Site visit: IG Copper, Freeport
 probe Russia’s Far East

KHABAROVSK, FAR EAST RUSSIA — IG Copper (IGC), a privately held U.S. company, is making headway at its 51% held Malmyzh copper-gold porphyry project in Far East Russia, near the border of China, with Freeport-McMoRan (NYSE: FCX) holding the other 49%.

In mid-2016, IGC completed the Russian government’s review for “strategically significant” deposits and received a Strategic Industries Law (SIL) approval. The SIL approval is required for any large copper, gold, platinum group metals or uranium deposit to be held by a non-Russian firm.

As a result, IGC’s joint venture firm Amur Minerals LLC (not to be confused with London-listed Amur Minerals) kept full control of its 226.9 sq. km exploration and mining licences at Malmyzh, along with the mining and production rights for all minerals from Malmyzh and Malmyzh North.

The approval makes it easier for IGC and its partner to raise funds and develop the massive project, which contains an inferred resource of 12.5 billion lb. copper and 9.1 million oz. gold (nearly 16 billion equivalent lb. copper).

On the SIL announcement, the shares of IGC’s largest shareholder Eurasian Minerals (TSXV: EMX; NYSE-MKT: EMX) soared 22% to $1.28 per share on July 25. Eurasian owns a 36% equity stake in IGC on a fully diluted basis.

During a November site visit, Scott Close, Eurasian’s director of investor relations, reveals that Eurasian had heard that IGC needed cash to explore Malmyzh. The royalty and prospect generator then bought its stake in IGC through three private placements, totalling just under US$8 million in 2011.

Eurasian — known for being a mineral exploration pioneer in places such as Serbia, Kyrgyzstan and Turkey — says its IGC investment could become the “most lucrative.”

Close reckons that “at some point, IGC is going to be bought out by somebody for way too much money.”

A day before our arrival in Russia, our taxi crawls through the evening rush hour traffic from South Korea’s Incheon airport to the heart of Seoul. The plan is to take a three-hour flight the next morning to Khabarovsk Krai in Russia’s Far East.

Close expects that a large Asian entity or Western multinational company might be interested in a takeover. Project partner Freeport, given its current debt, might not be a likely candidate. (Freeport declined to comment on its plans for Malmyzh.)

“Some people get a little nervous when you start talking about Russia,” Close says, adding he has not come across any evidence of mining projects ever being nationalized in modern-day Russia. The country’s oil and gas sector, however, is a “completely different ball of wax,” he adds.

Russia’s second- and third-largest gold producers are Western miners: Kinross Gold (TSX: K; NYSE: KGC) and Petropavlovsk (LON: POG).

“It really does show the world that Russia is still open for business with Western companies. And it’s being done right now.”

Humble beginnings

The city of Khabarovsk gives off a Parisian vibe, with its tree-lined boulevards, vintage lamps and array of shops, cafes and bars.

Home to 600,000 people, Khabarovsk is the second-largest city in Russia’s Far East after Vladivostok, about an hour’s flight, or 650 km south. Khabarovsk sits 30 km from northeastern China along the Amur River, the world’s tenth-longest river, which forms a natural border between these parts of Russia and China.

At IGC’s spacious office in downtown Khabarovsk, American CEO Tom Bowens, 54, and Western Australian business manager Douglas McGay, 69, provide a brief history of IGC, which was previously InterGeo Copper.

Bowens, a trained geologist — with a penchant for cowboy hats and singing — and McGay, a licensed surveyor, both know each other from their days in Mongolia and share an entrepreneurial streak.

Bowens began combing through Russia’s Far East as the vice-president of exploration and chief of operations for Lukas Lundin’s Fortress Minerals, 11 years ago. He played a crucial role in discovering two major deposits in the Far East, including the Svetloye gold project and Malmyzh.

McGay spent the past 20 years in Mongolia, building and managing resource-oriented businesses. He previously held senior roles in Harrods Minerals Mongolia and Ivanhoe Mines Mongolia around the Oyu Tolgoi discovery period. He was the founder and CEO of Batu Mining.

