Baja Mining’s Boleo produces first copper

When Tom Ogryzlo replaced John Greenslade as head of Baja Mining (TSXV: BAJ) in May 2012, the company and its then 70%-owned copper-cobalt-zinc Boleo project in Mexico were in freefall — reeling from hundreds of millions of dollars in cost overruns that even by the mining industry’s standards were hard to swallow.

The troubled project on the east coast of Mexico’s Baja peninsula, which according to an updated capital cost estimate in the fall of 2010 was supposed to ring in at about US$1.25 billion, was instead confronting an additional US$533 million in capex. And the target date of June 2013 for first metal production looked hopelessly optimistic.

Ogryzlo — a mechanical engineer with over fifty years of experience in the extractive industries and a history of developing multimillion dollar mining projects —  remains Baja’s interim CEO and chairman, though he had hoped he could help set things right within a year and reach production no later than the first quarter of 2014.

“I thought the assignment would last six to twelve months but we were overtaken by events,” Ogryzlo recalls of those highly fraught first months as interim CEO.

The events included class-action lawsuits, a re-evaluation of the mine plan, equipment and labour delays, and the need to negotiate a funding solution with the company’s Korean partners that slashed Baja Mining’s stake in the project first to 49% and then down to 10%.

The consortium of five Korean companies that initially held a combined 30% of the project, now own 90%. Of that 90% stake, state-owned Korea Resources Corp., or KORES, one of the original companies in the consortium, holds the dominant share.

But one of the biggest problems was the realization by mid-2013 that the mine plan and proposed mining methods would have to change due to difficult ground conditions. Specifically, roof instability was posing major problems due to historic underground workings and the softness of the ore, with its high clay content in the deposit’s seven, near-surface mineralized seams, or mantos.

A feasibility study completed in 2007 envisioned that 30% of the deposit would be mined from several small open pits and 70% from a series of underground mines using conventional soft rock continuous mining methods. But those percentages, at least for now, have had to be reversed.

“It happened, I’d have to say, because the original underground mining tests were not representative of normal conditions that were found after underground mining commenced,” Ogryzlo says. “Because the ore is soft with a high clay content and the intervening rock between mantos is not tremendously competent, the 70%-30% combination could not be made to work as originally envisaged.”

By the end of 2013, Ogryzlo says, it was recognized that the mining method would have to be dramatically altered. Instead of large-scale continuous underground mining, the underground mining is moving to a much smaller scale, he explains, and one of the impacts of that is the company will have to mine in many more places at any one time to maintain the planned output.

“Remember these are mantos dipping into a very high hillside,” he says. “The more you go after material using open pits, the more the strip ratio increases and mining costs go up. If you go underground, you can mine the high grade seams, thus trading off higher grades against the higher costs of underground mining . . . It’s all a question of where one breaks even compared to the other.”

After two and a half years on the job, Ogryzlo reckons the project is about 12-15 months behind the production schedule expected when he stepped into the interim CEO  post. Meanwhile, project costs have continued to pile up.

“More time means more money, so the project was no longer just US$533 million on top of the original US$1.25 billion,” he says. “It is now coming in at slightly over US$2 billion.”

The good news is that copper production at the Boleo plant started on Jan. 17. Ogryzlo says that according to forecasts, the ramp-up and normalized copper production should take place by year end, with commissioning completed and start-up of the cobalt-zinc circuits by March.

“With the ramp-up of both circuits expected by the end of 2015 my job should be done,” Ogryzlo says with a hint of relief in his voice. “I’m hoping during the course of this year we will reach the light that we now see at the end of the tunnel.”

Ogryzlo admits that Baja Mining’s remaining 10% stake in the project could be diluted further should anything go awry in the start-up, or should for some other reason more money be required from shareholders to support the project until it becomes cash positive.

“Although it is unlikely, there could still be a cash call to all shareholders,” he concedes. “In our case it would be unlikely that we could raise the money to support our current level of participation.”

Ogryzlo, who over the years has served as a director of more than 20 companies including Franco-Nevada (TSX: FNV; NYSE: FNV), Vista Gold (TSX: VGZ; NYSE-MKT: VGZ) and Aura Minerals (TSX: ORA; US-OTC: ARMZF), believes that the likelihood of further dilution is quite small.

Meanwhile, litigation launched in B.C. in June 2012 against Baja Mining by former shareholder Louis Dreyfus Commodities Metals has been dropped and a settlement negotiated. (“We were able to demonstrate circumstances that encouraged a settlement,” Ogryzlo says. “This was beneficial for both parties.”)

A separate class-action suit filed in July 2012 against the company for “making misrepresentations contrary to the securities act between November 2010 and April 2012,” remains ongoing. The plaintiffs dropped their claims against independent directors of the company named in the suit, but former CEO Greenslade was left as part of the lawsuit. Ogryzlo reckons that lawsuit could be settled within the course of this year.

In other developments, Baja Mining signed an option agreement in June 2013 to earn up to an 80% interest in Cinto Colorado, a private Mexican company whose main assets are the tailings and slag stored on its land from historic operations at Minero Boleo by a French company. The company created the slag between 1866 and 1947 from blast furnace and copper reverb operations. They left waste stockpiles with significant copper content.

The low-grade stockpiles from the Boleo mine were processed by a third party between 1962 and 1972 using a leach-precipitation-flotation plant to create the tailings. The slag and tailings are at surface and easily accessed by road. Baja Mining believes they are an opportunity to generate positive cash flow relatively quickly but it will require some investment to do so.

“We’ve held the ship together, we still have a modest treasury, and we’ve downsized from almost fifty people to three and a half,” Ogryzlo says. “We’ve got our annualized operating costs down to about a million dollars as we work through legacy issues relating to the change in control and the cost overruns . . . It’s been a continuous process but we still remain part of a very large project and we have every reason to expect ultimately to be cash-flow positive.”

Ogryzlo expects that dividends will come eventually, but can’t say when. “The timing for that will depend on the final total debt, the future price of copper and what operating costs will b
e, things that are not yet totally known,” he says.  “A lot of debt will have to be paid back before we start to receive dividends . . . We are keeping our fingers crossed and trying to identify viable business opportunities for the company.”