EMED perseveres at Rio Tinto

Mining has been going on at the Rio Tinto copper mine in Spain for thousands of years, but that doesn’t mean molding it into its most modern incarnation is an easy task.

EMED Mining (EMD-T, EMED-L) is anxious to re-start copper mining at the famed site but has to cope with permitting delays and investor angst over the company issuing paper at a time when equity markets are squalid.

“Share dilution is now in the past. Sure I wish our share price was higher, I wish the financial crisis didn’t happen, I wish permitting was faster, but those are all wishes and we have to deal with reality,” EMED’s CEO Harry Anagnostaras-Adams told investors on a conference call.

“Spilled milk is spilled milk. One wishes all sorts of things in the past but one has to deal with the present and the future,” he continued, “and this is arguably one of the most attractive investments in the copper space.”

The dilution that Anagnostaras-Adams refers to is connected to its recent deal with Red Kite Mine Finance, which will provide a total of $50 million in funding, including a $35 million standby loan facility and an equity issuance.

When the Red Kite standby loan is taken into account EMED has secured debt capital funding of $225 million. The bulk of that $175 million is from Goldman Sachs.

EMED recently announced that shareholders approved the second tranche of equity to be issued to Red Kite. In all, the equity financing deal raises $15 million for EMED but will bring its number of issued shares up to 1.177 billion, with Red Kit holding roughly 5.4%.

Despite that large amount of shares issued the company does not have an operating mine and the main hurdle on that front has been permitting.

The Rio Tinto mine was shuttered in 2000 due to low copper prices, but unfortunately the workers collective that operated the mine after Rio Tinto (RIO-N, RIO-L) disposed of it in the 1980s left an environmental mess behind.

Intent on not allowing the situation to repeat itself, the Spanish government has been slow to issue permits to EMED.

The latest news is that the approval for administrative standing, the first of four permits needed to trigger the re-start of mining, has been delayed and the company now expects to get it in the first quarter of next year.

The government has told EMED that the administrative standing is now tied to the approval of the environment plans. After those two permits, EMED will still require a final resolution plan permit and exploitation rights.

“The permits cascade,” Anagnostaras-Adams explains. “The government prefers to issue the first two jointly and then the other two will follow.”

EMED plans to begin commissioning of the mine by the end of next year and reaching base case production of 37,000 tonnes of copper in concentrate per year by the end of 2015.

But it will only do so at an increased cost as it now expects capex to ring in at $240 million, which is up from the $210 million it had original forecasted, primarily because of an increase in provisions for working capital, bonding and plant contingencies.

The company also says that cash costs will be higher than originally believed, as it now expects life of mine cash costs to come in at $1.50 per lb, which is up from $1.38 per lb., mainly due to rising diesel costs.

For Anagnostaras-Adams, however, a firm handle on costs won’t be had until the permitting process is complete.

“Once we finish permitting then the bonding for rehabilitation will be set. It is really then that we will have the final capital requirements,” he says. “We’ll know how far our project financing goes and how much equity capital will be required to finish the job.”

Despite the challenges, Anagnostaras-Adams insists Rio Tinto has unique advantages, largely due to the infrastructure already on site.

“In our case we managed to avoid the biggest lump of capital expenditure by the fact that we picked up infrastructure that we can use rather than build from scratch,” he says. “But that comes with a cost. The site needs to be cleaned up. We paid the cost of time and funding for the care and maintenance in order to buy a project that we can use the existing infrastructure on by modernizing it.”

Rio Tinto has proven and probable reserve of 123 million tonnes grading 0.48% copper for 585,000 tonnes. It also has measured and indicated resources of 203 million tones grading 0.46% copper for 930,000 tonnes of copper.

“In our view permitting remains the single biggest risk to the project schedule,” Garnet Salmon, an analyst with Jennings Capital wrote in his report. “We believe, however, that Rio Tinto copper project remains an attractive investment based also on the forecast mine-life of 14 years and the low capital intensity of $6,500 per tonne.”