Yellowhead reviving B.C. copper project (March 28, 2011)

Recently listed Yellowhead Mining (YMI-V) is resurrecting the Harper Creek copper project in central British Columbia, building on a deposit that was discovered over 40 years ago.

The company has already boosted the resource and completed a preliminary economic assessment (PEA) on the project. It’s planning more drilling for 2011 and looks to 2014 for possible production. Yellowhead is well advanced, despite only recently listing, because it has actually been working on the Harper Creek project since 2005 as a private company.

But as Ian Smith, chief executive of Yellowhead, explained by phone, private equity dried up after the 2008 crash as investors wanted more liquidity, so the company had to turn to the public markets.

It completed a reverse takeover and listed on the TSX Venture Exchange in November 2010, and is now working to bring the project, which sits 150 km northeast of Kamloops and just off the Yellowhead Highway, to production.

The company is not the first to take a crack at the project, though. Noranda discovered the deposit in 1966 and ended up joint venturing it with U.S. Steel (X-N) before the two decided it was uneconomic. In the intervening decades Aurun Mines and later American Comstock explored the property but both eventually abandoned it, while the people behind Yellowhead sat on the sidelines and waited.

Smith explained that Yellowhead’s chairman Greg Hawkins had been aware of the project for years.

“Greg had been watching, watching, watching until the time was right to do a deal. That happened and the rest is history,” Smith said. “When the time was right we were able to stake a chunk of what was Noranda, and did a deal with U.S. Steel when it was just about to turn off the lights and Harper Creek was the last of its non-core assets that it was trying to get rid of.”

Now, with the property in hand and the PEA completed, Yellowhead is looking at the possibility of a 70,000-tonne-per-day, open-pit mine with a 22-year mine life, producing 2.9 billion lbs. copper, 265,000 oz. gold and 4.9 million oz. silver in concentrate.

The Harper Creek project, which is sediment-hosted and not a porphyry deposit, has a measured and indicated resource of 532 million tonnes grading 0.31% copper, 0.03 gram gold per tonne and 1.08 grams silver per tonne. It also hosts 117.2 million inferred tonnes of 0.29% copper, 0.03 gram gold and 1.32 grams silver. Forty years ago, the resource stood around 85 million (non-National Instrument 43-101 compliant) tonnes, and the operators did not bother assaying for gold and silver.

The project will not be the cheapest copper producer around, with operating costs around US$1.40 per lb. and a breakeven price of US$1.94 per lb., but according to the PEA it is still viable well below the current high that copper is riding.

Using a base case US$2.66 per lb. copper, the internal rate of return comes in at 19.8%, the net present value, using an 8% discount, at US$598 million, and undiscounted net cash flow at US$1.86 billion. With capital costs of $759 million, payback would be in about four years.

While the project is not cheap, it does benefit from ample infrastructure in the area. The property is already criss-crossed with logging haul roads, the Yellowhead highway is 8 km north of the proposed plant, as is a 138-kilovolt transmission line, and the company plans to find the expected 312 employees in local communities rather than house them on-site.

“The outstanding thing about this deposit is its location,” Smith said. “It’s five hours from downtown Vancouver, you can drive right up onto the property… and we have no lakes, no rivers, no fish.”

The company still plans to build a 450-person camp for mine construction, and will still be on the hook for about $130 million for BC Hydro to upgrade transmission lines to 230-kilovolt capacity. Sustaining capital is estimated at $481 million. The project also has a 3% net smelter return royalty, capped at $2.5 million.

While 22 years is certainly a respectable mine life, Smith wants to increase the resource on the company’s 426 sq. km.

“With the current resource we have enough to develop a mine, but we feel the potential to expand the resource is considerable,” Smith said. Along with going straight into feasibility work, the company will continue exploration drill work
this year.

“The drill targets that have been identified by the geophysics suggest the sequence will continue along strike and we intend to pursue that going forward this year,” Smith said.

Yellowhead’s share price dropped 27¢ on the day the PEA was released to $1.63. Since listing at 80¢ in November the company’s share price has hit a high of $2.05. The company completed an $8.1-million financing shortly before going public, and in late January had about $5 million on hand and 35.2 million shares outstanding.