McGay reveals he delayed his plan to retire in a log cabin he built himself in the hills outside of Ulaanbaatar to join Bowens in Russia a year ago.

Bowens’ interest in the region dates back to his time at the Colorado School of Mines, where he graduated with a degree in geological engineering and a master’s degree in geology.

Sitting behind his desk, the jovial and sharply dressed executive says that as a student he was intrigued by how the deposits that formed around the Pacific Ring of Fire — known for frequent earthquakes and volcanic eruptions — stopped in Russia, possibly due to a lack of data. “It was like a big juicy steak just sitting there,” he says of the potential.

In 2005, Fortress did a licence swap with Phelps Dodge on its Mongolian licences, in exchange for 51% of Phelps’ Russian subsidiary that owned the Svetloye licence.

The next year Phelps identified the Malmyzh target, after perusing data archives in Moscow from the Soviet days.

IGC says the Soviets had overlooked Malmyzh, as it was a small, gold-in-stream anomaly. They were exploring for tin deposits in the Khabarovsk Krai because the “high-grade gold deposits in the Magadan district were sufficient for their needs,” Bowens says.

Freeport acquired Phelps’ interest in Malmyzh after it took over Phelps in 2007. Three years later, Fortress left Russia. It sold the Svetloye project to Russia’s Polymetal International and its 51% interest in Malmyzh to Bowens’ IG Copper.

IGC paid US$500,000 for the earn-in agreement on Malmyzh in 2010. “I heard later that Lukas said it was one of his biggest mistakes,” Bowens chuckles.

Malmyzh a district-scale play 

IGC’s flagship Malmyzh copper-gold porphyry project is 220 km — or a four-hour drive northeast of Khabarovsk. Beyond the city, the paved highway passes a few settlements and cuts through forested terrains, with little but snow-covered trees and low-lying hills in sight. After a few pit stops, including one for borscht and cabbage rolls, we arrive at camp, where IGC’s eclectic crew and two camp dogs greet us.

“Malmyzh is really a hallmark of what the potential is of this area,” Dean Turner, an American resource geologist and consultant to IGC and Eurasian, says during a technical presentation. “This is a concealed porphyry copper, not deposit, but district.”

Malmyzh’s four porphyry deposits — Valley, Freedom, Central and Flats — and over 10 porphyry targets occur within a district-scale, 16 by 5 km intrusive corridor concealed under shallow cover. Much of the property has more than 15 metres of cover.

IGC largely used ground magnetics to help delineate the hidden porphyry deposits, as well as soil geochemistry to outline the copper and gold anomalies.

From 2011 to the end of 2013, IGC drilled over 70,000 metres in 205 holes on Malmyzh. Most of this drilling defined the project’s four inferred resource deposits on nominal 200-metre centres. All four deposits remain open at depth.

Using an equivalent copper cut-off grade of 0.30%, Malmyzh contains a National Instrument 43-101 open-pittable inferred resource of 1.7 billion tonnes of 0.34% copper and 0.17 gram gold per tonne for 12.5 billion lb. copper and 9.1 million oz. gold.

It hosts nearly 16 billion equivalent lb. copper at 0.42% equivalent copper.

Valley is the largest deposit, with l billion tonnes at 0.41% equivalent copper. Freedom is the second largest, with 334 million tonnes at 0.46% equivalent copper.

Copper-gold mineralization at Malmyzh occurs in diorite porphyries and hornfelsed sedimentary rocks. Mineralization extends from shallow subcrop to 400 to 600 metres deep.

Turner describes diorities as intrusive rocks and hornfels as altered sedimentary rocks, or “ugly” black rocks that “only a geologist could love.”

To help identify deeper copper-gold porphyry drill targets, IGC has contracted Aussie geophysicist Keiran Logan, who runs Logantek. So far, Logan has used 3-D induced polarization and 3-D magnetics on the project. He applied these two methods on the Valley deposit to complete an orientation survey. The results from the survey combined with these two methods will help IGC explore for “sweet spots,” or higher grades at Malmyzh.

