.

And in mid-December, Quadra reached a milestone when its Carlota copper mine and SX-EW facility produced its first copper cathode after a development period that finished on time and budget. The company plans to produce 50 million lbs. copper cathode at Carlota in 2009 from ore carrying a lower grade than the deposit’s average; in 2010, Quadra expects production to increase to 70- 75 million lbs. copper.

Quadra collected US$20.1 million in net earnings over the third quarter of 2008, bringing its earnings in the first nine months of the year to US$164.9 million. At the end of September, the company had US$266 million on hand and no debt.

On news of the merger, Quadra gained 5¢ to close at $4. The company has a 52-week trading range of $1.97-27. Centenario’s share price rose 16¢ to $1.14; the company has a 52-week trading range of 45¢-$6.40.