Taca Taca gets bigger and better

After a brief stop around midnight to refuel in Panama, Ross Beaty pulls out a sleeping bag from his carry-on and spreads it in the aisle of the luxurious Gulfstream III jet he has chartered to fly a group of mining analysts to Lumina Copper‘s (LCC-V) Taca Taca project in northwestern Argentina. “This is the first time I’ve tried this,” the mining entrepreneur says almost sheepishly.

The bottom of Beaty’s sleeping bag is a few inches shy of the head of David Strang, Lumina Copper’s chief executive and a former middle-distance runner for Great Britain in the 1996 Olympic Games. Beaty discovered Strang at Standard & Poor’s in San Francisco where the whiz-kid worked as a valuation expert after studying mineral economics on a scholarship at Stanford University.  

The pair has worked together on base metals since 2003–about a year after Beaty decided to place a big bet on copper prices moving higher and started building the Lumina group of companies. Beaty’s plan was simple: to go out and acquire as many large undeveloped copper projects as he could get his hands on and develop them to the point where they could be sold at hefty premiums to larger companies who would then turn them into producing mines.   

The strategy unfolded as designed. Over the course of the next five years Beaty invested roughly $94 million in the exploration and development of copper deposits across Latin America and Canada and by 2008 had flipped the last of the four companies he had spun out of Lumina Copper (Global Copper Corp., Northern Peru Copper, Regalito Copper and Lumina Resources)–bringing in a total windfall of about $1.4 billion.  

Taca Taca is Lumina’s third and remaining acquisition from that period and will go up for sale within the next eighteen months. “We’re looking to divest in 2012 or 2013,” Beaty says of the massive copper-molybdenum-gold project 90 km east of Escondida, the world’s largest copper mine. “We’d like to turn it over to another company-a big company-to take it into production and make it a very big mine.”

Lumina purchased the deposit for about US$1 million from Corriente Resources (CTQ-T, ETQ-X) when that company decided to shift its exploration focus from Argentina to Ecuador. At that point Taca Taca had been drilled by Corriente, Falconbridge, BHP Billiton (BHP-N) and twice by Rio Tinto (RIO-L).

Lumina started drilling in August 2010 under the direction of project manager Guillermo Almandoz, a seasoned geologist intimately familiar with the deposit from his earlier work with Rio Tinto. At first Lumina targeted its drills on the area of higher grade core Rio Tinto had identified before them. Not only did Lumina’s deeper holes end in strong mineralization, but the company also discovered a zone of supergene mineralization in step-out holes to the north.

“We were incredibly fortunate to be able to retain a geologist that had worked for Rio Tinto–a very, very good geologist who understood the system and what had been missed by previous geologists, which is to say they didn’t drill deep enough and they didn’t drill to the northern part of the deposit where you have these spectacular high-grade supergene copper zones,” Beaty explains. “I have to think this is one of the best discoveries of the year. It is definitely the biggest.” 

In mid-November Lumina updated its resource estimate for Taca Taca. At a 0.4% copper-equivalent cut-off grade resource tonnes grew by about 66%, contained copper by about 71% and contained gold by about 48%. Indicated resources now stand at 516 million tonnes grading 0.76% copper-equivalent, 0.58% copper, 0.018% molybdenum, and 0.12 gram gold per tonne, for contained copper of 6.59 billion pounds, 204.6 million pounds molybdenum and 2.06 million ounces of gold.

Inferred resources add 880 million tonnes grading 0.57% copper equivalent, 0.43% copper, 0.015% molybdenum and 0.08 gram gold for contained copper of 8.28 billion pounds, 292.9 million pounds of molybdenum and 2.31 million ounces of gold.

The updated resource estimate places Taca Taca in the world’s top tier of copper deposits, Adam Low, a mining analyst at Raymond James, wrote in a note to clients on Dec. 9. “At 15 billion pounds of contained copper (20 billion pounds on a copper equivalent basis) Taca Taca is already one of the largest undeveloped copper deposits in the world, yet it still has significant exploration potential.”

The resource remains open to the north, northwest, east, south, southeast and at depth and currently the alteration footprint is about 7 sq km. Six drill rigs are on site and two more will be added before year-end. The 99,500-metre dill program will be completed by April 2012.

The Taca Taca property contains a large Andean type porphyry copper hydrothermal system that has generated supergene and hypogene copper, molybdenum and gold mineralization. Other mineralization on the property includes remnant bodies of oxide/supergene deposits within the leached cap of the porphyry; gold-copper quartz veins to the north and west of the porphyry, and exotic copper oxide mineralization to the east and southeast beneath the Salar de Arizaro. Taca Taca lies along the western edge of the salar, the largest dry salt lake in the country. A surface molybdenum anomaly also defines the Taca Taca system.

