B.C.’s next copper kings

VANCOUVER — With capital costs escalating all over the industry and mine financing not getting any easier, infrastructure is looking as crucial as ever for those looking to build a major copper mine in British Columbia while keeping costs down.

The land of copper-gold mega-porphyries already has its share of multi-billion-dollar projects in remote regions that face serious financial hurdles. Those include NovaGold Resources (NG-T) and Teck Resources’ (TCK.B-T, TCK-N) Galore Creek deposit with a current capex of $5.2 billion, Seabridge Gold’s (SEA-T) KSM deposit with a US$4.7 billion capex, Pretium Resources’ (PVG-T) Snowfield with a US$3.4 billion capex , and Copper Fox Metals’ (CUU-T) Schaft Creek, which had a $3.8 billion capex in a 2008 study, while a feasibility study on the project is now a year and a half behind schedule. All of the projects include extensive infrastructure spending.

In contrast, those copper projects moving forward in B.C. are all estimated to cost less than a billion dollars, or at least were expected to when construction started. Thompson Creek Metals’ (TCM-T, TC-N) Mt. Milligan mine, set to open in late 2013, was originally expected to cost $915 million but cost creeps mean the company is now facing $1.4 to $1.5 billion in costs. New Gold’s (NGD-T) New Afton mine will have cost the company about $765 million by the time it reaches commercial production this August. Imperial Metals’ (III-T) sizable Red Chris project, expected to be in production by early 2014, should cost a relatively thrifty $444 million, closely in line with the $438 million it cost Copper Mountain Mining (CUM-T) to re-start its past-producing mine. Taseko Mines’ (TKO-T) New Prosperity, if it ever goes ahead, is expected to cost about $1 billion, thanks to the $300 million in costs added to the new mine plan.

The projects going ahead all happen to have fairly good road access, and, at least once the northwest transmission line goes in, will have reasonable access to grid power. So what other advanced-stage B.C. copper projects have respectable infrastructure, multi-billion-lb. copper resources, and what look to be achievable cash costs?

Yellowhead Mining’s (YMI-V) Harper Creek project fits the description. The property sits roughly 150 km northeast by road from Kamloops and 10 km south of the logging community of Vavenby. Road and rail access are both excellent and the community is linked to the grid, though Yellowhead will have to work with BC Hydro and put up money to upgrade the transmission line.

Based on a feasibility study released in early March, the company expects the 70,000-tonne-per-day open pit mine to cost $839 million. Sustaining costs push net life of mine capital costs to $1.13 billion. The mine benefits from a low stripping ratio of 0.81:1 thanks to its hilltop location, which, along with some gold and silver credits, helps bring the total cash cost in at US$1.56 per lb. copper.

With a 28-year mine life, Harper Creek is expected to producing a total of 3.6 billion lbs. copper, 372,000 oz. gold and 14 million oz. silver from reserves of 704.4 million tonnes grading 0.26% copper, 0.029 gram gold per tonne and 1.14 grams silver per tonne. The deposit is somewhat unique among B.C.’s big deposits in that it’s an extensive low-grade volcanogenic sulphide system, rather than a porphyry.

Using US$2.50 per lb. copper and an 8% discount, the project has a pre-tax net present value of US$749.7 million and an internal rate of return of 20.2% with a 5 year payback.

With the positive feasibility study now complete, no apparent environmental risks, and so far positive relations with the local First Nations, the biggest overhang for the company is financing as it looks to be in production by 2015. Yellowhead is looking to possibly follow a Copper Mountain model by selling off part of the project to an end-user, as well as the standard debt and equity, but has yet to announce any formal decisions. 

On the day the study was released Yellowhead’s share price climbed 22¢ to $1.31, while it has since retreated to 99¢. Following the study’s, Canaccord Genuity analyst Wendell Zerb wrote a note headed ‘Harper Creek feasibility rocks!’ and increased his 12-month price target from $2 to $2.55. Jennings Capital analyst Peter Campbell noted that the study was net positive, and put a $2.50 price target on the stock.

The Ajax copper-gold project near Kamloops also looks to fit the bill based on a feasibility study released in late December. Owned 49% by Abacus Mining & Exploration (AME-V) and 51% by Poland-based KGHM, the project has a US$795 million capital cost, though sustaining capital adds a full US$604 million.

The 60,000-tonne-per-day open pit operation should produce 2.5 billion lbs. copper and 2.3 million oz. gold over a 23-year mine life, and production, like at Harper Creek, could start in 2015. The project hosts reserves of 503 million tonnes grading 0.27% copper and 0.17 gram gold.

Unlike Yellowhead, Ajax has already found its deep-pocketed friend in KGHM, which just decided to option a further 29% of the project for $30-million. Abacus stated that the move derisks the project and shows that KGHM is going to move the project to production.

Not quite in the multi-billion lb. range, Pacific Booker Minerals’ (BKM-V) Morrison project sitting 65 km northeast of Smithers looks to be finally heading towards production.

Based on a 2009 feasibility study, the project hosts reserves of 224.3 million tonnes grading 0.33% copper, 0.16 gram gold and 0.004% molybdenum and could produce 1.37 billion lbs. copper, 658,000 oz. gold and 10 million lbs. moly over a 21-year mine life.

The 30,000-tonne-per-day operation is estimated to cost $517 million in pre-production capital. Operating costs are estimated to run $60.3 million a year.  Based on US$2.75 per lb. copper, US$658 per oz. gold, and an 8% discount rate, the NPV came in at $495.9 million and the IRR at 20.1%.

On March 19 the company announced that its mining lease application had been accepted by the province, one of the last steps before the company can begin construction on the property.

As to earlier-stage multi-billion lb. copper projects, Serengeti Resources (SIR-V) is working to advance its Kwanika project in central B.C. The project is road accessible, 40 km east of a rail line, and 75 km from the power line to the Kemess mine, while Serengeti will be putting out some hard numbers on capital costs in a scoping study expected in the second quarter.

As of a March 2011 resource update, the central zone hosts 244 million indicated tonnes grading 0.23% copper, 0.21 gram gold and 0.69 gram silver for 1.2 billion lbs copper and 1.7 million oz. gold, and the South zone hosts 240 million inferred tonnes grading 0.2% copper, 0.09 gram gold plus some moly and silver for 1.1 billion lbs. copper and 664,000 oz. gold.

In February Lions Gate Metals (LGM-V) released an updated resource on its Poplar project that sits not far north of Imperial’s Huckleberry mine. The new resource, using a 0.15% copper cut-off, came to 171.3 million indicated tonnes grading 0.28% copper for 1.06 billion lbs. copper, or a 0.4% copper equivalent with minor gold, silver and moly values. Inferred resources added 209 million tonnes grading 0.23% copper for a further 1.4 billion lbs. copper, or a 0.33% copper equivalent with other metals.

The company, headed by Paul Sarjeant as president and CEO as of January, plans to finish metallurgical work and continue infill drilling in the next few months so it can have a preliminary economic assessment out later this year. Because the deposit sits only a few km off the road and power line that leads to Huckleberry, Lions Gate expects capital costs to be fairly reasonable.

Not far from Poplar sits Thompson Creek’s Berg project, with 506 million tonnes grading 0.3% copper, 0.037% moly and 3.77 grams silver for 3.3 billion contained lbs. copper. Thompson Creek is busy in B.C. building Mt. Milligan, but Berg looks like an interesting next target for the company.