Quadra announces JV with Chinese utility

VANCOUVER — A memorandum of understanding between Quadra Mining (QUA-T, QADMF-O) and State Grid International Development Ltd. (SGID) outlined a deal to jointly develop and operate Quadra’s Franke copper mine and Sierra Gorda copper-gold-molybdenum project in northern Chile.

The proposed deal with SGID, a subsidiary of State Grid Corp. of China, the largest utility company in the world, would see a new 50-50 joint venture created to combine Quadra’s operating Franke mine and its development-ready Sierra Gorda project with SGID’s capital access.

Quadra would remain responsible for the day-to-day operations of the JV’s properties.

The Sierra Gorda project and Franke mine represent US$900 million in assets. The details of the transaction have not yet been finalized, but Quadra says the deal would require SGID to contribute sufficient capital to earn a 50% stake in its assets. The Chinese company would also be responsible for arranging funds to develop Sierra Gorda, with an expected ratio of no less than 60% debt and 40% equity.

The deal would also see SGID acquire 10.9 million Quadra shares at $13.91 per share, giving the Chinese firm slightly less than 10% of the Canadian company. The private placement will be structured as a subscription receipt, to be completed along with the JV.

The board of directors’ positions for the JV will be split evenly between the two companies. Under the share deal, SGID will also nominate a board member to Quadra’s board.

Quadra had been seeking out funding for its Sierra Gorda project, which according to its scoping study has capital costs of US$1.66 billion. Sierra Gorda, wholly-owned by Quadra, is in Chile’s Atacama Desert. The resource estimate for the sulphide portion of the deposit stands at 1.35 billion measured and indicated tonnes grading 0.42% copper, 0.025% molybdenum and 0.067 gram gold per tonne, plus 456 million inferred tonnes averaging 0.38% copper, 0.012% moly and 0.044 gram gold. The project also hosts some 250 million tonnes of oxide resource that was considered waste in the scoping study.

That study for Sierra Gorda examined the economics of an open-pit operation with a mill and flotation facility processing 111,000 tonnes of ore per day to produce between 250 and 400 million lbs. of copper annually over a 25-year mine life. By the end of its mine life, Sierra Gorda would have processed 989 million tonnes of rock ore grading 0.42% copper, 0.027% molybdenum and 0.069 gram gold.

The cost of producing a pound of copper at Sierra Gorda is expected to average US79¢, net of gold credits, though the significant amounts of molybdenum produced for the first eight years reduce the cash cost of producing copper to US34¢ per pound initially. The sizable project generates an after-tax net present value of US$622 million, using a 10% discount rate, and should produce a 16% internal rate of return.

The other asset that might become part of a joint venture is the Franke mine. Quadra began producing copper at its 100%-owned Franke mine in the third quarter of 2009. Franke contains 41.7 million tonnes of reserves grading 0.75% copper.

The deal comes just as Quadra announced net earnings of US$80.5 million or 89¢ per share for the year ending Dec. 31, compared to US$38.6 million or 61¢ per share for the year prior.

The company got a big boost from an increase in the copper price from US$1.32 per lb. to US$3.33 per lb. over the year. Quadra also took a hit of US$54.5 million from an accounting loss on derivatives tied to the increased copper prices.

For the quarter ended Dec. 31, Quadra reported earnings of US$46.4 million or 47¢ per share, compared with a loss of US$126.1 million or $1.94 per share in the fourth quarter of 2008. Again high sales and copper prices are attributed to the huge swing.

The company believes that copper prices will remain high due to continued growth in Chinese copper demand and a general worldwide increase in demand as economies recover.

Quadra’s share price was up 92¢ on the news to close at $16.45. The company’s 52-week share price range is between $3.61 and $17.81, with 100 million shares outstanding.