Chariot Races to Production

SITE VISIT

Lima, Peru — Across the swaths of desert stretching alongside the southern Peruvian coast, there’s nary a farm, cultural heritage site or environmentally sensitive area — just ocean, rock and sand. But beneath the desolate surface sits one of the largest copper deposits discovered in the country in the past decade.

The combination of robust mineralization and its ideal location for mining has Chariot Resources’ (CHD-T, CHDSF-O) president and chief executive, Ulli Rath, thinking big at the company’s Marcona project.

“We’re still a junior in a sense,” he says, “but we’re doing things on a major’s level.”

Although Marcona will ultimately host a medium-sized mine by global standards, Chariot is giving itself the major task of driving feasibility and environmental impact studies, as well as doing its financing, simultaneously.

It’s a plan of attack aimed at ensuring the mine captures as much of copper’s historic high prices as it can, but it also gives the company advantages in terms of adaptability.

“By doing financing with the mine plan you can go and adjust financing to suit the mine plan,” Rath says. “Banks better understand what it is you’re trying to do and they come around to being in favour of it.”

While choosing the right leaching process for oxide ore delayed plans by a few months, the company is now on track to have feasibility and environmental impact studies finished by the fourth quarter of this year and financing completed by the first quarter of 2008.

That would put mine construction in the third quarter of 2008, with production coming in the first half of 2009.

And while the three-pronged approach means there’s a lot on Rath’s plate, at least he doesn’t have to deal with the community, environmental and logistical concerns that weigh down so many other development projects.

Plus, the infrastructure in the area is excellent, with the site located near the Pan American Highway, with access to the national power grid, an ample water supply, and two deepwater seaports, as well as labour.

“We have everything we need within twenty-five kilometres — people, power, water and roads,” Rath says.

And unlike most of the mines situated high up in Peru’s Andes Mountains, Marcona sits just 800 metres above sea level, making things considerably easier on both employees and equipment.

With a 0.3% copper cutoff, Mina Justa — the most defined and largest known deposit at Marcona — has an indicated resource of 347 million tonnes grading 0.71% copper for 5.4 billion lbs. copper, and an inferred 128 million tonnes grading 0.6% copper for 1.7 billion lbs.

While Mina Justa will provide the bulk of the ore over the course of an estimated 13.5-year mine life (likely to be expanded in the coming feasibility study), recent drilling at Magnetite Manto, 1 km west of Mina Justa, is shaping up into a robust starter pit that will provide higher-grade ore for the first couple of years of operation.

“There’s oxide here from around twelve to eighty metres with the best part in the middle,” Rath says above the heavy din of a reverse-circulation drill at Magnetite Manto.

In May, the company released drill results that put some solid numbers behind Rath’s assessment. Twelve of the first 14 holes at Magnetite hit grades of 0.4% copper or more over long intersections, and six of the 12 holes hit grades north of 0.9% copper.

Highlights included 24 metres grading 3.79% copper, 56.5 metres grading 1.86% copper, 20 metres of 2.8% copper and 49.2 metres at 1.53% copper.

Those numbers inspired a note from Haywood Securities analyst Stefan Ioannou on the same day, in which he wrote that the Magnetite deposit would result in a boost to the project’s overall economics.

“Our formal valuation includes two initial years of higher-grade oxide feed (from Magnetite Manto) at an average head grade of one per cent copper — today’s results suggest this assumption to be conservative,” Ioannou wrote.

In addition to a higher head grade going into the mill, Rath says copper at Magnetite is on a fractured surface and therefore the ideal place to start vat leaching.

While the selection of the appropriate extraction method for oxide ore may be a minor point, the issue has been of central concern to Chariot for the first part of 2007.

The original plan to use conventional heap leaching was rejected because it wasn’t efficient — Chariot would’ve had to build new pads for different types of ores.

Of the two feasible options the company was left with — vat leaching or thin layer heap leaching — it chose the former.

With vat leaching, the company will recover 85% of the copper using 35 kg of acid per tonne of ore compared with the 75% recovery and 51 kg of acid per tonne that acid thin layer leaching would require. Capital costs are only slightly higher for vat leaching at US$75 million than for thin layer heap leaching, at US$70 million.

Operating costs for vat leaching are lower, coming in at roughly US$3.90 per tonne, while thin layer leaching comes in at US$5.31 per tonne.

And while the capital costs associated with vat leaching are roughly double the US$35-million estimate for conventional leaching considered in the initial scoping study, Rath says it will get high recoveries without requiring “fancy mine plans and selective mining.”

