Hana’s Banana: The Next Big Thing In Copper?

SITE VISIT

MAUN, BOTSWANA — Over the vast swaths of Botswana’s Kalahari Desert, visitors have grown accustomed to seeing kudu, waterbuck and the occasional leopard. But the wildlife is set to get some new, more industrious neighbours.

Hana Mining (HMG-V) is proving that copper and silver mineralization in the region is far more extensive than previous mining companies ever suspected.

The company’s drills are encountering mineralization so broad that its president and chief executive, Marek Kreczmer, is convinced its Ghanzi property sits on top of the world’s next significant copper-mining camp.

“It’s a mining district,” Kreczmer says. “Our property alone is the size of the Zambian copper belt, and then you have the other side that Discovery Metals has, so you basically have a brand new copper and silver mining district in the world that is controlled by two junior companies.”

Discovery Metals (DME-L, DML-A), a Brisbane, Australia-based company, is pushing to have a feasibility study on its neighbouring Boseto project completed by the first quarter of 2010.

With the two projects both part of the same geological system, Discovery’s more advanced-stage work offers a glimpse into what Hana might expect down the line.

One of the more promising metrics developed by Discovery is Boseto’s projected operating costs of US$1.04 per lb. copper over its 10-year mine life.

And while Hana is still a few years away from finishing a feasibility study of its own, Kreczmer says the metallurgy will be much the same as Discovery’s, with a copper concentrate being produced close to Boseto’s stated grade of 44% copper.

And while Kreczmer likes Boseto’s operating costs as a comparative for Ghanzi, he feels production totals are a different story.

Discovery is looking to spend US$150 million on a mine that will produce roughly 25,000 tonnes of copper and 700,000 oz. of silver per year, but Kreczmer believes Hana churn out double that total.

Where Discovery is pushing ahead with feasibility based on a resource of 50 million tonnes of ore, Hana is taking a more methodical approach that will bring it a larger resource.

Discovery’s 50.2-million-tonne JORC-compliant resource is broken up between 4.7 million indicated tonnes grading 1.6% copper and 24 grams silver per tonne, and 45.5 million inferred tonnes grading 1.4% copper and 17.2 grams silver.

Hana already has a global inferred resource of 60 million tonnes grading 1.51% copper and 17.98 grams silver, for 2.02 billion lbs. copper and 34 million oz. silver.

But, Hana’s resource uses the more conservative cutoff grade of 0.75% copper, compared with Discovery’s 0.6% copper cutoff.

And while Hana’s resource is largely made up of the massive Banana zone, it also includes two zones that have become more peripheral for the company in the near term: Zones 5 and 6.

“What happened in June, with the resource split between Zone 5, Zone 6 and Banana, we realized that a company like Hana couldn’t develop all of them at once,” Kreczmer explains. “We can’t go and drill and drill indefinitely, so we had to demonstrate that a part of the mineralization was economical and that’s what we did with Banana.”

And while putting two high-potential areas like Zone 5 and 6 on the bricks may seem like sacrilege to some, when the scale of Banana is considered, the move makes perfect sense.

Banana is a massive 30-km, banana-shaped mineralized zone which, to date, has shown continuous mineralization along the contact between underlying sandstone and siltstone layers.

The zone currently has an inferred resource of 40 million tonnes grading 1.47% copper and 21.66 grams silver.

But the company has designs on bringing much more ore to the table.

“I’m confident that we can double the resource at Banana,” says Jacques Janse van Rensburg, project manager at Ghanzi. “We’ve been adding at a rate of 3.8 million tonnes for every one kilometre we drill.”

By the end of 2009, Hana had put roughly 170 reverse-circulation (RC) holes into Banana thanks to three rigs averaging one 150-metre hole per day — a rapid pace made possible only by the use of RC rigs.

And while RC rigs bring greater speed and coverage, the company understands the North American market’s greater comfort with diamond drilling.

Any such reservations should be allayed by the 98 diamond-drill holes Hana has already completed at the project. If that isn’t enough, to ensure the quality of RC results, Hana twinned them to diamond-drill holes and had a third party confirm a direct correlation between the two drilling methods.

“The only thing we miss with the RC is the structure, you can’t see it. But the mineralization is there,” Janse van Rensburg says.

Size matters

One of the challenges in getting the Ghanzi story out, Kreczmer says, is that the Banana zone is too big for many investors to conceptualize.

To help flip on the switch of cognition in potential investors, Kreczmer includes a slide with a map of England in his presentation package.

The entire Ghanzi property is overlain on the County of London and continues beyond its limits all the way northeast into the County of Suffolk. The Banana zone alone extends from London’s southwestern corner to its northeastern-most reaches.

“It’s an inverted canoe with each limb stretching thirty kilometres long,” Kreczmer says of Banana.

