GlobeStar Undaunted By Copper’s Descent

SITE VISIT

MAIMON, DOMINICAN REPUBLIC — A siren wails as GlobeStar Mining (GMI-T) chairman Larry Ciccarelli addresses a crowd of more than 200 people at the Cerro de Maimon open-pit copper-gold mine, 70 km northwest of Santo Domingo — but there is no reason to worry.

“That siren you hear in the background is just the discharge of copper concentrate,” Ciccarelli explains from a podium. “So bear with us, it’s a good sound and hopefully it keeps sounding all day.”

Next to Ciccarelli sits a group of Dominican dignitaries and GlobeStar officials, there to officially open the Dominican Republic’s (DR) first copper mine and to celebrate the company’s transition from explorer to miner. And behind them, in plain view of the crowd, are a brand new 1,300-tonne-per- day sulphide plant and a 700- tonne-per-day oxide plant, in the process of ramping up to full production.

It’s evident that the US$69-million capital project, which created about 150 jobs in an area of high unemployment, has the approval of the Dominicans. The company pays out about US$175,000 in wages every month, an average of nearly US$1,200 per person, many of whom received about 60 hours of specialized training.

Government officials from every level take a turn at the podium, and the country’s vice-president, who arrived by helicopter, apologizes profusely because the president had to bow out at the last minute.

A priest says a blessing, Canadian and Dominican national anthems are sung, and symbolic gifts are exchanged.

This mine will produce about 230 million lbs. copper, 130,000 oz. gold and 4.1 million oz. silver over nine years, generating revenue of US$623.8 million and profits of US$248.2 million.

Sulphide reserves at the mine total 4.8 million tonnes grading 2.54% copper, 0.96 gram gold per tonne and 34.9 grams silver. Oxide reserves are 1.2 million tonnes grading 1.86 grams gold and 34.5 grams silver.

Finally reaching production is momentous for GlobeStar too, which made its entry into the country in the late 1990s. In 2009, the company expects to mine 475,000 tonnes of sulphide ore grading 3.3% copper to produce 29 million lbs. copper, plus 7,300 oz. gold and 368,000 oz. silver. The company also forecasts that it will produce another 14,000 oz. gold and 280,000 oz. silver from oxide ore.Netincome this year is anticipated at US$13 million after US$5 million in general and administrative costs, US$11 million in derivative gains, US$2 million in interest costs and US$6 million in taxes. Gross revenues are projected at US$60 million.

GlobeStar is in a good place. Sure, the copper price has plunged from US$3.50 per lb. last September to US$1.50, but the company is well positioned to make money and expand. Over the mine life, Globe- Star’s projected cash costs at Cerro de Maimon will average about US42¢ per lb. and total costs are projected at US$1.05 per lb., so Ciccarelli isn’t fazed by the current markets. (The company used life-of-mine metal prices of US$2.45 per lb. copper, US$543 per oz. gold and US$10 per oz. silver).

“Dire conditions were when you had US60¢ copper versus US$1.50 today,” says Ciccarelli, six weeks after the November opening ceremony. “We are a low cash cost producer and obviously it would be nice to see US$3 copper but we are still making money at US$1.50.”

GlobeStar declared commercial production on Jan. 1, but cash began flowing in last fall, as the company ramped up operations.

Fourth-quarter production came to 89,800 tonnes grading 3.5% copper, totalling 5.1 million lbs. copper, 1,500 oz. gold and 120,000 oz. silver (in 7,700 tonnes of concentrate).

Overall, copper recovery in the sulphide mill averaged 75% during the fourth quarter. For December, recovery improved to more than 80% and the company expects to achieve an 85% recovery in 2009.

GlobeStar received about US$8.5 million from concentrate shipments at year-end, but still had about 1,900 tonnes left in inventories waiting to be shipped.

In a Jan. 14 report, Research Capital mining analyst Wayne Hewgill said that GlobeStar is off to a good start.

“GlobeStar is developing the reputation of doing what it says,” Hewgill writes.

Hewgill says 2009 will be challenging for base metal producers because of lower commodity prices, but chooses GlobeStar as “a top pick” in its sector because of its low cash costs.

“Even though (Globestar’s) principal asset, Cerro de Maimon, has a relatively short mine life, eventually the company would be an easy takeout target as the asset would be a simple bolt-on operation to any intermediate base metal company,” Hewgill writes.

Thomas Weisel mining analyst Matthew O’Keefe notes in a Jan. 13 report that although fourth-quarter estimates were lower than expected, the ramp up has been going smoothly. He expects costs to remain at or below US$1 per lb.netof byproducts.

“GlobeStar remains on solid financial footing,” O’Keefe writes. “We believe the stock continues to represent excellent value given its robust mining operation, solid balance sheet, excellent management team and favourable operating jurisdiction.”

GlobeStar is now wrapping up the final touches at its new mine, including increasing the size of the water retention pond and paving roads outside the mine to minimize dust for local residents. Sustaining capital expenditures like these will amount to about US$3 million over the year.

Eric Olson, chief operating officer and senior vice-president, has been living full-time in the DR since August 2007, and was previously the company’s vice-president of projects. Olson says the biggest challenge with Cerro de Maimon was getting it done on time and on budget.

“We didn’t have the funds to go over,” Olson says. “We’re a small company and this was our first project.”

The mill has two plants, one for oxide ore and one for sulphide ore. GlobeStar ramped up production in the sulphide mill first because the sulphide ore is the main focus of the project.