“Porphyry deposits are often ring shaped, at least prior to faulting and ground movement, and the current deposit forms roughly half of this typical ring on the western side,” Low of Raymond James writes. “Management has found that the hypogene copper mineralization identified thus far mimics the zones of intense quartz stockwork with molybdenum. Surface geochemical work has shown similar molybdenum anomalies to the southeast …The inference from the molybdenum anomalies is that the mineralization could be continuous to complete the ring.”

Beaty, Lumina Copper’s major shareholder with a 25% stake in the company, says Taca Taca is the largest project he has ever been involved with in his career. “It’s the largest size, the largest economic value, one of the most interesting geologically and absolutely one of the most fun. It’s true exploration. We don’t know what the next hole is going to bring us but so far they’ve brought us much happiness and joy and great value for our shareholders.”

 Of course the question on everyone’s mind is whether Taca Taca eventually will prove to be as enormous as Escondida or any of the other huge deposits in the region such as Chuquicamata and Collahuasie, both of which are among the top five copper deposits of the world.

“Taca Taca has an Escondida-sized alteration halo,” says Strang, “but whether that translates into the same amount of mineralization I can’t tell you.” What Strang and Andy Carstensen, Lumina’s vice president exploration, are willing to say however is that the age of the mineralization at Taca Taca is about the same as Escondida’s and could have been part of the same mineralizing event 29 million years ago.

“It’s in a region where there are super giant ore bodies,” Beaty continues with characteristic enthusiasm. “I’m not going to say Taca Taca is in that league but it’s pretty darn big. It certainly is a giant. It’s probably larger than any copper deposit in Canada for example, by quite a stretch, larger in both tonnes and grade, and therefore it’s a very exciting and rare deposit which we feel very privileged to be developing.”

Getting there …

It takes about eight hours to drive to Taca Taca from the city of Salta in the Puna (altiplano) region of western Salta province and most visitors like to break up the roughly 400-km journey (230 kilometres as the crow flies) with an overnight stop at a small rest-house in San Antonio de los Cobres, an outpost of about 800 people that sits at an elevation of 3,600 metres on an active railroad line running between Chile and Argentina.

The four-hour trip to San Antonio de los Cobres is mostly along a gravel provincial road and from San Antonio de los Cobres it’s another four to five hour drive to the property. The road continues beyond Taca Taca another 60 km to the Socompa pass on the Chilean border and then on to Antofgasta, a deep-water port city in northern Chile about 1,130 km north of Santiago.

One of the most incredible things about the project is that while it is literally in the middle of nowhere and in one of the most uninhabitable places on earth (save for the occasional cluster of lamas that manage somehow to eke out an existence there), Taca Taca is within 10 kilometres of a narrow gauge rail line that could take copper concentrate from the proposed mine site straight to deep-water port facilities near Antofagasta in Chile.

The round-trip along the 80-year-old line would take about forty-four hours and Lumina estimates it could transport 3,000 tonnes of concentrate a day (1 million tonnes a year) to Antofagasta. The government-owned railway line is managed under a long-term agreement by Belgrano Cargas, a private Argentinian company, which in discussions with Lumina has said it has the capacity to run five or six trains a day in the future if it can negotiate a long-term contract. Each train pulls 25 wagons and each wagon has the capacity to carry 40 tonnes of concentrate, Lumina’s management says.

In terms of power, TermoAndes S.A., a national power generator based in Salta, operates a 640-megawatt power plant and a 345-kilovolt international transmission line that runs from Cobos in Salta province to Andes in Chile and passes within 135 km of the Taca Taca project. The Salta plant has the capacity to add an additional 320-megawatt plant based on future demand

“The Taca Taca project connection to the Argentinean Bulk Electric Market is possible and capacity exists, making long-term electric market power prices accessible in the range of US$75-82 per megawatt hour,” says Marshall Koval, Lumina’s vice president of corporate development. Making the connection possible would involve physical reconfiguration on the existing international line and permitting, he explains. Currently Lumina consultants are evaluating five alternatives and routes to connect Taca Taca to power supply. The alternatives include three options: to connect to the TermoAndes line, a connection to the Chilean grid, and a natural gas power plant option near Taca Taca.” In addition there are other planned mining projects in the area like Mansfield Minerals‘ (MDR-X) Lindero gold project, 40 km to the south of Taca Taca, which also will require connection to the grid and may provide economies of scale for local power infrastructure. “Provincial authorities have expressed an interest in providing institutional support to make these mining project connections possible,” Koval says. Lumina is completing further studies and in the meantime Taca Taca’s power needs are being met by diesel generators.  

On the environmental front, Lumina management believe permitting Taca Taca should be fairly straightforward, given the lack of virtually all human and biological life in the area and the fact that there are no competing industrial or agricultural uses for land. “There are no negative social or environmental impacts because there is almost no species of anything, let alone any endangered species, anywhere near the project,” Beaty says,  “so it’s just a very nice place to develop a mine.”