And Hana is hell bent on defining mineralization along each of the canoe’s gunwales.

If the 80-million-tonne mark is reached by early next year, the company will shift gears and begin infill drilling to convert resources from inferred to measured and indicated. That will set it up to proceed with a preliminary feasibility study by the end of 2010.

Coinciding with the drive to add tonnage is the search for higher-grade, thicker mineralized zones that Hana calls “sweet spots” — areas that grade more than 2% copper and run as thick as 20 to 25 metres as compared to the more regularly encountered 1% to 2% copper over 15 to 18 metres.

The more sweet spots Hana can hit, the more condensed its payback period will become, as more higher-grade material going to the mill will generate greater revenue streams.

To help it find new sweet spots, the company is flying a closely spaced aeromagnetic survey over the property early in 2010.

“We have a perfect base case with Banana because we know where the sweet spots are; we just don’t know what controls them,” Janse van Rensburg says. “We know how to find the copper, but can’t explain why it’s there. Why is it thicker there? There must be an answer.”

What is apparent is that the sweet spots consistently show both alteration and intrusives. While the secondary enrichment that ensues from those two factors would explain the higher grades, the thickness of the zones remains a mystery.

The company plans to bring in a geologist to work specifically on the issue. And while the hunt for higher grades will be of considerable interest to investors, the status of lower-grade material shouldn’t be overlooked.

An interesting aspect to Banana is that rock with grades lower than the 0.75% cutoff grade will still be included in any pit design.

That means although those lower grades will be mined, for the purposes of economic modelling, those grades won’t be counted. Including only the higher grades shortens the payback period, but the lower-grade ore certainly won’t be blowing away in the wind.

Instead, it will remain onsite to be milled later, after the payback period, thus increasing cash flows at the back end of the project’s life.

Jim Sullivan, Hana’s recently appointed president and chief operating officer — and the most experienced mine builder on Hana’s staff — thinks that over the life of the project, the actual cutoff will come in at around 0.4% copper.

To give an idea of how that changes the resource’s size, the global resource increa
ses to 3 billion lbs. copper from 2 billion lbs. when the cutoff is dropped to 0.3% from 0.75% copper. Hana’s plan upon arrival at Ghanzi — which sits roughly 70 km southwest of the city of Maun — was simple enough: drill more than any of the past holders of the property to see if mineralization is continuous.

Ghanzi had seen no shortage of historical activity up until then, with the likes of U.S. Steel, Anglo American (AAL-L, AAUKY-Q), Gencore and Delta Gold all drilling parts of the property over the last 50 years.

But all of those companies believed mineralization was contained in individual pods that weren’t big enough to be economic.

Delta was the last to take a crack, but it left disappointed in 2000 — although US50¢-per-lb. copper prices at the time didn’t offer much in the way of motivation.

“We didn’t want to be pigeonholed with a small project,” Kreczmer says of Hana’s initial approach to Ghanzi and the 8 million tonnes of resources that Delta had delineated. “We decided to use Delta’s estimate as a starting point and then went to work on understanding the geology. That’s when we realized it was a Kupferschieferstyle mineralization.”

Kupferschiefer deposits are a sedimentary style of mineralization well known in Europe — especially in Germany, where copper and silver were mined extensively in the 1800s, and in Poland, which is currently Europe’s largest copper and silver producer.

Kupferschiefers often stretch over great distances — in Europe, the system runs from southern Germany through Poland and into the Baltic states.

And while Ghanzi parallels such vastness, a key difference between Europe and Botswana is the depth at which mineralization occurs. Whereas in Poland, mining is taking place underground at depths of 800 to 1,000 metres, Hana is defining an open-pittable resource no deeper than 200 metres.

That shallow mineralization is associated with sandstone anticlines that have been weathered to the point of being flat at surface.

But sandstone anticlines are only part of the story. The sandstone actually undulates, progressing from anticline to syncline with a hangingwall of siltstone overlying the sandstone synclines. All mineralization occurs along the contact between the two layers.

Banana is merely the perimeter of one former anticline, but as the pattern persists throughout the property, Hana has followed it to define another five zones, and many other areas that display the same formations have yet to be explored.

So while Banana remains the talk of Hana’s camp, it is by no means the only game in town.

Following the undulating pattern some 95 km north of Banana, Hana twinned holes drilled by Anglo American — which had the property from 1989 to 1994 — and was able to prove up an inferred resource at Zone 6 of 6.2 million tonnes grading 1.5% copper and 6.7 grams silver for 206 million lbs. copper and 1.3 million oz. silver. That resource again uses the high 0.75% copper cutoff grade.

Even more impressive is its results from Zone 5, which sits 75 km north of Banana. Again, Anglo American holes were twinned to come up with an inferred resource of 13.4 million tonnes grading 1.66% copper and 12.11 grams silver for 492 million lbs. copper and 5.2 million oz. silver.

