The increase in the share price of
Results from 29 diamond drill holes in the La Fortuna zone indicate a large mineralized porphyry system. The system remains open to depth, as well as to the north and northwest. Noranda will evaluate the latest results over the summer before releasing its first resource estimate by the end of the third quarter. Noranda has indicated to Metallica that it intends to proceed with the next round of drilling early in the fourth quarter, weather permitting.
BMO Nesbitt Burns analyst Craig Miller calculates a weighted average, for all drilling, of 440 metres grading 0.32% copper and 0.28 gram gold per tonne over an area measuring 1,200 by 900 metres. A higher-grade core is denoted by 13 holes in an area of about 800 by 500 metres. These holes have a weighted average of 471 metres grading 0.52% copper and 0.46 gram gold. A back-of-the-envelope calculation by Miller suggests that the potential volume defined by these holes is more than 470 million tonnes.
The target was further enhanced by holes 4, 12A, 18, 21 and 26, which intersected an enriched copper horizon with values ranging from 1.05% to 3.28%. Results included:
– 70 metres grading 1.15% copper and 0.35 gram gold, beginning at down-hole depth of 150 metres, in hole 4;
– 46 metres grading 3.28% copper and 0.21 gram gold, starting at an angled depth of 62 metres, in hole 12A;
– 63 metres of 1.52% copper and 0.18 gram gold at 35 metres down-hole in hole 18;
– 62 metres of 1.05% copper and 0.28 gram gold at a 52-metre depth in hole 21; and
– 22 metres of 1.05% copper and 0.43 gram gold, starting at a depth of 84 metres, in hole 26.
Miller rated Metallica an “outperform (speculative)” in a commentary published in late May, based on what was then a trading price of 83.
Noranda can earn a 70% interest in El Morro by spending US$10 million on exploration, and by paying US$10 million in cash to Metallica by September 2005. If Noranda wishes to continue earning-in this upcoming field season, it must subscribe for US$1 million worth of Metallica shares by Sept. 14, 2001, at 1.5 times the average trading price for the 60 days prior to the exercise date.
Noranda is required to complete a bankable feasibility study and is also responsible for making all underlying property option payments.
In addition, Metallica holds a one-time right to have Noranda fund 70% of the junior’s 30% share of capital costs to develop a mine, at a carried rate equal to Noranda’s cost of financing plus 1%. Effectively, Noranda would provide 91% of the capital, leaving Metallica responsible for 9%.
Graeme Currie of Canaccord Capital writes that the terms of the option agreement “are among the most favourable for a junior partner that we have seen in recent years for a property at this stage of exploration.” He recommends Metallica as a speculative buy at 84 for risk accounts, based on its exposure to El Morro, which he says is “a porphyry project that exhibits world-class potential at initial average grades.” As well, Metallica is prized for its leverage to higher gold prices through its half-interest in the advanced-stage Cerro San Pedro project in northern Mexico.
The El Morro project is 80 km east of the city of Vallenar and comprises 164 sq. km in the Andean Mountains. Noranda’s drill holes were collared at elevations ranging from 3,957 to 4,182 metres. Four property blocks, including 22.4 sq. km controlled through three separate purchase option agreements, make up the project. Metallica staked the remaining 141.6 sq. km. These purchase options require total aggregate payments of US$3.3 million due by June 2003. The Santa Julia property covers much of the core area of the La Fortuna zone and is not subject to royalties, other than a one-time payment of US$400,000 due within two years after the start of production. The other two options are subject to a 2% net smelter return (NSR) royalty, one of which can be reduced to 1% for a US$500,000 payment.
El Morro is at the southern tip of the 300-km-long Chilean Oligocene porphyry copper belt, within a 16-km-wide, north-south-trending graben fault structure. The basement rocks in the graben are Triassic volcanics that locally form roof pendants where Paleozoic granitoids have intruded the volcanic series.
Exploration work has identified three main zones of copper-gold porphyry mineralization: El Morro, La Fortuna and El Negro. There is also a high-sulphidation epithermal gold target, known as Cantarito and thought to be related to La Fortuna.
During 1993 and 1994, BHP Minerals drilled 5,080 metres in 36 holes (28 reverse-circulation and eight core holes) targeting La Fortuna and Cantarito. A single RC hole tested El Negro. BHP encountered consistent, but sub-economic, copper and gold values in its widespread drilling on the La Fortuna zone. The Cantarito target yielded two significant intercepts: 18 metres of 6 grams gold and 22 metres of 1.04 grams gold.
The one hole drilled into El Negro averaged 0.25% copper and 0.3 gram gold to a depth of 100 metres.
