Korean group partners with Baja to cover swelling costs at El Boleo

A South Korean group has agreed to kick in US$435 million to help develop Baja Mining‘s (BAJ-T) El Boleo copper project in Mexico, where development costs have risen about 45% to US$991 million.

Led by Korea Resources Corp. (Kores), the group will acquire a 30% interest in the project by acquiring a 30% interest Baja’s Mexican subsidiary, Minera y Metalurgica del Boleo S.A. de C.V.

Baja’s president, John Greenslade, says the deal has put the company in a much more comfortable financial position going forward with US$967 million now available to develop the project. Baja expects to reach production by 2010, and at full production will produce 55,750 tonnes of copper cathode, 1,535 tonnes of cobalt cathode and 6,300 tonnes of zinc contained metal per year over the first four years of operation.

“At this point in time, assuming we can close the transactions, we are almost 100% funded,” Greenslade says. “We are pushing hard to have it done by the end of May that’s a very optimistic deadline but I think it’s doable.”

Kores, a state-owned corporation in the Republic of Korea, looks for resource development opportunities to supply the country’s industrial economy. Kores is the process of signing off-take agreements with Baja before closing the deal.

The financing package from Kores will consist of an up-front cash payment, reimbursement of agreed project expenditures since completion of the definitive feasibility study, payment of the group’s share of the project capital and a package of senior and subordinated debt financing in conjunction with a Korean lending agency.

In March, Baja decided to conduct a cost-review after seeing other projects incur significant development cost increases.

Greenslade says he knew costs were off because numbers being used varied between 2006 and 2007 because the processing plant was designed nearly one year before the final resource estimate and feasibility study were completed.

“Drilling took a lot longer than we anticipated,” Greenslade says. “In 2006, the ability to get drill rigs was very bad, and we had expected originally we would put six or seven drills on the project and drill off the resource in a few months.”

On top of that, the numbers being used by the equipment suppliers were even older.

“Some of their numbers were from 2005,” Greenslade says.

He says the cost of equipment for the acid plant increased significantly but noted that the company decided to increase the size of the plant and add some extra equipment to make it more efficient. The enlargement means that the cogeneration power plant attached to it will be able to produce 41 to 46 megawatts of power, up from about 34 megawatts of power.

“So while it increased our capital costs in that area, if we should achieve 46 megawatts of power off the acid plant, it would be all the power for the operation we wouldn’t need any diesel,” Greenslade says. “Therefore we have a fairly significant cost savings in operating costs.”

At present time, about 60% of the orders for process equipment have been made, representing 23% of the construction cost.

The company says there is low risk for further cost increases because of the detailed review done by the construction contractor.

The rest of the funding required will be provided by cash on hand and a Baja equity contribution or a combination of a equity plus financing related to metal off-take contracts.