Lumina’s Taca Taca shows robust economics

A preliminary economic assessment of Lumina Copper’s (LCC-V) enormous Taca Taca project, among the world’s top-tier undeveloped copper deposits, demonstrates a US$2.1-billion after-tax net present value and a 17.2% after-tax internal rate of return, using an 8% discount rate, a US$2.75 per lb. copper price and a mine life of nearly three decades.

The PEA evaluates the merit of building a mine and concentrator at the copper-molybdenum-gold project in northwestern Argentina’s Salta province, about 90 km east of Escondida, the world’s largest copper mine. The results anticipate copper production of 244,000 tonnes a year, gold production of 110,000 oz. per year and moly production of 4,100 tonnes per year, over a projected 28-year mine life. The study is based on a 120,000-tonne-per-day milling operation, expanding to 180,000 tonnes per day in year eight.

Life-of-mine cash costs, net of by-product credits, are expected to average US$1.11 per lb. copper sold.

Capital payback on initial capital of US$3 billion would take 3.8 years after the start of production. Life-of-mine sustaining costs are estimated to reach US$1.8 billion, which ­includes a third mill and flotation line added during the sixth and seventh years of production. The life-of-mine strip ratio works out to 1.57 to 1.

Lumina says the project could generate 1,100 full-time jobs and US$9.5 billion in taxes and royalties for the Argentine and Salta governments.

The PEA is based on a forecast long-term copper price of US$2.75 per lb. — 21 mining analysts made a long-term consensus price forecast of US$2.89 per lb. — as well as long-term, by-product metal prices of US$1,200 per oz. gold and US$12 per lb. moly.

The study is based on the most recent resource estimate for Taca Taca, which was completed in October 2012 and calculated using a 0.3% copper-equivalent cut-off grade. Indicated resources total 2.2 billion tonnes grading 0.44% copper, 0.08 gram gold per tonne and 0.013% moly, for 21.2 billion contained lb. copper, 5.56 million oz. gold and 615.8 million lb. moly.

Inferred resources add 921 million tonnes grading 0.37% copper, 0.05 gram gold and 0.012% moly for 7.6 billion lb. copper, 1.57 million oz. gold and 235.4 million lb. moly.

Taca Taca is 10 km away from a narrow-gauge rail line that could take copper concentrate from the proposed mine site straight to deepwater port facilities near Antofagasta in Chile.

In terms of power, TermoAndes S.A., a national power generator based in Salta, operates a 640-megawatt power plant and a 345-kilovolt international transmission line that runs from Cobos in Salta province to the Andes in Chile, and passes within 135 km of the Taca Taca project. The Salta plant has the capacity to add a 320-megawatt plant based on future demand.

“Unlike a lot of countries in the world today, where deposits are in remote areas with no infrastructure, Taca Taca — while remote — has available power, rail and port,” David Strang, Lumina’s president and CEO, told participants on a conference call.
Strang notes that the project’s robust economics are driven by a large resource base, a higher-grade starter pit (averaging plant feed grade of 0.72% copper for the first seven years of operation) and excellent regional infrastructure, all of which support a lower-than-average capital intensity ratio on initial capital.

“The project really has turned out to be fantastic,” he says. And in terms of the capital and project-inflation escalation seen across the industry, “the ability to have a project that does not have excessively high capital numbers is certainly a value-add in terms of Taca Taca.”

He adds that when compared to projects like Cobre Panama in Panama — which is expected to produce 300,000 tonnes of copper a year for 40 years, making it one of the largest undeveloped copper projects in the world — Taca Taca “compares very, very well.”

Commenting on the ongoing strategic review Lumina launched last year, Strang says companies have shown interest in the project, with some interested in signing confidentiality agreements. “Completing the PEA is an important step in the review process and will be able to provide those companies interested in looking at Taca Taca more detailed information on the project than has been available to date,” he says.

Lumina held a site visit on April 5, and Strang says he expects another one soon. The stumbling block, he notes, is how quickly the company can get visas.

“The issue is getting visas for people from China to be able to visit the project, and we hope to get some of those done this quarter.”

Strang says there are two or three Western companies that are showing interest in the project, but that “global events and particularly sector events have had an impact on that.”

Strang says the company views Salta province as one of the best mining jurisdictions in the world, and that on a country-wide basis, he has been encouraged to see recent investments in the country’s oil and agricultural sectors.

“With regards to the political situation, the best we can say is that there are congressional elections later this year, and we’ll see how the populace views the state of affairs with regards to the Kirchner government as a result of those elections,” he adds.

Lumina bought the deposit for about US$1 million from Corriente Resources (CTQ-T, ETQ-X), when the company shifted its exploration focus from Argentina to Ecuador. By that point Taca Taca had been drilled by Corriente, Falconbridge, BHP Billiton (BHP-N) and twice by Rio Tinto (RIO-N).

The Taca Taca property contains a large, Andean-type porphyry-copper hydrothermal system that has generated supergene and hypogene copper, moly and gold mineralization.

Other mineralization on the property includes remnant bodies of oxide-supergene deposits within the leached cap of the porphyry, gold-copper quartz veins north and west of the porphyry and exotic copper-oxide mineralization east and southeast beneath the Salar de Arizaro. Taca Taca lies along the western edge of the salar, the largest dry salt lake in the country. A surface moly anomaly also defines the Taca Taca system.

Christopher Chang of Laurentian Bank Securities says the PEA is largely in-line with his expectations, and supports his belief that Taca Taca remains an economically robust project with a long mine life.

“The significant annual production levels should continue to pique the interest of the major global producers given the project’s attractive capital-intensity profile and favourable infrastructure,” he writes in a note to clients. “In our view, an attractive mergers and acquisitions (M&A) opportunity exists for potential acquirers to secure economically robust assets in Argentina at depressed valuations. While we continue to believe that Taca Taca has world-class potential and remains an attractive takeover target, risk aversion in the financial markets will likely deter large, corporate M&A activity in the near-term, as many of the major global producers are reducing capital cost budgets or divesting assets deemed non-core.”

But Chang expects Lumina’s shares will appreciate over time, as the company de-risks the project from a technical perspective with more economic studies. He has a $22-per-share target price on the stock.

At press time Lumina shares were trading at $7.62 within a 52-week range of $6.85 to $16.68.