Panoro’s Cotabambas PEA a good start

Analysts believe Panoro Minerals’ (TSXV: PML; US-OTC: POROF) preliminary economic assessment (PEA) on the Cotabambas project shows the copper-gold-silver-molybdenum porphyry deposit is viable, despite failing to impress investors. 

Cotabambas sits within the prolific Andahuaylas-Yauri copper-gold belt of southern Peru. This belt hosts several large copper deposits, including Glencore Xstrata’s (LSE: GLEN) Las Bambas and Antapaccay projects, Hudbay Minerals’ (TSX: HBM; NYSE: HBM) Constancia project, and First Quantum Minerals’ (TSX: FM; LSE: FQM; US-OTC: FQVLF) Haquira deposit.

The PEA, released April 9, envisions Cotabambas’ two pits, Ccalla and Azulccaca, feeding an 80,000-tonne-per-day plant for 19 years. Life-of-mine copper production would total 2.7 billion lb., averaging 143.4 million lb. a year at C1 cash costs of US$1.26 per lb., net of by-product credits. Initial start-up costs are US$1.4 billion.

“The results are in line with the company’s expectations,” Luquman Shaheen, the company’s CEO, said in an email. “We expected a 500- to 600-million-tonne mine plan for a 60,000- to 80,000-tonne-per-day mine with a 1.3 strip ratio. Our PEA includes a mine plan at the top end of our expectations, as well as a throughput at the top end. The [1.03-to-1] strip ratio was better than expected.”

Assuming a base-case copper price of US$3.25 per lb. and a 7.5% discount rate, Cotabambas, on an after-tax basis, has a US$627.5-million net present value and a 14.4% after-tax internal rate of return (IRR). Payback would occur within four years.

“We believe the PEA shows the market is a viable project that still has a long road to become an operating mine, but the first step has been made. So it’s positive news, but as any junior project, there is a lot of risk involved,” Peru-based Kallpa Securities analyst Luis Vicente says. Vicente says the firm could reduce some of the capital costs in the prefeasibility or feasibility study.

However, investors appeared unimpressed by the PEA results, pushing the stock down 25% to 18¢ within two days of the study’s release. Panoro shares fell another 5% to close April 14 at 17¢.

“The share price drop is disappointing, but I think it is more a reflection of where the market is rather than the results of the PEA. The PEA has identified that the technical aspects of the project do not present any difficulties in engineering and the economics of the project are strong,” Shaheen maintains.

Haywood Securities analyst Stefan Ioannou, who doesn’t formally cover Panoro, suggests the stock partly fell due to the PEA’s arguably low after-tax IRR of 14.4%. 

“It wasn’t a fantastic headline number. I would say from a financing point of view, most investors would want to see something on an after-tax basis of probably at least 18% or higher. Right now, the market is more pessimistic than optimistic. They are looking at everything through US$2.75 [spot price] copper glasses, as opposed to US$3.25 copper glasses.” 

That said, Ioannou says a PEA is a first stab at a project and that there is still plenty of room for optimization. “It’s an economic project. I think it is something that deserves attention going forward,” he says.

Shaheen says enhancements include increasing recoveries in higher-grade zones through more metallurgical testing and recovering more metal early in the mine life, with a shift in cut-off grade strategy and mining sequence. There’s a possibility of increasing the mine life through exploration. 

With the PEA checked off, the junior can optimize the project and initiate infill and exploration drilling later this year. 

Asked if the firm is seeking a joint-venture partner to help advance the project, Shaheen says that “the company’s goal is and always has been to complete a feasibility study, line up development capital and obtain a permit before selling, partnering, joint-venturing, etc.”

But Haywood’s Ioannou notes that Cotabambas is likely on Hudbay’s mergers and acquisitions radar, given the project is similar in size and grade to the nearby Constancia copper project, which the major picked up through its $520-million acquisition of Norsemont Mining in 2011. (Constancia, budgeted at US$1.8 billion, should start commercial production by mid-2015.)

“Hudbay has publicly stated they view Constancia as more of a regional play, and they want to grow it over time. So this will be a great add-on, and you could call it Constancia No. 2 … they have already put their money where their mouth is, and they own north of 11% of Panoro, on the equity side of things.”

Commenting on the market, the analyst says there are oversupply concerns, but given that many new copper mines are not coming online as expected, the copper price could increase in the next two to four years, with prices soaring up to US$4 per lb. 

“Copper is not going have its day probably until at least 2018. But at that point, $3.25, $3.50 or even $4 copper is pretty reasonable.”

When that happens, Cotabambas, which might not start production until 2020, could look more attractive.