Rosemont will cost more, Augusta says

Shares of Augusta Resource (AZC-T, AZC-X) closed 7.8% lower at $1.66 per share following an updated feasibility study release that estimated higher capital and operating costs for its Rosemont copper project near Tucson, Ariz.

Total initial capital costs for construction, commissioning and mine pre-development at Rosemont is estimated at US$1.2 billion, which is a 32% increase over the cost estimate in the company’s 2009 feasibility study. The higher price tag reflects inflation across the industry for equipment, material and labour, the company notes, but it also reflects  the design changes Augusta Resource will make to meet the recommendations of the U.S. Forest Service (USFS).

Last year the USFS stated it preferred the “barrel alternative,” which is different than what the company had envisioned. The plan changes “respond to public and agency comments and include incorporating the latest agency requirements for impact avoidance, pollution control, habitat migration, resource conservation and public safety,” the company outlined in a press release.

Rosemont has also removed oxide-ore processing from its mine plan, and the capital associated with a heap-leach and solvent-extraction electrowinning plant.

John Hayes, a mining analyst at BMO Capital Markets in Toronto, writes in a research note that operating costs have climbed 43% from his previous estimate to US$8.89 per tonne, while the waste-to-ore ratio has fallen slightly to 1.9 to 1, from 2 to 1.

“Annual copper production is expected to average 243 million lb. over a 21-year mine life at a cash cost of US$1.02 per lb. copper, net of by-products,” he continues. “This compares to our estimate for 203 million lb. copper annually over a 21-year mine life at a cash cost of US67¢ per lb. A full analysis awaits publication of the full feasibility study, but based on the update, our 10% net asset value could decline materially.”

The near-surface, large tonnage, skarn-hosted and porphyry-intruded copper-molybdenum deposit has updated reserves of 605 million tonnes grading 0.44% copper for 5.19 million contained tonnes copper and 0.015% molybdenum, for 194 million contained lb. molybdenum.  

At presstime Augusta Resource shares traded at $2.22 apiece within a 52-week range of $1.52–$4.95 per share, and has 143 million shares outstanding.

Christopher Chang of Laurentian Bank Securities is maintaining his “speculative buy” rating on the stock, but has lowered his one-year price target to $4.80 per share. While he believes permitting risk remains the largest overhang on the company’s shares, he anticipates Rosemont will secure all the permits it needs for development by September 2013, and will start production in the fourth quarter of 2015. Once up and running he forecasts average production over the life of the mine will be 242 million lb. copper and 5 million lb. molybdenum, at an average cash cost of $1.13 per lb.

After the permitting process Chang believes the company will be “an attractive acquisition target, due to Rosemont’s relatively large resource size, low political-risk jurisdiction, excellent local infrastructure and low capital intensity.”

On Aug. 6 the company received a draft Air Quality permit from the Arizona Department of Air Quality. The permit had been denied earlier by the Pima County Department of Environmental Quality.