For Terrane And Goldcorp, It’s Crunch Time At Mt. Milligan

VANCOUVER — The question on many analysts’ minds during a Terrane Metals (TRX-V, TRXOF-O) conference call addressing a revamped feasibility study of the company’s Mt. Milligan copper-gold project in mid-October, was: What will Goldcorp (G-T, GG-N) do?

The answer from Terrane president and CEO Robert Pease was: We’ll have to wait and see.

Goldcorp has the option to convert its 60% fully diluted equity stake in Terrane into a direct joint-venture interest of the Mt. Milligan project, a project now boasting the second-largest gold reserve in Canada, according to Pease.

The deadline on the onetime option is fast approaching, a date that falls in early January 2010, Pease said. Terms of the option agreement, which accompanied a $40- million loan (so far about a third drawn) extended to Terrane with the backing of Goldcorp a year and a half ago, allow Goldcorp to take a stake in Mt. Milligan of between 30% and 60% in exchange for a proportional conversion of its equity stake.

“If I can put on an imaginary Goldcorp hat for a moment,” Pease told analysts, “we gotta now see how this project fits into (Goldcorp’s) pipeline and their strategy for growth. I think that’s really the question of the day.

“And we all know their pipeline isn’t empty,” Pease continued. “And they are big projects and there’s only so much capital to go around.”

While Pease was careful during the conference call not to draw any definitive conclusions about Goldcorp’s intentions, he noted that so far, they have been highly supportive of the Mt. Milligan project. As an example of that support, he pointed to comments in Terrane’s press release about the revamped feasibility study made by Goldcorp president and CEO Chuck Jeannes.

“We are very pleased with the feasibility update study,” Jeannes said. “Not only did it hold the line on costs but it also significantly boosted reserve ounces and mine life. Terrane has clearly grown Mt. Milligan into a major, construction-ready, copper-gold project with an opportunity for outstanding net operating margins. Goldcorp, as majority shareholder, remains committed to working closely with the Terrane board of directors to unlock value for all shareholders at Mt. Milligan.”

As a shareholder Pease noted that Goldcorp, whatever it decides to do with the Mt. Milligan option, won’t want to undercut the value of its stake in Terrane. Pease said Goldcorp is in it with all the other shareholders and that “they don’t want to do anything that will destroy the company. They don’t want to put themselves into a write-down situation.”

The revamped feasibility study undoubtedly gave an attractive outline to the Mt. Milligan project, one that boosted Terrane’s share price 8¢ to 78¢ (the company has 123.2 million shares outstanding and 407 million fully diluted).

The updated look at Mt. Milligan grew the project’s copper and gold reserves by more than 30% to 482 million tonnes grading 0.2% copper and 0.39 gram gold per tonne. With additional reserves came a 45% longer mine-life of 22 years and capital costs of $915 million.

The 60,000-tonne-per-day proposed mine would be a conventional open-pit mine using a typical flotation circuit to produce a concentrate grading 26.4% copper and 43.3 grams gold.

Addressing the mine plan during the conference call, Pease emphasized the higher-grade gold aspect to an initial operation at Mt. Milligan that Terrane developed in the updated feasibility study. During the first six years of operation, gold would account for 55% of revenue; gold production would hit 262,000 oz. per year, while yearly copper would come in at 89 million lbs.

Over the 22-year mine life, Terrane estimated gold production at 194,000 oz. gold per year and copper production at 81 million lbs.

The base-case scenario in the updated feasibility study used US$2-per-lb. copper and US$800- per-oz. gold and accordingly returned a net present value of just over $1 billion and an internal rate of return of 17.4%. Payback would come after about four years and cash costs would average US$51 per oz. gold, net of copper credits.

Concentrate from Mt. Milligan, 155 km northwest of Prince George, B. C., would be trucked about 80 km to a loading site just north of Fort St. James, where it could be transported by train to Asian-bound cargo ships in Vancouver.

In his address to analysts during the conference call, Pease underlined the fact that the project is close to being fully permitted. The B. C. provincial government approved the project in March 2009 and issued a Mine’s Act permit in September. Furthermore, Pease said, he expected the federal government to approve the project in the fourth quarter, with a few residual permits to follow in the first quarter of 2010.

If all goes well — both in terms of permitting and financing — Pease forecasts that Mt. Milligan could be commissioned in 2012 and reach full production in 2013.

But what happens if Goldcorp doesn’t enter into a joint venture? Pease said Terrane would consider its options, including taking on other partners. He also noted that Mt. Milligan has been well received in the debt market.

Yet at the moment, Terrane won’t be shopping around for alternative financing, at least not until Goldcorp makes up its mind. On that note, Pease said: “We’re looking forward to clarity from Goldcorp on their long-term intentions.”