Sizing up BC’s next copper kings

With capital costs escalating all around the industry and mine financing not getting any easier, good infrastructure looks to be as crucial as ever to building a successful, major copper mine in B.C.

The land of copper-gold mega-porphyries already has its share of multi-billion-dollar projects in remote regions that face serious financial hurdles. These include NovaGold Resources’ (NG-T, NG-X) and Teck Resources’ (TCK-T, TCK-N) Galore Creek deposit, with a capital expenditure (capex) of $5.2-billion; Seabridge Gold’s (SEA-T, SA-X) KSM deposit, with a US$4.7-billion capex; Pretium Resources’ (PVG-T) Snowfield, with a US$3.4-billion capex; and Copper Fox Metals’ (CUU-V) Schaft Creek, which had a $3.8-billion capex in 2008, and a feasibility study on the project that is a year and a half behind schedule. All of the projects include extensive infrastructure spending.

In contrast, the copper projects moving forward in B.C. are all estimated to cost less than a billion dollars, or at least were expected to when building started. Thompson Creek Metals’ (TCM-T, TC-N) Mount Milligan mine, set to open in late 2013, was originally expected to cost $915 million, but costs have since crept to $1.5 billion. New Gold’s (NGD-T, NGD-X) New Afton mine could cost the company $765 million by the time it reaches commercial production this August. Imperial Metals’ (III-T) sizeable Red Chris project, expected to reach production by early 2014, could cost a relatively thrifty $444 million — in-line with the $438 million it cost Copper Mountain Mining (CUM-T) to restart its past-producing mine. Taseko Mines’ (TKO-T) New Prosperity, if it ever goes ahead, is expected to cost $1 billion, owing to $300 million in costs added to the new mine plan.

The projects that are going ahead all happen to have good road access and, at least once the Northwest Transmission Line goes in, will have reasonable access to grid power. 

So what other advanced-stage B.C. copper projects have respectable infrastructure, multi-billion-pound copper resources and what look to be achievable cash costs?

Yellowhead Mining’s (YMI-V) Harper Creek project fits the description. The property is located 150 km northeast by road from Kamloops and 10 km south of the Vavenby logging community. Road and rail access are excellent and the community is linked to the provincial power grid, though Yellowhead will have to work with BC Hydro and put up money to upgrade the transmission line.

Based on a feasibility study released in early March, the company expects the 70,000-tonne-per-day, open-pit mine to cost $839 million. Sustaining costs push net life-of-mine capital costs to $1.13 billion. The mine benefits from a low stripping ratio of 0.81 to 1 owing to its hilltop location, which, along with some gold and silver credits, helps bring the total cash cost to US$1.56 per lb. copper. 

With a 28-year mine life, Harper Creek is expected to produce 3.6 billion lbs. copper, 372,000 oz. gold and 14 million oz. silver from reserves of 704.4 million tonnes grading 0.26% copper, 0.029 gram gold per tonne and 1.14 grams silver per tonne. The deposit is somewhat unique among B.C.’s big deposits in that it’s an extensive low-grade, volcanogenic sulphide system, rather than a porphyry.

Using US$2.50 per lb. copper and an 8% discount rate, the project has a pre-tax net present value (NPV) of US$749.7 million and an internal rate of return (IRR) of 20.2% with a five-year payback.

With the positive feasibility study now complete, no apparent environmental risks and so far positive relations with the local First Nations, the biggest overhang for the company is financing, as it seeks production by 2015. Yellowhead is looking to possibly follow a Copper Mountain model by selling off part of the project to an end-user, as well as the standard debt and equity, but has yet to announce any formal decisions.  

On the day the study was released Yellowhead’s share price climbed 22¢ to $1.31, though it has since retreated to 99¢. Canaccord Genuity analyst Wendell Zerb released a note following the study headed “Harper Creek feasibility rocks!” and increased his 12-month price target from $2 to $2.55. Jennings Capital analyst Peter Campbell said that the study was net positive, and put a $2.50 price target on the stock.

The Ajax copper-gold project near Kamloops also looks to fit the bill based on a feasibility study released in late December. Owned 49% by Abacus Mining & Exploration (AME-V) and 51% by Poland’s KGHM, the project has a US$795-million capital cost, though sustaining capital adds a full US$604 million. The 60,000-tonne-per-day open-pit operation should produce 2.5 billion lbs. copper and 2.3 million oz. gold over a 23-year mine life, and production, like at Harper Creek, could start in 2015. The project hosts reserves of 503 million tonnes of 0.27% copper and 0.17 gram gold. 

Unlike Yellowhead, Ajax has already found its deep-pocketed friend in KGHM, which optioned a further 29% of the project for $30 million. Abacus states that the move de-risks the project and shows that KGHM is going to move the project to production. 

Not quite in the multi-billion-pound range, Pacific Booker Minerals’ (BKM-V) Morrison project 65 km northeast of Smithers looks to be finally heading towards production. 

Based on a 2009 feasibility study, the project hosts reserves of 224.3 million tonnes grading 0.33% copper, 0.16 gram gold and 0.004% molybdenum, and could produce 1.37 billion lbs. copper, 658,000 oz. gold and 10 million lbs. moly over a 21-year mine life. 

The 30,000-tonne-per-day operation is estimated to cost $517 million in pre-production capital, and operating costs are estimated to run $60.3 million a year.  Based on US$2.75 per lb. copper, US$658 per oz. gold and an 8% discount rate, the NPV came in at $495.9 million and the IRR at 20.1%. 

On March 19 the company announced that its mining lease application had been accepted by the province, one of the last steps before the company can begin construction on the property.

As to earlier-stage multi-billion-pound copper projects, Serengeti Resources (SIR-V) is working to advance its Kwanika project in central B.C. The project is road accessible, 40 km east of a rail line and 75 km from the power line to the Kemess mine, while Serengeti will be putting out some hard numbers on capital costs in a scoping study expected in the second quarter. 

As of a March 2011 resource update, the central zone hosts 244 million indicated tonnes grading 0.23% copper, 0.21 gram gold and 0.69 gram silver for 1.2 billion lbs. copper and 1.7 million oz. gold. The South zone hosts 240 million inferred tonnes grading 0.2% copper and 0.09 gram gold, plus moly and silver for 1.1 billion lbs. copper and 664,000 oz. gold. 

In February Lions Gate Metals (LGM-V) released an updated resource on its Poplar project north of Imperial’s Huckleberry mine. The new resource, using a 0.15% copper cut-off, came to 171.3 million indicated tonnes grading 0.28% copper for 1.06 billion lbs. copper, or a 0.4% copper equivalent with minor gold, silver and moly values. Inferred resources added 209 million tonnes grading 0.23% copper for a further 1.4 billion lbs. copper, or a 0.33% copp
er equivalent with other metals. 

The company, headed by Paul Sarjeant as president and CEO as of January, plans to finish metallurgical work and continue infill drilling in the next few months so it can have a preliminary economic assessment out later this year. Because the deposit is located a few kilometres off the road and has a power line that leads to Huckleberry, Lions Gate expects capital costs to be fairly reasonable. 

Not far from Poplar sits Thompson Creek’s Berg project, with 506 million tonnes grading 0.3% copper, 0.037% moly and 3.77 grams silver for 3.3 billion contained lbs. copper. Thompson Creek is busy in B.C. building Mount Milligan, but Berg could be an interesting, upcoming target for the company.