Delays and low costs

Rath is an ebullient 40-year mining veteran who knows a thing or two about building mines. He’s brought three into production so far — the most notable being Peru’s massive Antamina copper-zinc mine — now controlled by a joint venture led by BHP Billiton (BHP-N, BLT-L) and Xstrata (XSRAF-O, XTA-L).

And so it comes as no surprise to find him unruffled by the delays to feasibility caused by the selection of a leaching method at Marcona.

Knowing that project development doesn’t always proceed according to Bay Street’s schedule, he’s confident that the major complications at Marcona have been worked out.

“We’re no longer fighting the orebody,” he says.

Overall costs at Marcona are relatively low for a mine of its size — an important detail that has been temporarily overlooked because of the delays.

Rath is confident the mine can be built for US$235 million, and credits the project’s sound economics to the fact that the mill’s 30,000-tonne-per-day rate, when combined with low levels of waste rock, means there’s no need for giant dump trucks, or the long waiting times it takes to get them.

Also, in areas where equipment costs could potentially run high, and strong hands can do the work, operating in South America offers advantages.

“In Peru, you don’t want to be to capital intensive because labour is cheap,” Rath says.

Once the mine is built and the ore is milled, it’s only a 20-minute drive along a paved road to a bay, 22 metres deep, with an old Peruvian Navy pier jutting out from the shore.

While talks are at an early stage, and no dollar figures have been released, Rath is confident the company will be able to sign an agreement with the Navy and refurbish the pier for industrial use.

As for power, the company can tap into the national power grid at a cost of US4.5 per kilowatt hour.

Being situated in the desert also helps the bottom line.

“The beauty of desert is it has great benefits on not needing extra money for environmental protection,” Rath says. “Acid evaporates quickly in the sun, so you don’t need to line the waste pond.”

To comply with government regulations, Chariot does have to find the water table, and while it hasn’t hit upon it yet, the depth of its drilling shows it’s well out of harm’s way.

“We’ve gone 600 metres without hitting it, and we’ll likely have to go to 823 metres (sea level) to get to it,” Rath says.

Chariot has a 70% stake in Marcona, with its South Korean Partners — state-controlled Korea Resources and LS-Nikko Copper — holding the remaining 30%.

The union came ab
out after Chariot’s founders Bob Baxter (still a board member) and Alex Black brought Rath onto the board of directors and expressed an interest in Marcona — which Rio Tinto (rtp-n, rio-l) was looking to sell.

Rath recognized the project as a potential company maker, and set out to get the financing the fledgling company would need to make the winning bid.

His quest led him to Chariot’s Korean partners. With their contribution, the consortium was able to make the high bid and win Marcona in December 2004 by paying what will likely amount to US$43.5 million.

The agreement gives LS-Nikko the right to buy 70% of the cathode and 90% of the concentrate production for 10 years — at market prices.

The discovery

Rio Tinto discovered Mina Justa after doing an airborne survey in 2001.

“They were drawn to the area because magnetite was increasing,” Rath explains. “They postulated that farther away from the magnetite there should be copper and they were right.”

While Rio gets full marks for the discovery, the company’s understanding of what it had found proved to be somewhat lacking.

While it was able to define the faults that control the deposit, it wasn’t able to develop a clear picture of the actual ore zones.

“They had them dipping in the wrong direction,” Rath says. “Once we figured out it was dipping in the opposite direction, it really opened our eyes.”

Drilling based on the new model returned higher grades, and the company now has a model that gives it a clear picture of an iron-oxide copper gold (IOCG) deposit.

IOCG deposits are among the most poorly understood deposit types, partially due to the fact that they are structurally more complicated.

Unlike some porhyries or skarns, where mineralization can be spread throughout the rock, IOCG ore remains structurally controlled in geological packages. That means grades don’t, as Rath puts it, “get smeared.”

This situation is often missed by computer programs designed to map ore zones. When such programs inaccurately smear mineralization outside of such geological packages, an orebody can wind up looking larger in the lab, resulting in a picture that could be meaningless in the field.

“We could have doubled our resource if we used one of those techniques,” Rath says.

To avoid such misrepresentation, Chariot defined geologically controlled sub-domains, giving it a more realistic mine plan and decreasing the likelihood of digging up barren rock from its open pit.

Geology

The Mina Justa deposit represents the first IOCG discovery made in Peru and one of the largest in the Andes. Australia’s massive Olympic Dam, owned by BHP Billiton, is perhaps the most famous IOCG deposit.

Mina Justa itself is made up of two mineralized zones. The Main zone dips from surface over 1,700 metres to a depth of 500 metres, and is still open. The Upper zone dips from surface over 1,100 metres to a depth of 250 metres.

The geometry of the Main and Upper zones is similar, as both have flat, bowl-like features and dip to the east and southeast.

