Hana plunges on Ghanzi PEA disappointment

Hana Mining’s (HMG-V) share price dropped 68% after the company released a long-awaited preliminary economoc assessment (PEA) on the Banana zone and zone 5 at its 70%-owned Ghanzi copper-silver project in northeastern Botswana.

The news was released after  markets closed on May 14, and with the study not meeting expectations, Hana’s share price fell 88¢ to 42¢ the next day with 16.6 million shares traded, but had rebounded to 71¢ at presstime.

Hana has set out plans for a 10,000-tonne-per-day conventional open-pit copper-silver mine with an initial 13-year mine life. The mine is expected to produce 66.4 million lb. copper and 878,000 oz. silver per year at head grades of 1.02% copper and 12.13 grams silver per tonne for life-of-mine production of 863 million lb. copper and 11.4 million oz. silver. The company plans to produce a clean copper-silver concentrate grading 46% copper.

Using somewhat bullish price assumptions of US$3.40 per lb. copper, US$30 per oz. silver and an 8% discount rate, the financials of the project work out to an after-tax net present value of US$262 million and an internal rate of return of 19.3%. The after-tax rate factors in the country’s 22.5% corporate tax rate, as well as a 3% net smelter return royalty for base metals and a 5% royalty for precious metals. Payback is estimated at five years.

Adam Low, a mining analyst at Raymond James, dropped his price target for the company to $1.65 from $2.10 on the news, noting that his modelled NPV for the project dropped to US$265 million from US$415 million after factoring in the latest information. The lowered valuation resulted in a decrease of the net asset value per share to $4.17 from $5.14.

Commenting on the PEA, Low wrote that “although Hana finally delivered on its long-awaited PEA, the results of the study identified a project that is not as economically robust as we had previously modelled.”

Low identified the head grade, strip ratio and intital capital costs of the project as positive or satisfactory, but those were more than offset by higher operating costs.

Initial capital costs are pegged at US$285.5 million, while pre-production, sustaining and deferred costs bring the total to US$399 million. Life-of-mine cash costs are anticipated at US$1.82 per lb. copper net of by-product credits. The projected costs come in at US$1.96 per lb. for the first five years because the company is not yet linked to the national grid, and has factored in using heavy fuel oil until the grid is extended.

The life-of-mine strip ratio would be 6.8 to 1, with an average pit depth of 183 metres in the four pits. The company has factored in contract mining rates but is considering an owner-operated model for the feasibility study.
Other potential improvements in the feasibility study include linking earlier to the power grid, improving the resource with 2012 drilling, optimizing the pit design and adding an underground mining operation.

The new resource on the Banana zone outlined 40.9 million indicated tonnes grading 0.87% copper and 12.5 grams silver for 780 million lb. copper and 16.4 million oz. silver, plus 191.6 million inferred tonnes grading 0.6% copper and 7.1 grams silver for 2.7 billion lb. copper and 44.7 million oz. silver, all using a 0.4% copper cut-off. Zone 5 hosts 16 million inferred tonnes grading 1.47% copper and 13.2 grams silver for 520 million lb. copper and 6.8 million oz. silver.

Mineralization is characterized by a near-surface oxide zone containing chrysocolla, chalcocite and malachite, plus trace azurite and native copper, with the base of the zone lying between 40 and 50 metres vertical depth. A transition zone ranging from 3 to 10 metres thick separates the oxide and sulphide zones, and at depth copper occurs in bornite, chalcocite and chalcopyrite, and as native copper.

Hana, with $20 million in cash, plans to continue drilling the project in 2012 as it works towards a feasibility study. The company is targeting 2016 for full start-up of the mine.