Bear Creek keeps Corani on track, reduces costs

As Bear Creek Mining (TSXV: BCM) works to produce an updated feasibility study for its flagship Corani silver–lead–zinc project in southern Peru by year-end, its efforts to reduce costs are already paying off.

Over the past six months, three engineering firms hired to conduct optimization studies to improve on the project’s 2011 feasibility have identified several design modifications that Bear Creek says should keep capital costs in the US$600-million range.

Those modifications include  not building a tailings dam — one of the most expensive items in terms of capital and sustaining costs. Instead, the company would dry-stack filtered tailings for the first five years of operation, followed by in-pit tailings disposal.

The change would either reduce the footprint of the tailings dam or eliminate it entirely.

The company says that data showing more than half of the waste rock at Corani is not acid-generating have opened up its options for tailings disposal. The dry-stacking and in-pit tailings option would increase operating costs marginally and reduce capital expenses substantially. Less need for water would eliminate the need for a freshwater storage dam at savings of up to US$30 million, while shorter haulage distances would mean capital expenditure savings on mine-fleet equipment.

Permitting of the modified project — the company expects to apply for permits in early 2015 — would also likely be easier.

In a release, Andrew Swarthout, Bear Creek’s president and CEO, said he is pleased with the improvements, which could keep capital costs in line with the US$574 million projected in the original study.

“To be able to negate the capital cost creep of the last four years and preserve the low cash costs per ounce of silver expected to be produced net of base-metal credits [negative for the first seven years of the projected 22-year mine life] is an important achievement for our company,” he said.

An environmental and social-impact assessment (ESIA) based on Bear Creek’s previous feasibility study was approved in September. However, the company expects the modified project — in Puno Department, 160 km southeast of Cuzco — could move forward under the same ESIA.

Capex savings could also come from using smaller semi-autogenous grinding mill and ball mill components for the plant, without affecting the 22,500-tonne-per-day throughput, or annual production of 13.4 million oz. silver. Contract mining for first three to five years of production is also being considered to reduce costs.

The 2011 feasibility projected Corani’s after-tax net present value (NPV) at US$463 million and its internal rate of return (IRR) at 17.6%. This was based on metal prices of US$18 per oz. silver, US85¢ per lb. zinc, US85¢ per lb. lead and a 5% discount rate.

In a client note, Canaccord Genuity mining analyst Eric Zaunscherb said that while progress is being made on the optimization front, the project’s capital cost is still a challenge for Bear Creek.

“Despite these optimizations, we continue to look for production in 2020, with US$600 million in initial capital a significant hurdle,” he wrote.

Zaunscherb has a “hold” rating and a $3.20 target price on Bear Creek, noting that the company’s Santa Ana project in southern Peru is still in limbo. The government took away the company’s licence to operate Santa Ana in 2011, in response to protests by local indigenous communities. Bear Creek is pursuing international arbitration against the Peruvian government.

“The market remains anxious for a settlement with the Peruvian government concerning the Santa Ana silver project rather than a protracted international arbitration process,” Zaunscherb said.

In August, when the company submitted a formal request for arbitration, Swarthout explained that in order to preserve its rights under the Free Trade agreement between Peru and Canada, Bear Creek is required to push forward with the arbitration. However, he said that negotiations with the government were ongoing and productive, and noted that arbitration does not preclude a settlement.

Santa Ana has an 11-year mine life and is expected to produce 47.4 million oz. silver. A 2010 feasibility study projected that at a US$14.50 per oz. silver price and 5% discount rate, the US$70-million project would yield an US$80.2-million after-tax net present value and a 24.9% internal rate of return.

On the Corani update, Bear Creek shares fell by 15¢, or 4.5%, to $3.15. The shares have traded in a 52-week window of $1.19 to $3.97.