It’s the people that matter

Kreczmer is no stranger to Africa. The Polish-born, University of Toronto-educated geologist became active in the continent’s mining scene back in 1989. By 1993, he had founded the company that would become Tanzanian Royalty Exploration (TNX-T, TRE-X), on whose board of directors he still sits.

In 2000, he started Hana, and while the company had projects in Mongolia, China and India, it wasn’t until 2006 when Kreczmer came to hear about three individuals looking to sell a stake in a copper project in Botswana, that Hana found its company-building property.

After six months of negotiations and of feeling out the business environment in Botswana, Kreczmer came away with a 70% stake in Ghanzi for US$200,000 and 166,667 common shares, along with 666,667 warrants with a strike price of 32¢ per share. A pittance for the scale of mineralization the company has begun to realize.

After completing a resource estimate on the project in the summer, the only thing left to do was to wrap up the final 30% of the project.

“Once we realized it was going to be a mine, it was important for us to lock it up,” Kreczmer says. “We could no longer leave it like a standard joint venture that they may or may not participate in. And we didn’t want anyone else coming in and offering them some amount for the thirty per cent.”

Hana renegotiated with the original claim holders for the exclusive right to acquire the other 30% on completion of a feasibility study for $9 million in cash and 4 million warrants at a strike price of $2 per share.

The Botswana government retains a 3% net smelter return (NSR) royalty on base metals and 5% on precious metals and has the right to acquire a 15% working interest upon issue of a mining licence.

And while that may seem somewhat steep, at least the government can argue that in Botswana, you get what you pay for — not the case in every African country.

The Fraser Institute’s Annual Survey of Mining Companies ranked Botswana 18th out of the 71 jurisdictions surveyed this year — the highest score of any African nation. When the list is narrowed to countries instead of jurisdictions, Botswana’s ranking moves up to 7th out of 41 countries.

And as the resource at Ghanzi grows along with Hana’s stake in the project, so too does the brain trust at the company’s Vancouver headquarters.

In October, the company signalled its readiness to move to the next level by bringing Jim Sullivan in as president and chief operating officer.

The former Kinross Gold (K-T, KGC-N) executive brings 30 years of mine development experience — the most recent feather in his cap being the successful construction of Kinross’s Kupol project in eastern Russia.

Kreczmer says Sullivan’s decision to sign on was directly tied to his bullishness on the project.

“Jim spent a week here before joining and came back to me and said he didn’t see any fatal flaws,” Kreczmer says. “There’s no metallurgical issues, water is not an issue (the site has access to three aquifers) and power isn’t an issue.”

On the last point, Kreczmer says while a feasibility study will likely consider the use of diesel generators, he has been told by government officials that the area could be hooked up to the national power grid by 2012.

Another government plan that would be bullish for Hana is a feasibility study currently being carried out by the governments of both Namibia and Botswana. The two countries are considering running a rail link from Botswana to the coast of Namibia. As it stands now, the plan calls for the rail line to run within a few kilometres of Ghanzi.

If Kreczmer is right, and a mining district is being proven up all around him, such infrastructure plans will move quickly from the abstract into reality.

With such potential, it’s no wonder that many larger miners have begun calling.

“We’ve signed a number of confidentiality agreements with various companies and we’ve started discussing building a camp just to accommodate all the visitors,” Kreczmer says with a smile.

All the attention is also translating into more dollars for the company.

Hana recently announced that it will raise $4 million through a private placement with an unnamed U.K. investment management group that controls $1.6 billion in assets.

Perhaps the most impressive fact about the financing is that the company is raising money at 80¢ per share when its shares had traded as low as 65¢ on Dec. 8 — a clear sign of the kind of leverage that Hana now enjoys when arranging financing.

And while Kreczmer and crew look to zero in on reaching that big payday, it wasn’t long ago that all was nearly lost.

While far away from the near-chaos that struck Wall Street just over a year ago, the vast expanses of the Kalahari were not immune from the ill effects of the collapsing financial system.

Kreczmer and Janse van Rensburg, who has also been with the project since day one, both admit to fearing the worst at the time.

With financing drying up quicker than dew drops on a hot day in the Kalahari, what was looking like a once-in-a-lifetime project was in danger of slipping through their fingers.

“Everyone took a salary cut because we didn’t want to lose people,” Kreczmer says of the drastic actions the company needed to take to hold onto Ghanzi. “All of us hunkered down. We applied to the exchange and the exchange allowed us to pay ourselves in shares — which, as it turns out, we did extremely well as a result of.”

And they stand to do a lot better if the rest of the mining world comes to see the district-scale mining potential around Ghanzi that is as plain as day in Kreczmer’s eyes.