The majestic rise of Imperial’s Red Chris

DEASE LAKE, B.C. — Buying used equipment. Building the small mine envisioned by previous project owners because it was already permitted. Funding the $500-million capital cost from cash flow, supplemented by a loan from a single shareholder. Keeping mine construction management in-house rather than contracting specialists to lower costs and increase flexibility.

A tight approach to everything from capital outlay to marketing has long made Imperial Metals (TSX: III; US-OTC: IPMLF) a bit of a different duck in the waters of the mining world. As the company builds Red Chris, an open-pit, copper-gold mine in northwestern B.C., it is relying on these same tactics and proving that pragmatism can be highly effective.

Red Chris is being built into an open-pit mine served by a 30,000-tonne-per-day mill and flotation facility. The property, located 80 km south of Dease Lake, hosts a porphyry copper-gold deposit containing 301 million proven and probable reserve tonnes grading 0.359% copper and 0.274 gram gold per tonne.

The reserve could feed the 30,000-tonne-per-day operation for 28 years. The potential at Red Chris, though, is much bigger. 

Imperial is building the mine that the previous project owner bcMetals planned and permitted, before being acquired by Imperial in 2007. Since the acquisition, Imperial has finalized, funded and now started building the mine, a move that had to wait until the government got to work on a new power line to bring electricity to the area.

Imperial also probed underneath the defined reserve to see what Red Chris offers at depth. The short answer: a lot. Hole 335, the first hole of the deep-drilling program at Red Chris, returned 1.01% copper and 1.26 grams gold over a whopping 1,024 metres on the east side of the deposit. The hit shows that high-grade copper-gold mineralization reaches twice as deep as the planned pit. Hole 350 produced another remarkable result: 433 metres of 2% copper and 3.8 grams gold, starting 530 metres downhole and including a 152-metre segment of 4.12% copper and 8.83 grams gold.

It turns out that the deeper rocks at Red Chris not only show higher grades, they also bear a consistently higher gold-to-copper ratio than the nearer-surface mineralization. In addition, the deep Red Chris rocks carry much less pyrite than the shallow rocks. The result is a zone that offers some extra copper and a lot of gold — and both are easier to recover.

In 2012, after four years of deep drilling, Imperial updated the Red Chris feasibility study. The mine plan was left almost unchanged, maintaining the reserve at 301 million tonnes, but Imperial incorporated the deep-drilling results into a new overall resource. The calculation came in at 1.3 billion measured and indicated tonnes grading 0.32% copper, 0.319 gram gold and 1.1 grams silver per tonne, plus 1.7 billion inferred tonnes averaging 0.218% copper, 0.239 gram gold and 0.882 gram silver.

Yes, the resource at Red Chris is almost 10 times bigger than the reserve.

That is why Imperial has incorporated lots of room for expansion into the mine it is building at Red Chris. For example, Imperial moved the mill 4 km from its planned location to an area that allows room to grow, and will not be in the way of an enlarged pit.

Imperial has not released official plans for a Red Chris expansion, but neither is management keeping the cat completely in the bag. President Bryan Kynoch has conjured up an image of the Red Chris mine churning through 150,000 tonnes per day — which would mean a fivefold expansion supported by either a much bigger pit, or a large-scale, underground operation.

This is an exciting possibility, but first Imperial has to finish building today’s version of Red Chris. The task is more than half done, with the mine on track to start commissioning on time in May 2014.

Costs at the project are staying contained. Credit for that goes to Imperial’s willingness to jump on cost-cutting opportunities, such as building the mine’s truck shop and warehouse out of a used Quonset hut and a stack of shipping containers. Compared to the original plan to build a traditional building, the move cut the cost of the truck shop from $14 million to less than $4 million.

Similarly, Imperial bought the mine’s large, semi-autogenous grinding (SAG) mill and related components: two huge electric cable shovels and a raft of rolling stock including dozers, graders and mobile cranes used from when AuRico Gold (TSX: AUQ; NYSE: AUQ) shuttered its nearby Kemess mine. Compared to purchasing all that equipment new, the deal saved Imperial millions of dollars.

“We are managing this build in-house because that provides us with flexibility, so we can take advantage of opportunities that crop up to lower costs,” says Gordon Keevil, vice-president of corporate development. “And Imperial essentially only spends money that we make. In general, we run tight — that’s how Imperial operates.”

