Lima connections help Dia Bras acquire Yauricocha mine

Using the contacts of director Alberto Arias, a former Goldman Sachs (GS-N) analyst turned resource investor with a well-connected mining family in Peru, Dia Bras Exploration (DIB-V) has penned a US$310.2-million deal to acquire Sociedad Minera Corona, a company traded on the Lima Stock Exchange.

Corona owns the Yauricocha silver-copper-lead-zinc mine, located in Yauyos Province, near Lima. It is forecast to produce 2.1 million oz. silver, 5,407 tonnes copper and 14,968 tonnes zinc this year. 

Karl Boltz, vice-president of corporate development for Dia Bras, explains in a telephone interview how the company was able to leverage the “very powerful network” of Arias and his private investment fund, Arias Resource Capital Fund, to acquire Corona.

“His family knows the ownership family that is the controlling family of Corona,” Boltz says. “They run in the same upper-crust circles in Peru. That just gave us another leg up.”

Though Boltz was unable to answer several questions about the mine while Dia Bras compiles the documentation required for exchange approval, he did say the company is pleased with the price it paid, and it calculates a three-year payback on the deal.

Arias made his reputation as the managing director and head of equity research for the Americas at Goldman Sachs before starting his own investment fund. His family has managed private mining companies in Peru for several generations, though he went to the U.S. for school, completing two degrees in engineering as well as three master’s degrees.

Dia Bras expects to finance the large purchase with a US$150-million bridge loan from Citigroup Global Markets and a $167-million equity offering. Arias’s private equity fund, which currently controls 59% of Dia Bras, will subscribe for 17.5 million shares under the offering for $50 million. It will control roughly 46% of the company after the transaction is completed.

Dia Bras is buying 92% of the voting shares (representing about 82% of the total equity) of Corona from the Gubbins Granger family, who has been involved in Peru’s mining industry since at least the 1960s.

Five of Corona’s seven directors have the surname Gubbins, Granger or Gubbins Granger, and they should all do well by the deal: they stand to receive US$285.4 million for their collective stake. They are led by president Salvador Jesus Guillermo Gubbins Granger, who is interesting in his own right.

A three-time national surf champion of Peru, Salvador Gubbins Granger is an avid supporter of cock-fighting who, in the early 2000s, found himself in trouble with Peruvian authorities for secretly running a breeding ground of 400 fighting cocks in the countryside of the Chorrillos district. Though cock-fighting is legal in Peru, certain permits are required which the president apparently lacked. 

Salvador Gubbins Granger has also managed other mining companies in Peru, most notably Sociedad Minera La Cima. In 2006, South African miner Gold Fields (GFI-N) bought the company and its Cerro Corona copper-gold project for US$40.4 million. Last year Gold Fields produced 393,600 gold-equivalent oz. from the mine at an average cash cost of US$348 per oz.

Nevertheless, it is another Gubbins Granger brother who grabs most of the media spotlight in Peru. Alejandro Gubbins Granger is the president of a rival mid-sized Peruvian company, Minera Casapalca, which the Peruvian media have occasionally singled out for its labourers’ poor working conditions.

Having presidents that are siblings has not helped relations between the two companies. According to Corona’s most recent financial statements, Casapalca has sued several members of Peru’s Supreme Court and named Corona a co-defendant over the 2002 bidding process for the Yauricocha mine. The current status of the case is unclear, though Corona notes in its financial statements that it believes the final outcome will be favourable to the company, or else would not result in any significant liabilities.

In 2002, amid the dismantling of Peru’s state-owned mining company Centromin, the Yauricocha mine was put up for sale. Both Casapalca and Corona competed in the bid, which Casapalca won by offering to pay US$5.2 million and investing another US$3 million in the mine over five years.

According to unverified reports by Business News Americas, six days later the sale began to unravel. Casapalca had refused to pay all of the money for the mine, claiming Centromin breached its contract by not disclosing that most of that year’s production had already been sold to a third-party refinery.

Peru’s privatization authority, Cepri, took the mine back and promptly sold it to Corona for US$4.3 million. Peru’s congress apparently set up a commission to probe certain irregularities of the sale, though details of the probe are cloudy.

Corona started operating Yauricocha in April 2002, mining at a rate of 114,000 tonnes per year. At the time of the purchase, the mine employed 400 workers and had a 500,000-tonne-per-year concentrator. By the end of 2002, Corona had increased mill throughput to 190,000 tonnes per year, and by 2007, had increased throughput to 527,000 tonnes per year. Corona’s last reported production information from 2009 calculated mill throughput at 790,743 tonnes grading 113 grams silver per tonne (3.3 oz. silver per ton), 1.06% copper, 3.41% lead and 2.04% zinc. 

That year saw Corona sell US$85.5 million of mineral concentrates at a cost of US$34.7 million. Along with income from the company’s hydroelectric power plant, Corona’s net earnings for 2009 totaled US$28 million. Unaudited reports for 2010 calculated net earnings of US$48.3 million.

As for Dia Bras, it is now completing a National Instrument 43-101 report for Yauricocha, which it says is already JORC-compliant (the Australasian equivalent of NI 43-101). Dia Bras adds Yauricocha has a forecasted mine life of nine years, but hopes to prolong that with further exploration as early as this year.