Quadra FNX loses Chinese partner for Sierra Gorda (June 28, 2010)

A Chinese utility company has walked away from a potential 50-50 joint-venture deal with recently-merged Quadra FNX Mining (QUX-T) for its Sierra Gorda copper-gold- molybdenum project and Franke copper mine in northern Chile.

State Grid International Development, a subsidiary of State Grid Corp. of China, claimed that Sierra Gorda was too much of a gamble for such a large capital investment because the company doesn’t have a construction permit yet.

Quadra FNX expects to complete a $40-million feasibility study by the end of the year and is preparing for capital costs in the neighbourhood of US$2 billion to build the 110,000-190,000 tonne-per-day open-pit mine.

Production at Sierra Gorda is expected to start in 2013, but reaching that goal will require ordering some long lead items before the permits come in. Now Quadra will have to go it alone for the time being.

“From Quadra’s experience, the permitting process in Chile is one of the best permitting countries in the world and we are happy in order to make the time frame of the project to spend money prior to getting the permits,” says Derek White, Quadra FNX’s vice-president of corporate development, in an interview. “That’s not something State Grid wanted to do. They’ve had situations in the utility business where they have tried to build things on an unpermitted basis and it certainly hasn’t worked out for them.”

It was in March that Quadra, prior to its merger with FNX, signed a memorandum of understanding with State Grid, which expired on June 15. The deal included a $151.6-million private placement of 10.9 million Quadra FNX shares, which have been held in escrow pending the finalization of the joint-venture deal.

White says that even without the financing, the company has enough money to complete the feasibility study, noting that now Quadra FNX is free to talk to other potential partners.

“We had a number of discussions prior to the time State Grid was involved so we know there is interest in the project from before,” White says.

Adam Schatzker, a mining analyst at RBC Dominion Securities, says the loss of State Grid could force Quadra FNX to delay building its project by at least a year.

That said, the company is still undervalued at its current share price and the loss of State Grid could be positive for the company once it completes the feasibility study and receives its permits, Schatzker writes in a note to clients.

“The Sierra Gorda project will be significantly derisked and more attractive to potential partners,” Schatzker notes. “We think that a new partnership will require Quadra FNX to sell a smaller portion of Sierra Gorda and will not include a stake in Franke.”

Schatzker gives Quadra FNX a 12-month target price of $20 per share. Quadra FNX shares closed down $1 on June 15 to $12.48 on a trading volume of 3.6 million shares. The company has 188.5 million shares outstanding.

The Sierra Gorda project has measured and indicated resources of 35 billion tonnes grading 0.42% copper, 0.025% molybdenum and 0.07 gram gold per tonne within sulphide ore. There’s an additional 456 million inferred tonnes averaging 0.38% copper, 0.012% moly and 0.04 gram gold. The project also hosts 250 million tonnes of oxide resource, which was considered waste in the scoping study.

The prefeasibility study contemplated an open-pit mine with a mill and flotation plant, which would produce 250 million to 400 million lbs. of copper per year over 25 years. Cash costs have been estimated at US79¢ per lb. copper, net of gold credits, though moly production during the first eight years could reduce that to US34¢ per lb. copper.

The Franke open-pit mine began production in the third quarter of 2009. It contains reserves of 41.7 million tonnes grading 0.75% copper and has a mine-life of 8.5 years.