The backstory

“When you’ve got an approved environmental assessment in hand, you take advantage of that and you go build a mine,” says Steve Robertson, Imperial’s vice-president of corporate affairs. His words describe in a nutshell why Imperial is building the mine that it is building at Red Chris, even though it wasn’t Imperial that designed the operation.

The general design came from previous owner bcMetals, which completed a feasibility study on Red Chris in early 2005. Later that year the junior emerged from the environmental assessment process, approval to develop Red Chris in hand.

With its development-ready, open-pit copper-gold project, bcMetals became an object of much attention.

By late 2006, that attention turned into a takeover battle. Imperial kicked things off with an all-cash takeover bid of 95¢ a share. Arguing the offer was too low, bcMetals adopted a poison pill, which meant Imperial ended up with just 17% of the company.

A few weeks later Taseko Mines (TSX: TKO; NYSE-MKT: TGB) stepped into the ring with an all-cash offer of $1.10 per share. Then the bidding really took off.

Four months later Imperial emerged victorious with an offer of $1.70 per share — almost triple bcMetals’ share price — before the battle began. The deal valued bcMetals at $74 million, and still represents one of the biggest takeover premiums in Canadian history.

Imperial immediately set to work assessing Red Chris’ hidden potential. From 2007 to 2011 the company punched 100 deep holes into the deposit, most more than a kilometre in length. The program was a resounding success, with most holes returning hundreds of metres of mineralized core.

As it became apparent that the Red Chris resource was much larger than the reserve contained in the mine plan, Imperial was faced with a conundrum. Should the company throw out the small mine plan and start fresh with a bigger, bolder plan? Or should it build the operation for which it already had approval?

Imperial had time to contemplate its decision because development at Red Chris had to wait until another factor fell into place: power. The B.C. government had talked for years about building a power line into the northwest corner of the province, which was backed by many mining firms with projects in the area.

In early 2010 the news broke: B.C. was committing to building the Northwest Transmission Line (NTL) and the first stage, pegged for completion in 2014, would bring grid power within 90 km of Red Chris. Near the same time the B.C. Supreme C
ourt confirmed the validity of the Red Chris environmental approval, which had been challenged based on the federal government’s decision-making process.

Suddenly Imperial had reaffirmed environmental approval and a pending connection to grid power. It was time to make a decision — though it turns out Imperial hadn’t lost much sleep over the question.

“From the time we took over the project we had determined that we would build the mine that was permitted,” Robertson says. “Also, the smaller mine is attainable to build alone. We’re a $750-million company — how could we have built a multi-billion dollar mine without a partner? This way, we can build it alone and maintain full ownership.”

And so by mid-2010, Imperial gave itself a green light to build the 30,000-tonne-per-day  mine at Red Chris that its predecessor planned.               

Today’s Red Chris mine

“It’s a great spot to build a mine,”  Robertson says. “It gets almost no snow, it’s flat, there’s a big valley perfect for tailings with very low water flow and it’s essentially right beside the highway.”

Mines, like real estate, depend on location, and mother nature had a great spot picked out for Red Chris. Highway 37, one of only two highways in the northern half of B.C., runs just 20 km west of the project. By taking advantage of pre-existing roads, Imperial only had to build 8 km of production-grade road in 2012 to connect its mine site to a major transportation corridor.

As Robertson mentioned, the climate and topography are ideal for mining. Even though northwestern B.C. is rightfully known for its rugged, snowy mountains, Red Chris happens to sit in an area of rolling hills and minimal snowfall.

The deposit, too, is designed to be mined, starting right at surface and containing shallow pods of higher grades of both copper and gold to boost returns in the mine’s early years. And the deposit remains amenable to mining throughout the 28-year pit, with a remarkably low strip ratio that averages 1.25 to 1. Keevil notes that there is so little waste rock early on that they had to quarry to get the rock they needed for construction.

The mine will start out as two separate pits, named Main and East, that will eventually merge. A massive shovel that can move 59 tonnes of material with each bucketful will load a fleet of haul trucks rated for 240 tonnes.

Haul trucks will dump their loads into a primary crusher, which will feed a 3 km long conveyor leading to the crushed ore stockpile. Crushed ore will be fed into the SAG mill, and oversized pebbles from the SAG mill will be sent through a pebble crusher before returning to the SAG. A subsequent trip through a ball mill prepares ore for flotation.

