Mercator Minerals and Stingray Copper to merge

Stingray Copper (SRY-T) shares bounced 37.5% or 18¢ to 66¢ apiece on news of its pending merger with Mercator Minerals (ML-T) — a deal that will transform the junior overnight into a copper producer.

“It’s a great day for Stingray shareholders,” Peter Mordaunt, Stingray’s chairman and chief executive, told analysts and investors on a conference call. “In a pretty tight credit market this allows us to transition from a development company to a high-profile producer.”

The coupling will allow Stingray Copper to advance its El Pilar copper project in northern Mexico through a combination of internally generated cash flow, debt and equity. Enhanced liquidity, capital markets profile and research coverage will be additional benefits of the deal.

Mercator Minerals owns Mineral Park, an open pit copper-molybdenum mine about 120 km southeast of Las Vegas in northwestern Nevada. The mine produces copper, molybdenum and silver in concentrates and copper by SX-EX leach extraction and currently has an estimated 25 year mine life based on its proven and probable mineral reserves.

Stingray is advancing its El Pilar copper project, about 15 km south of Mexico’s border with the United States in north-central Sonora. El Pilar lies 45 km northwest of Grupo Mexico’s Cananea copper mine, the largest porphyry copper deposit in Mexico and one of the largest in the world. (Cananea contains 7.1 billion tonnes grading 0.42% copper.) El Pilar contains a mineral reserve of 239 million tonnes that has been scheduled for a 14-year open-pit mining operation.

In addition to the copper assets each company brings to the table, Stingray has $15.8 million in its treasury with no debt, while Mercator holds $70 million in cash with $130 million of debt.

Under the agreement, which is still subject to shareholder approval, Mercator will purchase Stingray shares at an exchange ratio of 0.25 Mercator shares per Stingray share.

The deal represents a 51.6% premium to Stingray shareholders based on the closing price of both companies on Oct. 1, and a 71.4% premium to Stingray based on the 20-day volume weighted average price of both companies.

Michael Surratt, Mercator’s current president and chief executive, will remain the head of the combined company, while Mordaunt will take the title of president and chief operating officer.

For its part Mercator is acquiring a low cash cost and near-term cathode copper producing asset that will boost its annual copper production by about 70 million pounds annually starting from 2012. It also gives Mercator a 112% increase (1.5 billion lbs. copper) in copper reserves acquired at less than US1.7¢ per lb. copper.

An April 2009 feasibility study of the El Pilar project demonstrated positive economics for the development of a low cost, open-pit mine with a solvent extraction and electro-winning plant to treat the deposit’s oxide mineral reserve.

The study envisioned annual average production of more than 70 million lbs. copper over the first five years with an after tax, internal rate of return (IRR) of 25.3% at a copper price of US$2.25 per lb. The study estimated a net present value (NPV) after tax of US$184 million.
The initial capital cost is estimated at about US$209 million and includes the construction of a co-generating sulfuric acid/power plant.

Mercator’s Surratt told analysts and investors that one of the advantages of the merger was the close proximity of the two deposits — only about a six to seven hour’s drive apart. He also described Mexico as the “best jurisdiction in the mining industry.”

“The logistics of being in Mexico and in particular northern Mexico is a tremendous advantage,” he explained. “We consider that as our backyard in Arizona and there are a lot of synergies between the two operations.”

In addition there is a railroad running to the south of El Pilar with power lines within 20 km of the site.

Surratt also pointed out that while the feasibility study on El Pilar outlined a 14-year mine life, he believes the estimate is “conservative” because the ore body extends at depth and is still open to the south.

Above all, however, the additional copper El Pilar brings with it will elevate Mercator to an entirely new level. “It doubles our pounds of copper,” he explained. “It moves us up into another whole league of companies with an equivalent of about 8.1 million lbs. copper.”

“We’re not an exploration company,” he added. “We don’t like to take the time and financial risk of doing exploration so we look for good marriages like this that will enhance the bottom line near term, not long term, for shareholders.”

Finally, the timing of the development of El Pilar will dovetail nicely with Mercator’s scheduled second-phase expansion program at Mineral Park. “Most of the expansion [at El Pilar] will be at the end of Mineral Park’s phase two [expansion] so it won’t interfere with our capital spending on Mineral Park,” he said. “And a lot of the cash for El Pilar can come out of cash flow from Minerals Park.”

In 2007 Mercator started construction of a 50,000 tonne-per-day mill facility at Mineral Park as a two-staged project. (The first stage involved 25,000 tonnes per day and the second stage is set to expand that to 50,000 tonnes per day.)

Mercator completed the commissioning and began commercial production of the first stage of the 25,000 tonne-per-day mill in the second quarter of this year. Stage two is expected to be completed in late 2010.

Over its forecast 25 year lifespan, Mercator anticipates that Mineral Park will produce 1.1 billion pounds of copper, 257.5 million pounds of molybdenum, and 11.7 million ounces of silver.

The operation will be profitable at life-of-mine base case metal prices of US$1.53 per lb. copper, US$10.16 per lb. molybdenum and US$7.50 per oz. silver.

At base case metal prices, the mine is expected to generate an average of US$55 million annually in operating cash flow.

Mercator Minerals closed down 17¢ or 5.84% at $2.74 per share.