“Stacked deposits, deep high-grade core zones and lateral overprinting of adjacent deposits are all targets we are investigating for high grades,” Bowens notes.

Touring the camp

IGC’s campsite can house up to 120 people in cabins and yurts. IGC has 100 employees, including 53 on-site.

Project geologist Vlad Mramornov lets us peek inside his shared yurt containing five beds, with a warm stove in the middle. Depending on the size and quality, a yurt can cost US$2,000 to US$3,000 apiece, making for relatively cheap housing.

There is also a banya (sauna), where employees can soak in the heat after a cold day’s work. “You’ll feel like you’re in paradise in an hour or so after,” Mramornov says.

Once the drilled core arrives at camp, employees log and split it, according to international standards, before it goes to an ISO-certified lab. Malmyzh has also gone through independent sampling, Turner says.

After a stop at the core shack, we drive a few kilometres to where the drillers are working on hole 211, the sixth hole in this year’s 35,000-metre program.

Drilling at Malmyzh resumed in late September, after IGC took a two-year break to complete a GKZ report and the SIL review. The GKZ report includes a Russian-compliant C1 and C2 reserve estimate (5.6 million tonnes copper and 9.6 million oz. gold) and a TEO economic analysis to show that the project is a viable mining operation. (The reserve estimate isn’t 43-101 compliant.)

Bowens explains that if a foreign-owned company has an asset with approved GKZ reserves of more than 1.5 million oz. gold or 500,000 tonnes copper, the deposit becomes of strategic importance to the Russian Federation. As a result, the company would need an SIL approval to retain ownership.

IGC got the thumbs up for its GKZ report, which included the TEO economic analysis, in mid-2015, and received the SIL approval in mid-2016. It also prepared a 43-101 inferred resource estimate in May 2015.

There’s one drill turning at Malmyzh. IGC expects to bring on a second drill in June 2017. It plans to drill another 35,000 metres by the end of 2017, with an aim of defining higher-grade zones, expanding known resources and uncovering more concealed porphyry deposits.

While it is still early days for the program, IGC has hit some interesting intercepts.

In early November, IGC intersected a blind discovery called Sleeper near the Valley deposit. “We drilled it based on geomorphology and gut instinct,” Bowens says.

In early December, IGC began drilling hole 213 for its deepest hole to date. “It is 775 metres vertical into well mineralized hydrothermal explosion breccia in the Freedom NW deposit — many kilometres east of Sleeper — and has been in this mineralized breccia starting at 100 metres from surface,” Bowens shared in an email. “We are very excited.”

To help fund the program, IGC is raising US$10 million through an equity raise, where it will issue 1 million shares at US$10 apiece. It has 7.2 million shares outstanding.

“We plan on either closing it in mid-January and going one more year as a private company, or listing the company on the AIM in 2017,” Bowens says.

As of November, IGC and Freeport have invested a total of US$35 million on the project. To keep costs low, Bowens uses his private service company KolymaGeo, which is equipped with three rigs. Drillers on average complete 70 metres a day for US$50 per metre.

KolymaGeo contains 10 of IGC’s early investors, and is IGC’s second-largest shareholder at 11%. Bowens uses the revenue generated by KolymaGeo — which provides a range of services for other mining companies — to fund IGC. The two companies share technical staff and office space.

Working in Russia

Back in the office in Khabarovsk, a beaming Bowens shows off two discoverers’ medals that the Russian Federation awarded his team in 2015 for Malmyzh and 2016 for Svetloye, which Bowens helped find years earlier. The silver medals are the first two given to a foreign mining company.

The executive says the perceived geopolitical risk of investing in Russia has stopped many Western firms and geologists from exploring the country’s geological potential.

“If this was not Russia because everybody is scared of Russia, and you hit Malmyzh, there would be Canadians all over it. Everybody would be going ‘eh,’” Bowens says.

