EMED perseveres at Rio Tinto in Spain

The Rio Tinto copper mine in southwest Spain has been mined for thousands of years, and modernizing it might be a challenge. 

EMED Mining (EMD-T, EMED-L) is anxious to restart copper mining at the famed site, but has to cope with permitting delays and investor angst over EMED issuing paper while equity markets are squalid.

“Share dilution is in the past. Sure, I wish our share price was higher; I wish the financial crisis didn’t happen; I wish permitting was faster. But those are all wishes, and we have to deal with reality,” EMED CEO Harry Anagnostaras-Adams told investors on a conference call.

“Spilled milk is spilled milk. One wishes all sorts of things in the past, but one has to deal with the present and the future,” he says. “And this is arguably one of the most attractive investments in the copper space.”

The dilution that Anagnostaras-Adams refers to is linked with its recent deal with Red Kite Mine Finance, which would provide $50 million in funding, including a $35-million stand-by loan facility and an equity issuance.

When the Red Kite stand-by loan is taken into account, EMED has secured debt capital funding of $225 million. Most of this — $175 million — is from Goldman Sachs.

EMED shareholders recently approved the second tranche of equity to be issued to Red Kite. The equity-financing deal raises $15 million for EMED, but would bring its issued shares up to 1.177 billion, with Red Kite holding 5.4%.

Despite the large amount of shares issued, the company does not have an operating mine, and the main hurdle on that front has been permitting.

The Rio Tinto mine was shuttered in 2000 owing to low copper prices, but the workers collective that operated the mine after Rio Tinto (RIO-N, RIO-L) disposed of it in the 1980s left an environmental mess behind.

Intent on avoiding the same situation, the Spanish government has been slow to issue permits to EMED.

The latest news is that the approval for administrative standing — the first of four permits needed to trigger a mining restart — has been delayed, and the company expects to get it in the first quarter of this year.

The government has told EMED that the administrative standing is linked with the approval of the environment plans. After these two permits, EMED would need a final resolution-plan permit and exploitation rights.

“The permits cascade,” Anagnostaras-Adams explains. “The government prefers to issue the first two jointly, and then the other two will follow.”

EMED expects to commission the mine by the end of 2013, and reach base-case annual production of 37,000 tonnes of copper in concentrate by the end of 2015.

But it would only do so at an increased cost, as it expects capex to ring in at $240 million, which is up from the $210 million it had forecasted, owing to increased provisions for working capital, bonding and plant contingencies. 

The company also says that cash costs would be higher, as it expects life-of-mine cash costs to come in at US$1.50 per lb., which is up from US$1.38 per lb., mainly due to rising diesel costs. 

For Anagnostaras-Adams, however, a firm handle on costs won’t be had until the permitting process is completed.

“Once we finish permitting, the bonding for rehabilitation will be set. It is really then that we will have the final capital requirements,” he says. “We’ll know how far our project financing goes and how much equity capital will be required to finish the job.”

Despite the challenges, Anagnostaras-Adams insists that Rio Tinto has unique advantages, largely due to the infrastructure already on-site.

“In our case, we avoided the biggest lump of capital expenditure by picking up infrastructure that we can use, rather than build from scratch,” he says. “But that comes with a cost. The site needs to be cleaned up. We paid the cost of time and funding for the care and maintenance to buy a project that we can use the existing infrastructure on by modernizing it.”

Rio Tinto has proven and probable reserves of 123 million tonnes grading 0.48% copper for 585,000 tonnes. It also has measured and indicated resources of 203 million tones grading 0.46% copper for 930,000 tonnes copper.

“In our view, permitting remains the single biggest risk to the project schedule,” Garnet Salmon, an analyst with Jennings Capital, writes in his report. “We believe, however, that Rio Tinto copper project remains an attractive investment based also on the forecast life of 14 years, and the low capital intensity of $6,500 per tonne.”