“We didn’t want to start both at the same time,” Olson says. “We didn’t want the oxide plant to interfere.”

The oxide plant will only be in operation for four years and will then be converted to a second sulphide plant.

GlobeStar has a sizable fleet of mining equipment for the pit — “way higher than we need,” Olson says. But this allows the company to make up for time lost during the rainy season, when the ore is too wet. “At any given time we have thirty to forty days of ore blasted in the pit,” he says.

Olson also says it’s good to have a lot of ore blasted because the deposit has some really high-grade pockets that are best mixed with lower-grade ore in the mill.

“Our highest blast was 14 per cent copper — 15,000 to 17,000 tonnes,” Olson says. “We had to blend that down because we were budgeting 3 to 3.5 per cent copper.”

Olson says the mine staff have a production meeting every day at 3 p. m. to decide how much of each material to crush depending on the balance of the stockpiles.

He says it’s possible the exploration team will find more deposits around the mine as “massive sulphides are such that when you find one, you find clusters.”

“It’s a very rich orebody,” Olson says. “Usually, high-grade copper is mined underground, but ours is on surface.”

The rest of the company’s newfound cash flow will go toward paying down its fully drawn US$45-million debt facility with Nedbank and finding new projects that will generate value, says CEO David Brace, who joined GlobeStar in the fall.

“I believe our cash flow and our producing situation will be the driver of what interests investors,” Brace says. “They are looking at GlobeStar as being a new, up-and-coming company.”

The company doesn’t plan to sit idle as it watches the money flow in from the mine. Almost US$4 million has been earmarked for exploration while cash out-flows for financing activities are forecast at US$14 million.

Brace says GlobeStar is going after two distinct types of development projects.

The first will be in the DR — advancing some of the copper, gold, nickel and limestone properties it already has, including looking for new deposits near Cerro de Maimon to expand the mine’s life. The company also has a lithium project in Quebec.

In fact, GlobeStar is downplaying its nickel laterite projects for now due to the dramatic drop in the nickel price and troubles in the nickel industry. The difficulty has been felt about 10 km from Cerro de Maimon at Xstrata’s (XSRAF-O, XTA-L) Falcondo operation. The mine, which employed about 900 workers, was put on care and maintenance last year. Xstrata is doing a study to see if it can find a cheaper energy source than oil to run its operation.

The second type of development sees the company extending beyond the DR for opportunity. Brace says GlobeStar is considering projects in Mexico, northern Colombia and Central America.

“Those are the areas we are looking at for other high-grade massive sulphide deposits with byproduct gold and silver,” he says.

Brace notes that the company is not looking for huge porphyries — “We can’t afford to develop a billion- tonne porphyry because we are a junior company,” he says, but higher-grade massive sulphides, hydrothermal gold or skarn deposits would be of interest.

“We’ve got a Latin crew that can move easily in the milieu of Central America and Mexico and we’ve shown that we can develop mines in Latin America, so that’s where we’re concentrating,” Brace explains.

The 80-sq.-km Bayaguana copper- gold project, located within hauling distance to Cerro de Maimon is a priority. GlobeStar already has a mineral resource estimate for Bayaguana, located on the Los Ranchos formation which also hosts Barrick Gold’s (ABX-T, ABX-N) 13.3- million-oz. Pueblo Viejo gold project. Brace says the company will do an induced-polarization survey early this year at Bayaguana, to be followed up by drilling.

The Cerro Kiosko area at Bayaguana has measured and indicated resources of 570,000 tonnes grading 1.01% copper, 4.2 grams silver per tonne and 1.93 grams gold, plus 4.4 million inferred tonnes grading 0.98% copper, 5.17 grams silver and 2.01 grams gold. The Dona Amanda area hosts inferred resources of 127.8 million tonnes grading 0.31% copper, 1.43 grams silver and 0.19 grams gold per tonne. And finally, the Dona Loretta area holds inferred resources of 8.2 million tonnes grading 0.5% copper.

As GlobeStar moves ahead with exploration and looks for new, more advanced projects in the region, Brace says the company will also consider accelerating its debt payments. “Our ability to pay it down quickly is driven by the copper price,” he says.

The company had to hedge part of its production in order to get the debt financing.

It has synthetic put options on about 6.32 million lbs. copper, 32,400 oz. gold and 480,000 oz. silver at US$2.67 per lb., US$650 per oz. and US$11.50 per oz., respectively.

Brace says the company sells its production on the spot market, buys the hedged amount back, then sells it again at the fixed prices and financially nets everything out.

“So we don’t have to go out and buy ounces of gold to cover a delivery of gold,” Brace explains. “What we have found in the calculations is the copper hedge is so much more valuable than anything that happens with the gold and silver. . . the over-hedging we’ve done with the gold is not a problem.”

Although it may be disappointing that the copper price dropped just as the company began ramping up production at Cerro de Maimon, the fact that it is a high-grade open-pit mine with relatively low cash costs means that GlobeStar should feel comfortable going forward. It has demonstrated that it can handle many situations.

“Over the last couple of years, you’ve seen escalating construction costs and the scarcity of labour and they were able to bring this project (online) on budget,” Ciccarelli says.

As the last few wrinkles are ironed out at Cerro de Maimon, the company will be working on keeping investors interested in future growth.

“It doesn’t make sense to be a one-mine producer or a one-mine company,” Ciccarelli says. “Obviously, we need to grow and that’s where our focus will be, whether it’s internally or externally.”