Analysts at Florida-based Kopernik Global Investors write that some of the risks investors associate with Russia include resource nationalization, corruption, overlooking shareholders’ interests, government default and the risk of war.

While acknowledging the risks, the analysts argue that they are not unique to Russia and in some cases are overblown. The country has a lot to offer, including low tax rates, high saving rates and high education levels, they write. “Russia has gotten less risky, while most developed markets have become meaningfully more risky, yet the market is pricing that in reverse.”

As of October, three of Kopernik’s top-10 holdings in its US$887.5-million Global All-Cap fund were Russian firms: Gazprom, Sberbank of Russia and RusHydro.

Despite the risks, the attitude towards working in Russia is shifting. The Fraser Institute’s 2015 survey of mining companies places Russia 47 out of 109 jurisdictions in terms of overall investment attractiveness, just behind Washington State (46) and ahead of Spain (48). Since 2013, Russia has gone from 83 to 64 to 47. On the policy perception index, Russia ranked 75 in 2015, up from 97 in 2014.

IGC’s McGay attributes the improvement to Russia’s new tax laws, which provide companies certain exemptions and reductions for income tax and mineral extraction tax.

So far, the Russian Federation and nearby communities have been supportive of the Malmyzh development, particularly because it can create jobs and wealth.

As part of its social initiative, IGC contributes 0.5% of its annual exploration expenses to the nearby 550-person Nanai (native) village and 70-person Russian village through a fund managed by a steering committee. The villages, collectively known as Nergen, are a 15-minute drive from the project. For 2017, IGC plans to contribute US$500,000 to the fund.

Asked about the challenges of working in Russia, Bowens replies: “It’s cold. The women are too pretty.” In a serious tone, he reveals there are many regulations that companies have to obey. “Some Westerners just consider them burdensome and goofy, and they don’t pay attention to them. And they break the regulations. When you break them, you have to pay.”

Bowens notes that labour laws and forestry laws are “intense,” adding there’s a lot of paperwork involved in cutting down trees to make drill pads. “It’s not a country for old men,” he cautions.    

One of the mistakes Western companies make is that they want to joint venture with a strong Russian firm, Bowens says, adding this could complicate project and resource management.

While infrastructure could be a challenge at Malmyzh, it isn’t. The project is next to National Highway 46, and 65 km from the rail in Komsomolsk, which is a 1.5-hour drive from the project. There’s also a high-voltage power line within 500 metres of the project and a nearby natural gas pipeline.

“Compared to Oyu Tolgoi, Malmyzh is sitting in the middle of London,” McGay says.

Looking ahead

IGC plans to add more tonnage and boost grades at the Malmyzh project before construction at the project would start, according to the project implementation timeline in the GKZ report.

The company intends to sit down with Russian regulators to extend the 2021 deadline by a few years. This could give more time to fully unlock the deposit’s potential and arrange financing.

According to the GKZ report, the Malmyzh project has a potentially low strip ratio and a long mine life, with decent project returns at current copper prices.

IGC is optimizing the project. It has hired Oreoll Engineering to revise the TEO economic analysis by updating the ruble to U.S. dollar conversion rate and assessing the economics of shipping the copper-gold concentrate to Asia via the closer Vanino port, instead of to a processing facility in Western Russia.

As metal prices improve, Bowens notes this will further boost the value of the Malmyzh project (estimated at US$430 million).

In an October research note, TD Securities analysts write that the “copper market will move into deficit over the next several years, with the supply gap opening up by 2020.” Their long-term copper price forecast is US$3.10 per pound (spot copper closed Dec. 6 at US$2.65, and over the past month, it gained 15.6%).

IGC also plans to complete a National Instrument 43-101 compliant preliminary economic assessment on Malmyzh in late 2017.

Asked if he would sell Malmyzh, Bowens says that “selling it now … would be stupid, because I wouldn’t make nearly as much money. I’m not young, but I plan on being around long enough to spend whatever I get out of this.”