Silver Wheaton, Augusta Ink ‘New’ Deal For Rosemont

VANCOUVER– Augusta Resource (AZC-T) has secured major support for its Rosemont copper project in Arizona with a renegotiated deal to sell future silver and gold streams from the development-ready deposit to Silver Wheaton (SLW-T, SLW-N) for upfront capital. Silver Wheaton will pay US$320 million to Augusta for the right to buy all by-product silver and gold production at Rosemont for US$3.90 per oz. silver and US$450 per oz. gold, or at market prices if they drop below those figures. The capital injection represents about 25% of the US$890 million needed to build the mine.

This latest deal replaces a mid- 2008 agreement that would have seen Silver Wheaton advance US$165 million to Augusta in exchange for the right to buy 45% of Rosemont’s life-of-mine silver production. The two never completed a definitive deal, but instead signed a new letter of intent six months later to negotiate a deal based on the updated Rosemont feasibility study.

The Rosemont project is an open-pittable copper-molybdenum-silver porphyry deposit located 50 km southeast of Tucson in Pima County, Ariz.

In early 2009 an updated feasibility study pegged proven and probable mineral reserves at 495 million tonnes grading 0.45% copper, 0.015% molybdenum and 4.1 grams silver per tonne in sulfide ore, with an additional 64 million tonnes at 0.17% copper in oxide ore.

Augusta plans to churn through 70,000 tonnes of ore daily at Rosemont, to feed an on-site sulfide concentrator and a solvent extraction-electrowinning plant. The operation is expected to produce 221 million lbs. copper, 4.7 million lbs. molybdenum, and 2.4 million oz. silver annually for at least 20 years, which would have Rosemont producing roughly 10% of the total copper output for the United States. Cash costs are estimated at US62¢ per lb. copper.

In addition, since Augusta did not consistently assay for gold, the yellow metal is not included in the Rosemont reserve estimate but testing has indicated the possibility of 15,000 oz. gold production annually, which Silver Wheaton will have the right to buy.

Based on long-term metal prices of US$1.85 per lb. copper, US$15 per lb. molybdenum oxide, and US$12 per oz. silver, the mine at Rosemont would generate an after-tax net present value of US$1.2 billion, using a 5% discount rate, with a 17.8% internal rate of return.

Augusta expects to secure final permits by late 2010 and begin production by 2012. The company plans to finance the US$570 million in capital cost not covered by the Silver Wheaton advance through debt, so as not to dilute equity. The company recently negotiated a US$40-million senior secured loan and copper concentrate off-take agreement with Red Kite Explorer Fund. The new loan will pay off a mid-2008 credit facility with Sumitomo for the same amount and will give Red Kite the right to purchase up to 15% of Rosemont’s copper concentrate for 10 years, to a maximum of 45,000 dry tonnes annually.

Augusta is implementing several measures to make Rosemont more sustainable. Water reuse and conservation will reduce consumption by 50-60% compared with traditional practices. A well-received and managed project could be important as the property contains two other potentially open-pit-table copper-molybdenum skarn deposits, known as Peach Elgin and Broadtop Butte.

Rosemont adds to the growing list of projects feeding the Silver Wheaton family. The company, which was only established in 2004, has rights to precious metal byproduct stream from 14 active mines and four development projects. Total silver production for 2009 is estimated at 16 million oz. silver and 17,000 oz. gold, making Silver Wheaton the largest silver streaming company in the world. By 2013, annual production is expected to more than double to 39 million oz. silver and 20,000 oz. gold.

Silver Wheaton’s business model of acquiring metal only through streaming agreements allows it to secure access to large quantities of silver without exposing itself to variations in operating costs, as the company does not plan to produce silver itself. At the same time, focusing on oft-undervalued byproduct streams allows Silver Wheaton to purchase silver at low prices — though at prices still beneficial to mining operations focused on another metal — and then leverage the value against increases in the market price of silver. The metal is well-suited to the model, as upwards of 70% of global silver production comes from byproduct streams.

Both Augusta’s and Wheaton’s share prices rose on the news. Augusta’s share price gained 36¢ on the day to close at $2.66; the company has a 52-week trading range of 51¢-$3.78 and has 107 million shares outstanding. Silver Wheaton’s share price climbed 56¢ to close at $15.84; Silver Wheaton has a 52-week trading range of $7.26-$18.36 and has 342 million shares outstanding.