Norsemont rides into Peru

SITE VISIT

Lima, Peru — When Bob Baxter left his post as executive vice-president at Char- iot Resources (CHD-T) to become president of Norsemont Mining (NOM-T), he didn’t have to travel very far but he did have to move higher.

Both companies have their flagship projects inside Peru, but whereas Chariot’s Marcona copper project lies on the country’s coast, Norsemont’s Constancia project is situated 250 km east — and perched almost 5,000 metres higher.

It’s a good thing Baxter has grown impervious to altitude sickness. He doesn’t slow down a bit as he walks along the upper ridges of Constancia before stopping and looking down over the valley where one of the company’s drill rigs turns, not far from where locals are expanding a road.

“The locals know how to build roads,” he says. “They’re eager to work and they’ll go all day long.”

While originally from Australia, Baxter has worked in South America long enough to have travelled down many dirt roads in the Andes. For the better part of 22 years he’s made South America his home and in that time has gained intimate knowledge of not only the geology, but also the people and Peru’s politics.

Baxter was appointed president of Norsemont in July 2007, a new high for him professionally. His key roles in acquiring and progressing the Marcona copper project, as well as other projects in Argentina and Peru with the now-defunct North Limited, make him one of the region’s most experienced geologists.

It’s know-how that Vancouver-based Norsemont is drawing on as it evolves.

Originally formed in 1977 as Loredo Mining, its modern incarnation was listed on the TSX Venture Exchange near year-end 2004. Shortly after, Norsemont said it would acquire a significant stake in what has become the company’s signature project — Constancia.

Baxter hasn’t wasted any time while at the helm. At the end of March, the company announced its second resource update in less than six months. The second estimate indicated resources had grown by almost 10% and inferred resources by a whopping 133%.

With a 0.2% copper cutoff, it estimated 70 million tonnes grading 0.53% copper, 0.013% molybdenum and 4.01 grams silver, or 0.65% copper equivalent. That works out to 370,000 tonnes copper, 9,000 tonnes molybdenum and 9 million oz. silver.

Inferred resources moved up to 250.2 million tonnes grading 0.51% copper, 0.013% molybdenum and 4.5 grams silver, or 0.64% copper equivalent. That makes for 1.3 million tonnes copper, 33,000 tonnes molybdenum and 36.2 million oz. silver.

Copper-equivalent values were calculated using long-term prices of US$1.20 per. lb. copper, US$8 per lb. molybdenum and US$7.50 per oz. silver.

The news from the most recent update was better received than the resource estimate published in October 2006. When the news was released the company’s shares tumbled by roughly $1.00, a penalty for missing the Street’s expectations. That estimate put the inferred and indicated resources at Constancio at 898,000 tonnes copper, 23,000 tonnes molybdenum and 20.6 million oz. silver.

Along with the growth in resources has come a boost in market prominence that culminated with the company’s graduation to the TSX’s main board at the beginning of April.

Norsemont shares have traded between $1.50 and $1.75 since moving up from the TSX Venture Exchange and the company has roughly 29 million shares outstanding and a market capitalization of $50.6 million.

With exploration costs to date coming in at $6.6 million, and with roughly $1.6 million in cash at hand (as of Dec. 31, 2006), Norsemont’s financials look good, at least in the near term. Financing for operations came primarily from a private placement in 2006 of 3.5 million units at $4.00 per unit for a total of $14 million.

Location, location . . .

Beyond his belief in the mineral potential at Constancia, Baxter was also drawn to the deposit’s location — in the heart of a region that Swiss mining house Xstrata (XTA-L) clearly sees as a mining district.

Xstrata has two key copper projects in the area. Tintaya, Peru’s third-largest copper mine, sits 20 km southeast of Constancia, and Las Bambas, an exploration project, sits roughly 20 km northwest.

“We’re sitting right in the middle of two very important projects for Xstrata,” Baxter says. “That gives us significant advantages.”

And while advantages such as access to infrastructure, exploration potential and the chance that the project could become a takeover target for Xstrata, Constancia is not without caveats.

One reason Xstrata was able to acquire Tintaya for US$750 million from BHP Billiton (BHP-N, BLT-L) was that the Australian-miner became the target of heavy community protest.

The protests were fierce enough to force BHP to shut down operations for a spell in May 2005. It’s a situation that Norsemont is sensitive to.

Brian Soregaroli, vice-president of corporate communications, says that Norsemont has made a concerted effort since arriving in Peru to reach out and include the community as much as possible during exploration.

Norsemont funds school projects, as well as local agricultural and livestock programs.

