Good news for Quadra’s Sierra Gorda

Quadra FNX (QUX-T) is hooking up with Sumitomo to develop the sizable Sierra Gorda copper-molybdenum project in Chile.

On May 16, it signed a definite joint-venture agreement with Sumitomo and released a positive feasibility study for Sierra Gorda.

“What today’s announcement means to us is we are now poised to achieve our long-standing goal of 500 million lbs. of copper (per year),” said president and CEO Paul Blythe on a May 16 conference call. “And this provides us with a project that has a reserve of over 20 years – quite different from anything else we have in our portfolio now.”

He added that the company is “excited” to work with a financially strong and technically experienced partner as Sumitomo to get the project online by 2014. Sierra Gorda is expected to produce up to 500 million lbs. copper per year.

The partners estimate that it would cost them US$3 billion to get the project up and running. (This amount includes capital costs, working capital, interest during construction and costs already incurred.)

Derek White, executive vice-president of corporate development, said in the call that Sumitomo not only has the financial and technical muscles, but also the reputation and credibility the company was looking for in a partner. Having spent four centuries in mining and metal smelting, with 13 existing mining partnerships, and 34 operating mines and projects, he noted that Sumitomo met the company’s requirements with “flying colours.”

The joint venture (JV) and project funding would be split 55-45, with Quadra retaining a 55% interest, and Sumitomo the rest. (The JV would also be governed by a shareholders’ counsel comprised of two members from each company.)

Upon signing the agreement, Sumitomo will provide a minimum of US$360 million to the JV, and would give an additional US$724 million after closing the deal, which requires normal anti-trust approvals.

Sumitomo would also be responsible for arranging US$1 billion in project financing, non-recourse to Quadra. If the funding is not available, Sumitomo must provide a US$800-million shareholder loan, which will also be non-recourse to the Vancouver-based miner.

Quadra expects to provide its share of funding of about US$650 million, through a mix of cash it has on hand and debt financing, which the company is currently exploring with JP Morgan.

White noted the company currently has no plans of issuing equity to fund the development of the project.

However, if the JV deal doesn’t close by August 1, Sumitomo would loan Quadra US$360 million, by providing US$90 million per month from August to November. Quadra would have 12 months to repay the bridge loan if the deal is not sealed by Dec. 31.

Also under the JV arrangement, Sumitomo has the right and obligation to buy 50% of the copper concentrate. Quadra would have the right to sell the remaining half, which would be marketed by the JV.

The feasibility study envisions Sierra Gorda as an open-pit operation, initially processing 110,000 tonnes per day to produce both a copper and molybdenum concentrate. The company plans to ramp up throughput to 190,000 tonnes per day in year 4 of operations.

It would cost Quadra an extra US$818 million over the initial capex of US$2.87 billion to expand throughput to 190,000 tonnes per day, which would start in 2017.   

Once off the ground, Sierra Gorda would churn out an average of 438 million lbs. copper, 25 million lbs. molybdenum, and 64,000 oz. gold per year over its 20-year life.

The company notes that over the mine’s life it would generate about 76% of its revenue from copper, 20% from moly, and 4% from gold.

The study predicts that it would cost US56¢ to produce a pound of copper during the first five years, net of byproduct credits, and about US$1.15 per lb. over the life of mine, assuming prices of US$2.50 per lb. copper, US$12 per lb. moly, and US$1,000 per oz. gold.

With those assumed prices, after-tax net present value (NPV) at an 8% discount rate is US$720 million. However, at spot prices of US$4 per lb. copper, US$15 per lb. moly, and US$1,300 per oz. gold, the after-tax NPV at an 8% rate rises to US$5.1 billion.

Mine and plan sustaining costs is expected to come at US$1.04 billion, averaging about US$52 million per year over the life of the mine.

The company says an upside opportunity at Sierra Gorda could from the 237 million tonnes of oxide resources that were not included in the study.  

Quadra expects to receive approval from its environmental impact assessment in June.

On news of the JV and feasibility study, the company shares rose 5.7% or 79¢ to close the day at $14.48 per share on 9.8 million shares traded.