Goldcorp, Teck join forces to tackle El Morro in Chile

El Morro, the large undeveloped gold-copper deposit in northern Chile, will become the focus of a joint venture (JV) between Goldcorp (TSX: G; NYSE: GG) and Teck Resources (TSX: TCK.B; NYSE: TCK), giving it a better chance of reaching its production potential.

The JV has been made possible with New Gold (TSX: NGD; NYSE: NGD) agreeing in late August to sell its 30% interest in El Morro to partner Goldcorp in exchange for US$90 million in cash and a 4% royalty stream on gold production from the 417 sq. km property. And New Gold will no longer have to repay a US$93-million carried loan that Goldcorp and previous JV partners have funded on its behalf.

“While the free-carried El Morro stake was an attractive position for New Gold, the project remains stalled and set for a prolonged development period, likely seeing a better chance of eventual development in a Goldcorp/Teck combined scenario,” Raymond James analyst Phil Russo writes.

The sale bolsters New Gold’s balance sheet as it builds the Rainy River gold mine in Ontario and lowers its debt level, Desjardins analyst Michael Parkin comments, adding the market assigned “little to no value” to the company’s stake in El Morro.

Under the gold stream, New Gold will pay US$400 per oz. for the first 217,000 oz. delivered. After that, the price will include an annual 1% inflation.

The sale is expected to close in the fourth quarter, after which  Goldcorp will have a 100% interest in the gold-copper deposit. 

Instead of advancing El Morro on its own, the gold miner intends to combine the project with Teck’s Relincho copper-molybdenum asset. The two projects sit 40 km apart in the Huasco province in Chile’s Atacama region.

Goldcorp and Teck plan to hold the combined asset — tentatively named Project Corridor — in a fifty-fifty JV through which they would work to advance the deposits, as well as build infrastructure and develop community relationships.

Teck’s president and CEO Donald Lindsay says the combination makes sense, as it would likely lower costs, reduce the environmental footprint and generate “greater returns over either stand-alone project.”

Corridor’s preliminary economic assessment has pegged start-up costs for the first stage at US$3.5 billion. 

During  that stage, Corridor would process 90,000 to 110,000 tonnes per day to produce an average of 190,000 tonnes copper and 315,000 oz. gold per year over the first decade of its estimated 32-year life.

Corridor’s initial capital requirement is nearly half of the combined cost of building El Morro and Relincho as stand-alone projects. Early feasibility studies estimated development costs for El Morro and Relincho at US$3.9 billion and US$4.5 billion. 

BMO analyst Andrew Kaip, who covers Goldcorp, says combining the two projects would help, because the majors could “diversify development risk and potentially realize cost savings, due to synergies associated with shared infrastructure.” 

Kaip previously valued Goldcorp’s 70% interest in El Morro at US$2 billion.

BMO analyst Sasha Bukacheva, who covers Teck, echoes the potential benefits of the union, noting she previously assigned no value to the Relincho project, as it was “a long way from being sanctioned.”

However, those projects may get some love sooner under the new JV. The majors intend to complete a prefeasibility study on Corridor in mid-2017.

Corridor has total reserves of 16.6 billion lb. copper, 8.9 million oz. gold and 464 million lb. moly, based on reserves reported in late 2014 for El Morro and Relincho.

The shares of all three firms closed higher on the Aug. 27 sale and combination news. Teck rose 23% to $9.05 per share, New Gold shares climbed 8% to $2.90 and Goldcorp added 3.5% to finish at $18.08 per share.