The flotation circuit will produce a concentrate grading on average 27% copper, 11.7 grams gold and 42 grams silver. Tailings from the first phase of the flotation circuit will be refloated, to remove all pyrite and create non-acid generating waste that can be used to build the three dams involved in the tailings facility.

The operation would churn out 73.5 million lb. copper and 46,600 oz. gold annually over its minimum 28-year lifespan. Using base case prices of US$2 per lb. copper and US$900 per oz. gold, the mine could produce each pound of copper for US$1.22, net of gold and silver credits. Concentrate from Red Chris will be trucked 320 km to Stewart, the coastal town built around Canada’s most northerly ice-free port. Imperial is familiar with the port, as concentrate from its Huckleberry mine already goes to Stewart.

The one aspect of Red Chris that is not ideal is the metallurgy, particularly in the upper levels of the deposit. About 50% of the gold in the deposit is recoverable. Silver recoveries are likely similar, though Imperial has not released a silver recovery number. Copper recoveries are much better, averaging 87% over the mine’s life.

Tailings will be stored in a Y-shaped valley to the east, with the tailings impoundment area defined by three dams. Only one is needed for start-up: the North Dam, which is the widest and tallest of the three. It has to be 35 metres tall before tailings can flow, a feat that will take crews working 24 hours a day, seven days a week for five months to complete.

The last piece of the puzzle is a connection to the under-construction Northwest Transmission Line  (NTL). Turns out that took a bit of doing.

The 344 km NTL is extending 287 kV grid power north from Terrace to Meziadin Junction, where the current smaller line turns west towards Stewart, and then north to Bob Quinn Lake. Bob Quinn Lake is 90 km south of Red Chris, but Imperial was not alone in needing the line to reach farther north. In committing to the NTL the B.C. government promised to extend power all the way to Iskut, a small First Nations community 100 km north of Bob Quinn that has long relied on diesel generation.

The Iskut extension would have brought power almost to Red Chris’ doorstep, but there was a problem: the extension was a concept with no timeline. Needing the Iskut extension to become reality, Imperial approached BC Hydro.

After lengthy negotiations, the parties struck a deal: Imperial is building the 93 km Iskut extension, running a 287 kV line from the Bob Quinn substation to a substation near Red Chris; and BC Hydro will then run a line from the substation to Iskut.

Imperial is footing the cost to build the line, which is expected to be $82 million. Once it is done, BC Hydro will buy the line for $52 million. That means Imperial is spending $30 million to connect to the provincial power grid, the amount it budgeted in its feasibility study — provided the company keeps the costs of building the line contained. If costs climb, Imperial will bear the additional expense.

That would add to the $500 million that Imperial expects to spend turning Red Chris into a mine. With the build more than half complete the project remains on budget and on schedule.

Assuming a copper price of US$2.20 per lb., a gold price of US$900 per oz., a silver price of US$12 per oz. and a 5% discount rate, the mine carries an after-tax net present value of $423 million, and should generate a 15.7% after-tax internal rate of return.

That means the mine could pay back its capital costs in 4.6 years.

What might be

“This is a pretty spectacular deposit,” Keevil says. Indeed, any deposit with a measured and indicated resource containing 8.9 billion lb. copper, 12.9 million oz. gold and 44.6 million oz. silver — plus an inferred count that adds another 7.9 billion lb. copper, 12.8 million oz. gold and 47 million oz. silver — deserves to be called spectacular.

Keevil and Robertson were careful to caution — repeatedly — that Imperial has not studied its expansion options in any detail, let alone committed to or started permitting an expansion. The focus now is to get Red Chris into production. That being said, they acknowledge that Imperial is investigating the idea of a Red Chris mine that is perhaps five times larger than the one currently under construction.

“Ideally we’d like to build a huge open pit, because that’s what we are good at,” Robertson says. “If you dug to 900 metres you’d get most of it. That being said, we could also do a big block cave or conventional underground mine. We’ll need to make that kind of decision in two to three years.”

While Imperial is not rushing to expand Red Chris, it doesn’t want to wait too long, either. Its two other large mines will both run out of ore in the next 12 years — Mount Polley in 2025 and Huckleberry in 2021 — so it “makes sense to do it sooner rather than later, while we still have cash flow from all three operations,”  Keevil says.

“It’s not unrealistic to think the bigger mine could be there early next decade,” he says. Of course, any such timeline is subject to achieving regulatory approval.