How it came to be

Norsemont optioned Constancia from Rio Tinto (RTP-N, RIO-L) in 2005.

Under the terms of that deal, Norsemont can acquire a 51% interest by paying Rio US$4 million in cash, spending US$7.8 million on exploration and issuing 1.25 million common shares over five years.

Rio retained back-in rights of up to 17% if resources go above 4 million tonnes copper. If resources climb that high, Norsemont would wind up with 34% of a large deposit being brought into production by Rio’s deep pockets.

If Rio doesn’t exercise its back-in option, Norsemont can increase its interest to 70% by paying Rio another US$8 million.

Japanese smelter operator, Mitsui Mining, which was one of the first companies to drill on-site, retains a 30% interest in Constancia.

Based on 72 holes, Rio made a non-Instrument 43-101 compliant resource estimate of 608 million tonnes grading 0.48% copper, 3.4 grams silver, 0.05 gram gold and 0.015% molybdenum for 2.9 million tonnes (6.4 billion lbs.) contained copper.

Geology

Situated 600 km southeast of Lima and in the Yauri-Andahuaylas metallogenic belt, Constancia is characterized by two intrusive centres, spaced roughly 1 km apart and known as the Constancia and San Jose zones.

Rio followed up earlier drilling by Mitsui with 24 more holes and determined the deposit to be a medium to large copper-silver-molybdenum and gold porphyry system (the amount of gold and zinc were too small for Norsemont to report in its resource estimate).

Norsemont’s drilling not only confirmed that a large copper porphyry was present, but that it contained a shallow zone of secondary enriched sulphide, hypogene primary chalcopyrite and copper skarn mineralization (hypogene chalcopyrite has not been enriched by supergene processes so grades in that zone are lower).

The company says mineralization is associated with structurally controlled hydrothermal alteration related to the emplacement of a series of monzonite porphyries intruding into a sedimentary package that includes calcareous rocks.

Magnetite skarn bodies occur along the contacts between the porphyry and sedimentary rocks and limestones that are cut by the intrusive centres.

At Constancia, mineralization occurs in the oxides, supergene sulphides, mixed oxides and supergene sulphides and hypogene sulphides, while at San Jose, the mixed zone is absent.

Metallurgy

Earlier in the project’s life Norsemont had hoped to heap leach oxide ore at the site.

However a recent technical report by consulting firm Snowden says the mineralization is mostly sulphides which will require some form of pre-treatment, likely bacterial leaching.

Such leaching would process ore from the supergene zone, but significant capital would be needed to build the solvent extraction- elect
rowinning (SX-EW) plant.

Still, Snowden says copper recovery by flotation from the supergene, hypogene and skarn zones is “efficient” and recommends a conventional copper and molybdenum porphyry flow sheet, with standard primary grinding followed by rougher flotation, concentrate regrind, and three stages of copper cleaner flotation.

A separate concentrate would likely be separated from the bulk copper molybdenum concentrate by way of standard technology used for similar deposits.

Snowden says concentrate quality would meet commercial contract terms without any significant penalties for deleterious elements.

The report goes on to say that concentrate grades of 30% copper are feasible for the supergene and hypogene ore due to their high content of secondary copper. Ore from the skarn, however, has a lower concentrate grade of 26.6%, because copper there occurs as chalcopyrite, and there are substantial amounts of zinc occurring as sphalerite.

Land Rights

Land tenure in Peru can be touch and go. One reason is that the national system for agricultural land ownership isn’t always accurate.

The law doesn’t give surface rights with mineral rights, thus leaving companies to either buy the surface rights or make another agreement with surface rights owners to access the property.

Norsemont secured two agreements with local communities at the beginning of May so that it can push ahead with infill drilling as it moves towards a scoping study later this year, but further negotiations are necessary for mine development rights.

“There’s been exploration on the property for the last three years,” Baxter says, “and there’s a good working relationship with the local landowners.”

The company plans 25,000 metres of infill drilling for 2007 and has another 5,000 metres budgeted for new targets. Baxter says drilling will focus on defining the area between the San Jose and Constancia deposits, as well as targeting areas outside of the deposits, such as 900 metres north of San Jose , where a recent hole returned 38.7 metres grading 1.69% copper.

Beyond strong exploration upside, and having Xstrata as the company’s neighbour, Baxter also likes Peru’s improving political climate.

The recent election of President Alan Garcia has renewed optimism for the industry in the mineral- rich country after citizens flirted with the idea of electing the more extreme socialist, Ollanta Humala.