Rosemont will cost more, Augusta says

Shares of Augusta Resource Corp. (AZC-T) closed 7.8% lower at $1.66 per share following the release of an updated feasibility study that estimates higher capital and operating costs for its Rosemont copper project near Tucson, Arizona.

Total initial capital costs for construction, commissioning and mine pre-development at Rosemont is estimated at US$1.2 billion, a 32% increase over the cost estimate in the company’s 2009 feasibility study.

The higher pricetag reflects inflation across the industry for equipment, material and labor, the company noted, but also design changes Augusta Resource will make to meet the recommendations of the U.S. Forest Service.

Last year the USFS identified the Barrel Alternative as its preferred alternative, which is different than what the company had originally envisioned. The plan changes “respond to public and agency comments and include incorporating the latest agency requirements for impact avoidance, pollution control, habitat migration, resource conservation and public safety,” the company outlined in a press release.

Rosemont has also removed the processing of oxide ore from its mine plan and the capital associated with a heap-leach and SX-EW plant.

John Hayes, a mining analyst at BMO Capital Markets in Toronto wrote in a brief research note that operating costs have climbed 43% from his previous estimate to US$8.89 per tonne, while the waste to ore ratio has fallen slightly to 1.9:1 from 2.0:1.

“Annual copper production is expected to average 243 million pounds over a 21-year mine life at a cash cost of US$1.02 per lb. copper net of by-products,” he continued. “This compares to our estimate for 203 million pounds copper annually over a 21-year mine life at a cash cost of US$0.67 per lb. A full analysis awaits publication of the full feasibility study; however, based on today’s update our 10% NAV could decline materially.”

The near-surface, large tonnage, skarn-hosted, porphyry-intruded, copper-molybdenum deposit has updated reserves of 605 million tonnes grading 0.44% copper for 5.19 million tonnes of contained copper and 0.015% molybdenum for 194 million pounds of contained molybdenum.  

Augusta Resource has traded within a 52-week range of $1.52-$4.95 per share. The company has about 143 million shares outstanding.

Christopher Chang of Laurentian Bank Securities is maintaining his speculative buy rating on the stock but lowering his one-year price target to $4.80 per share. While he believes permitting risk remains the largest overhang on the company’s shares, he does anticipate that Rosemont will secure all the permits it needs for development by the third quarter of 2013 and will start production in the fourth quarter of 2015. Once in production he forecasts average production over the life of the mine will be 242 million pounds of copper and five million pounds of molybdenum at an average cash cost of $1.13 per lb.

And once it completes the permitting process Chang believes the company will be “a very attractive acquisition target due to Rosemont’s relatively large resource size, low political risk jurisdiction, excellent local infrastructure, and low capital intensity.”