Metallurgical testing is ongoing and initial test results have been encouraging, the company says, with copper concentrate grades of 31%-36% and relatively little arsenic. “If you look at copper deposits throughout Latin America these days arsenic is a big issue,” Koval says. “The arsenic in our concentrate is about 0.02% so it’s super low.”

Early test work has also demonstrated that commercial grade molybdenum concentrate is achievable. A moly separation test returned 49% molybdenum in concentrate-a saleable molybdenum concentrate. And preliminary leach testing of gold has returned recoveries of between 40% and 70%, percentages that Koval says can be improved in the next round of test work by experimenting with longer retention times and lower concentrations of cyanide.

Lumina completed an initial mine plan based on an earlier 2008 resource estimate and is now working on a second mine plan based on the updated resource. It is also looking at a combination of supply options for water including sourcing it from the salar, freshwater drilling and water treatment. A drill program is underway to find potential fresh water sources from aquifers and the company has commissioned AsencoVector to complete a regional water supply study. It has also retained Schlumberger to evaluate filtration alternatives to lower water salinity. Metallurgical tests also have been executed to evaluate the effect of salar water on copper flotation and so far the results have shown that there is little effect on rougher circuit recoveries or concentrate grades with a fresh water cleaning circuit.

As for the mine permitting process Lumina does not anticipate difficulties. “On a relative basis to other parts of the world the permitting process is transparent,” Strang says, noting that a precedent already has been set by Mansfield Minerals, which recently was awarded an environmental permit for its Lindero heap leachable gold porphyry deposit. “You hear about horror stories in various provinces of Argentina yet here we have a mine that is going to be built as an open pit and it’s going to use heap-leach and cyanide,” Strang says. “Its EIA was approved in a reasonable period of time.”

Indeed Lumina’s management repeatedly pointed to the pro-mining stance of the provincial government of Salta and its eagerness to develop the industry. In Argentina, legislation controlling mining is a provincial matter as it is in Canada, where every province has its own laws on mining and varying regulatory regimes. Some provinces in Argentina such as Chubbut and Rio Negro have banned the use of cyanide, for example, while in other provinces like San Juan and Santa Cruz mining is going full bore and delivering revenues to provincial treasuries. “Salta is in that happy camp,” Beaty says. “It’s a pro-mining space … this is a great province to be in.”

Admittedly at the national level Argentina does raise some eyebrows when it comes to resource development. The government imposes a heavy royalty of 10% on exports of copper concentrate (7.5% for projects like Taca Taca that are located in the Puna region), one of the heaviest and most regressive royalties of its kind in the world, which can make some projects uneconomic. At the same time, however, it realizes it must continue to encourage mining because it is a major growth engine for its economy.

“Right now Argentina is a very good place to develop mines although from time to time it develops legislation that doesn’t make a lot of sense,” Beaty says. “Obviously we hope it will take the same tradition as Chile has, and Peru has, and Brazil has, where mining development is an important priority for the government and attraction of foreign investment is seen as a very good thing.”

Looking ahead …

In November Lumina raised $30 million with 1.5 million shares issued in a brokered private placement at $10 per share and another 1.5 million shares issued in a non-brokered private placement. “With about $35 million on its balance sheet we believe Lumina Copper is poised to further de-risk the project with further drilling and engineering studies,” Tom Meyer of Scotia Capital wrote in a note on Dec. 8.

Meyer has increased his one-year target price on the stock to $18 per share, up from his previous $17 per share.” (At presstime in Toronto Lumina was trading at about $11.40 per share.)

“As a result of the increased share count, our NAVPS decreased to $25.89 (previously $27.61),” Meyer wrote. “However, we are increasing our target P/NAV multiple to 0.70x (previously 0.60x). In our view the premium is justified due to the size of the project and the quality of the work being conducted.”

Raymond James’ Low has a six-to-twelve month target price of $17 per share and a strong buy rating on the stock, noting that he believes Lumina “should be viewed as an acquisition candidate.”

When asked who might eventually turn up on a short list of interested buyers for Taca Taca Beaty says it’s hard to say but is convinced that the project will command a good value because of its quality and size. “I could reel off a dozen companies that would love to own it if the price was right,” he says. “It would be a core asset in almost every single major mining company’s portfolio. These are very, very rare deposits, it’s a mining friendly country, it’s a high-grade deposit, the economics look great, it has no fatal flaws and it will be a multi-decade-long mine life.”

Despite the lack of sleep, the six a.m. wake-up call, the four hour journey to the project and the eight-hour drive back to Salta, Beaty takes the wheel to give one of his geologists a chance to take a nap in the back-seat. The 58-year-old father of five has more energy than some of the analysts on the tour roughly half his age and an enthusiasm that has helped him spawn a mining empire that has grown beyond base and precious metals to new companies in the emerging field of geothermal energy.

“If I were a kid today I probably would have been put on Ritalin,” jokes the entrepreneur.

“I don’t need to do this,” he says, “I love doing this.”

And Taca Taca?

“This thing is going to get bigger and better.”