Mine financing

For the first half of the two-year mine build, Imperial funded Red Chris costs primarily from cash flow. The company also dipped into an existing $150-million credit facility. Then in June, Imperial — which hasn’t gone to the markets to raise money in the form of equity or debt since 2005 — announced it has signed a $75-million line of credit to provide some of the additional cash needed to bring Red Chris into production.

The credit line is from Edco Capital, a company controlled by Imperial’s largest shareholder, Murray Edwards. Edwards also guaranteed half of that $150-million credit facility. If that sounds unusual, it is — but Imperial’s unique relationship with Edwards goes back a long ways.

Edwards owns about 38% of Imperial’s outstanding shares today and has been a significant shareholder since 1994. Imperial is in good company in Edwards’ books, which also contain major stakes in Canadian Natural Resources, Ensign Energy Services, the Calgary Flames Hockey Club and several Canadian ski resorts. A self-made billionaire, Edwards often gets deeply involved with his investments. For example, he was widely credited as a central deal maker in the negotiations to end the National Hockey League lockout last year.

He also puts his money where his mouth is.

“The presence of Murray allows us to operate a little differently than others,” Keevil says. “He was there through the difficult period up to 2005 and participated in the financing to restart Mount Polley, and is supporting the company in the development of Red Chris.”

The Edwards advantage is evident in the latest loan agreement between Imperial and Edco Capital. It is structured as a line of credit with a related party and it represents less than 25% of Imperial’s market capitalization, which together means the payment timing and amount is flexible, and does not require shareholder disclosure or approval.

The deal jives with Imperial’s way of doing business because it doesn’t impose the rigid requirements that usually accompany standard bank loans.

“Imperial Metals and conventional bank financing don’t go well together because we run so tight,” Keevil says. To obtain a conventional loan for Red Chris, Imperial would have needed to provide and stick closely to a mine-development plan. In addition, it would have been much more difficult for Imperial to self-manage the construction. Imperial has a mine plan but it has deviated several times to take advantage of opportunities to save time or money, such as the choice to ditch its conventional truck shop in favour of the used Quonset hut.

Beyond Red Chris, Imperial already operates three mines. Mount Polley is a copper-gold mine in B.C., Huckleberry is a copper-molybdenum-silver mine also in B.C. and Sterling is a small, underground gold operation in Nevada. 

Located 100 km northeast of Williams Lake, Mount Polley produced 33.8 million lb. copper, 52,200 oz. gold and 116,100 oz. silver in 2012. The mine started operations in 1997 and current reserves extend the mine life to 2025, though exploration successes last year suggest the potential to add years with an underground operation.

Huckleberry is a few hundred kilometres to the northwest, sitting 120 km southwest of the town of Houston. It also started operations in 1997. In 2012 the mine churned out 35.1 million lb. copper, 2,580 oz. gold, 191,787 oz. silver and 4,556 lb. molybdenum. Imperial owns 50% of the mine and acts as operator. The Japan Group, which consists of Mitsubishi Materials, Furukawa and Dowa Mining, own the rest.

Mount Polley, Huckleberry and Red Chris are within a few hundred kilometres of each other, and Imperial takes full advantage of its operations’ proximity, moving equipment and personnel from one to another when it makes sense.

For example, Imperial bought two shovels from AuRico when it closed Kemess. Originally, the company planned to use both at Red Chris and immediately sent the larger one north to the developing mine. The smaller one went down to Mount Polley, where it is significantly larger than the mine’s standard fleet of cable shovels.

Similarly, Imperial took early delivery of two 240-tonne haul trucks intended for Red Chris and sent them straight to Mount Polley in 2012. The shovel and the trucks are a perfect addition to Mount Polley’s fleet at the moment, because the mine is going through a year of particularly high strip, as the Springer and Cariboo pits are joined. Access to a shovel that can move 46 tonnes with each bucketful and two massive haul trucks is lowering per-tonne costs there by as much as 10%.

On top of that, with the Red Chris machine at work, Mount Polley did not need all of its smaller machines, so Imperial sent five 100-tonne haul trucks from Polley to help build the tailings facility at Red Chris. “It’s allowed us to move material more cheaply here than we otherwise would have been able to,” Keevil says.

And so it goes with Imperial — wherever a rejig or a new opportunity can reduce costs, even by a bit, Imperial will do it. And as the savings add up, the company’s performance and potential grow.