Zaruma board, Luz del Cobre financing survive

Gold and copper hopeful Zaruma Resources (ZMR-T, ZMRAF-O) is free to proceed with finalization of a financing deal that would see construction at its Luz del Cobre copper project in Mexico financed by Swiss-based metal trader Glencore International.

The pair recently inked a memorandum of understanding whereby Glencore would foot the bill to bring Luz del Cobre into production, and be repaid (plus interest accrued at the London interbank offer rate) out of the project’s cash flow.

Glencore would also be granted the right to acquire all of the copper production from Luz del Cobre based on London Metal Exchange market prices.

The agreement hinged on Zaruma’s board of directors weathering a challenge by a dissident shareholder at its annual general meeting on June 29. The incumbents received votes representing 21.9 million shares versus 15.5 million, including 7.1 million held by the dissident group.

The challenge was spearheaded by Victor Wyprysky who in a dissident proxy circular expressed concern over management’s expenses and cost levels, and the ongoing dilution of the Zaruma shares.

Wyprysky proposed replacing Zaruma’s current board, which comprises Michael Power, Thomas Utter, Michael Richings, Peter Lorange and Frank van de Water, with his own roster that includes himself, Edwin Morrow, Paul Carrol, William Shaver, and Ian MacNeily. Morrow served as Zaruma’s CEO from November 1995 to December 2001.

Zaruma says Wyprysky plan is not in the best interest of the shareholders. The company says that in late 2005 and early 2006 it accepted several proposals for the development of Luz del Cobre copper project, including one form Wyprysky, which was rejected.

“It was clearly designed to enrich Mr. Wyprysky’s group at the expense of the Zaruma shareholders,” the company said in a recent press release responding to the dissident proxy. “The proposal appeared to be tied to a particular engineering, procurement and construction management company, the same company in which some members of the proposed board also have a significant financial and management interest. This same group now wishes to take control of your company,” it concluded.

With the board intact, Zaruma expects to warp up a definitive agreement with Glencore following the completion of an updated feasibility, which is expected by the end of September. Work on the feasibility study continues, with consulting engineers M3 Engineering & Technology reviewing the existing flow sheet and plant blue prints. The company is also wrapping up metallurgical recovery verification tests and detailed capital and operating cost updates.

Zaruma recently filed the project’s environmental impact manifest, which must be approved before construction can begin.

Measured resources contained in the optimized pit shell at Luz del Cobre total 1.6 million tonnes grading 1.3% copper, with another 2.9 million tonnes of inferred material running 0.9% copper. The estimates are based on an assumed mining and processing cost of US72 per lb. of recovered copper, and a copper price of US$1.61 per lb. The cost figure reflects those of an existing Mexican deposit of similar size.

Luz del Cobre is initially envisaged as an open-pit, heap-leach, solvent extraction and electrowinning operation. Annual production is forecast at 7,000-8,000 tonnes of copper cathode over 5-6 years, with cash costs estimated at around US65 to US$70 per lb. Start up could conceivable come within 12 months of financing.

Luz del Cobre is part of Zaruma’s 98-sq.-km San Antonio project, 160 km southeast of Hermosillo in Mexico’s Sonora state.

The project also hosts the gold-mineralized Realito structure. At last count, measured and indicated resources in the Golfo de Oro, Centenario and California zones totalled 1.74 million tonnes grading 4.4 grams gold per tonne. The bulk of this is in the Golfo de Oro zone. Another 162,000 tonnes of inferred resources in the Golfo de Oro and California zones grade 4 grams. The estimates are based on a cutoff grade of 2.5 grams gold and a gold price of US$325 per oz.

Shares in Zaruma were off 1.5 at 13 in afternoon trading in Toronto following the vote results on June 29. The shares trade in a 52-week window of 6-24. There are just more than 93.7 million shares outstanding.