The upper 200 metres of the zones is made up of copper oxide with sulphides gradually becoming dominant at deeper levels.

The dominant oxide minerals are chrysocolla and atacamite, while sulphides move outward in a sphere-like formation from bornite-chalcocite in the core through intermediate bornite, chalcopyrite to peripheral pyrite.

Feasibility

With the vat leaching issue out of the way, Chariot’s drive to have a feasibility study done by the fourth quarter will involve upgrading inferred resources within the outlined open-pit shell to the measured and indicated categories.

To get there, the company has a US$24-million, 45,000-metre drill program under way. With Magnetite Manto’s drill program now complete, rigs are at Mina Justa, focusing on infill and stepout drilling.

Of the 175 million tonnes of oxide ore within the current pit shell, Rath says roughly 20 million is inferred. And of the 65 million tonnes of sulphide ore, roughly 6 million tonnes is inferred.

“I’d love to just keep wandering around and poking holes, but we have to upgrade 20 million tonnes into indicated, and then see if we can push it a bit and add to the tonnage,” he says.

The company has been successful in adding tonnage in the past. From the time of the scoping study — released in mid-2006 — tonnage of sulphide ore has increased to almost 70 million tonnes from roughly 20 million tonnes.

And it is to those robust sulphides that Chariot plans to head after it has begun generating cash flow from the higher-grade oxide ore at Magnetite Manto, and then from the lower grade oxides at Mina Justa.

The sulphide region has returned intersects as strong as 42 metres grading 10.54% copper and sulphide mineralization remains open at depth.

Sulphides trend southeast and contain more gold at greater distances from the central ore zone.

“Once we’ve upgraded from inferred within the planned pit area, then we’ll step out and hit the southeast leg, which currently isn’t part of the mine plan — for the end of the year,” Rath says.

Rath describes mineralization here as one continuous slab of sulphide roughly 500 metres by 200 to 300 metres wide, and, he says, “there’s no donuts; it’s absolutely solid.”

The southern dip can be reached by building a ramp above it, once the open pit is dug out.

Another interesting — while less economical — feature of Mina Justa, is the presence of three major dykes that are classified as waste rock.

While Rio had said the dykes lacked sufficient grade, were as wide as 50 metres, and coalesced at the bottom into even larger areas, Chariot is finding out the situation is not so grim.

The company is finding some grade in the dykes, and better delineation is showing that the dykes are not as large as Rio believed.

“We’ve demonstrated that absent this one major dyke running north-south, the rest of the dykes are between two and four metres wide,” Rath says. “And more importantly, we know their distribution in space.”

That’s a big plus when it comes to mining the deposit, because Chariot can calculate the internal dilution of the ore level by level.

A better understanding of the dykes is part of the reason Rath says the boundary between the waste and the ore is so sharp, and that the strip ratio is a low 2.5:1.

And raising the cutoff to 0.35% copper from 0.2% should improve strip ratios even more.

Financing

One of the chief advantages of carrying out its feasibility study in conjunction with financing is the freedom it can afford the company to develop the copper-rich, but more capital-intensive sulphides at Mina Justa on its own terms.

Rath would like to accelerate the production of copper concentrate from sulphides to year four. The key to the plan, Rath says, is determining just how much additional capital costs the initial mining of the oxides at Magnetite Manto and Mina Justa can fund.

While banks generally demand repayment of loans as soon as cash flows begin, Chariot is looking at how it can best use funds to develop the mine.

“To impair the project by artificial repayment isn’t good for us or the banks,” Rath says. “But we have to still raise the necessary equity so that I can tell them there’s nothing between us and the rich sulphide.”

Social responsibility

The relative lack of obstacles in the Marcona area isn’t lulling Chariot into a state of apathy with regard to social responsibility.

Although it hasn’t generated a penny from mining, Chariot will spend roughly US$350,000 this year on social programs in the city nearest to its project, San Juan de Marcona.

Rath says the company put money into community relations before a drill ever broke ground.

“Our philosophy is to develop trust with the community,” Rath says. “People who come in early and just write cheques without understanding only end up making hal
f of the population mad. We integrate into the community, so we better understand their concerns.”

For example, to help stem the exodus of San Juan youth to the capital, Lima, Chariot created a 2-year program to bring them up to a high school level of reading and math, and teach them skills that will help them secure jobs in the area.

Such programs flow from Rath’s central philosophy — that while companies must make communities around the mine better off, giving handouts isn’t the best way to do so.

“We believe in outsourcing and we don’t think the paternalistic approach is right — we think it’s fraught with dangers,” he says. “The workforce comes to look to you to solve all of their problems.”