In July 1997, BHP optioned the La Fortuna property to Metallica. The agreement called for Metallica to spend US$1.3 million on exploration over a 3-year period in order to earn a half-interest. That agreement was later amended such that Metallica could earn a 100% interest by paying US$1.7 million over four years beginning July 1999.
Over the course of the next few years, Metallica expanded its land position and conducted limited exploration, including geochemical sampling and geophysics. The junior completed an initial drill program on the El Morro prospect and follow-up drilling on Cantarito, La Fortuna and El Negro, for a total of 3,700 metres in 17 shallow RC holes and one core hole. One RC hole drilled into the El Morro prospect averaged 0.64% copper and 0.22 gram gold over a 192-metre interval, starting at 76 metres. The hole was twinned with a core hole that returned 190 metres of 0.77% copper and 0.29 gram gold at 78 metres of depth, followed by 232 metres averaging 0.31% copper and 0.1 gram gold.
In September 1999, Metallica entered into a joint-venture agreement with Noranda that was amended a few months later. Noranda completed an initial 4,300-metre, 16-hole diamond drilling program at the El Morro project in early 2000. Eleven of the holes targeted the El Morro prospect.
Metallica reports that Noranda did not intercept the grades or widths of its discovery hole, but the drilling did show persistent secondary copper mineralization grading in the range of 0.2-0.5% over widths of 75-200 metres. The drilling encountered no intrusive porphyritic units, only rocks considered to be wall rocks to the porphyry system.
Noranda also directed five holes at La Fortuna, with hole 4 intersecting a 70-metre chalcocite enriched zone grading 1.15% copper and 0.35 gram gold, starting at 150 metres down-hole, and followed by 84 metres of 0.4% copper and 0.36 gram gold.
Last November, Noranda began a second round of drilling, completing 15,470 metres in 40 additional core holes, including 23 at La Fortuna and 17 at El Negro. Drilling at El Negro has tested an area of 3,100 metres north-south and 2,100 metres east-west. Although several of these holes encountered intercepts of significant copper and molybdenum mineralization (including 102 metres averaging 0.66% copper, 0.08% molybdenum and 0.18 gram gold), continuity has yet to be established. Assay results from seven holes are pending.
While further work is merited on both El Morro and El Negro, La Fortuna “exhibits a target size of world-class potential,” says Currie. He estimates the core area, measuring at least 550 by 550 metres, could contain upwards of 225 million tonnes. With copper grades consistently above 0.5% and gold values of plus 0.5 gram occurring regularly over intervals of up to
502 metres, there is also potential for a supergene enrichment zone averaging well over 1% copper. Currie says this zone could contain several tens of millions of tonnes.
Haywood Securities’ Glenn Brown has tested the El Morro project with a series of valuation models, and, on that basis, he recommends Metallica as a speculative buy for risk accounts at prices below $2 per share.
Metallica also holds a half-stake in the Cerro San Pedro open-pit, heap-leach gold-silver project in Mexico’s San Luis Potosi State.
In December 2000, Glamis released the results of a revised feasibility study using run-of-mine leaching as the preferred development option. Proven and probable reserves were recalculated at 49.2 million tonnes grading 0.57 gram gold and 23 grams silver, equivalent to 900,000 oz. gold and 36.4 million oz. silver, at a stripping ratio of 1.45-to-1. The study used prices of US$275 per oz. gold and US$5 per oz. silver. Based on an 8-year life, the project is forecast to produce 108,800 oz. gold-equivalent per year at a total cash cost of US$169 per oz. gold-equivalent.
Two rock types host the bulk of the mineralization. Gold recoveries are estimated at 75% for the porphyry oxide ore, containing some 748,000 oz., and 55% for the Begonia limestone, host to 139,000 oz. Silver recoveries in the porphyry oxide (30.3 million contained ounces) are estimated at 40%, whereas the Begonia limestone yielded recoveries of 25%.
Initial capital costs are estimated at US$45 million, for a 14.4% internal rate of return before financing costs. Construction of the mine and mill facilities is dependent upon improved gold prices and Glamis’s ability to secure financing for project costs.
The partners have budgeted $1.8 million this year for further development at Cerro San Pedro. This work entails relocating 20 families from the middle of the proposed leach pad, structural stabilization of the San Pedro Apostle church, and establishment of an on-site office.
“We expect shares of Metallica to receive more market attention for this project should gold trade above US$300 per oz.,” states Brown.
Metallica has 27.1 million shares outstanding, or 29.2 million fully diluted, and US$2 million in cash. At presstime, the issue was trading at around $1.16 per share.
Be the first to comment on "Metallica rated a speculative buy"