Zafranal could produce copper for nearly two decades, study says

A positive prefeasibility study on the Zafranal project — an Andean style porphyry copper-gold deposit in southern Peru owned by Teck Resources (TSX: TCK.A; TSX: TCK.B; NYSE: TECK), AQM Copper (TSXV: AQM) and Mitsubishi Materials — “tees Zafranal up for the next commodity cycle,” Haywood Securities analyst Stefan Ioannou says.

The study envisions a conventional open-pit operation feeding a concentrator over a 19-year mine life for total output of 3.1 billion lb. copper and 484,000 oz. gold.

The concentrate would be trucked 216 km away from the deposit to the Port of Matarani. Zafranal is 80 km from tidewater and 166 km by road from the town of Arequipa.

Initial capex could ring in at US$1.2 billion, with life-of-mine sustaining capital costs of US$263 million. The high sustaining capital costs reflect the purchase of mine equipment in years three and four of production, when the owners would take over the operation of the mine from a contractor.

“It’s pretty straightforward in terms of development,” AQM president and CEO Bruce Turner says in an interview. “We don’t have to relocate any communities, the climate conditions are good and it’s cheap power, compared with Chile. And what makes it a really good project is a near-surface, higher-grade supergene blanket that is 175 million tonnes of 0.6% copper. There is also a favourable mining environment in Peru, despite all the things you hear in the press.”

Using a base case of US$3 per lb. copper and US$1,200 per oz. gold, the study estimates that Zafranal would yield an after-tax net present value of US$496 million at an 8% discount rate, with a 15.9% post-tax internal rate of return and 5.1-year payback.

Production would average 120,000 tonnes per year of copper-in-concentrate over the first five years, falling to 75,000 tonnes per year over the life of the operation. The mine plan is designed for a variable feed to a concentrator in the range of 55,000 to 64,000 tonnes per day depending on the mineral type, with a peak total material movement of 75 million tonnes per year. The mine is scheduled to run 365 days per year.

Average mine-site production costs would come to US$1.29 per lb. copper from plant feed material processed, including mining, rehandling, milling and flotation. Average C1 operating costs for the 19-year mine life total US$1.59 per payable lb. copper net of transport losses and smelter deductions.

Teck, which discovered Zafranal in 2003, owns 50% of the joint-venture project. The other 50% is owned by Minera AQM Copper Peru, of which AQM Copper owns 60% and Mitsubishi Materials Corp. holds the rest.

Turner, who joined AQM in 2009, described the study as a milestone.

“We’ve gone through the whole process of exploration and putting together drill plans, and it has culminated in publishing the prefeasibilty study,” he says. “It’s well thought out, it’s built for purpose, it’s robust, it’s got examples of the designs that work well in Peru … unfortunately markets haven’t been particularly kind, so it’s been more difficult than expected, but we’ve done what we said we’d do, which is put together a solid development scenario for this project.”

Turner also notes that the study was put together by a group of consultants, including Ausenco Peru, which also worked on HudBay Minerals’ (TSX: HBM; NYSE: HBM) Constancia project — another copper porphyry project in southern Peru.

The current Zafranal concentrator design is a built-for-purpose plant. It has few overhead cranes, no roof or walls, and it’s an open building.

The mine design proposes two contiguous pits with a combined 3.5 km strike length, a maximum 1 km width and a maximum 456-metre depth.

The operation’s primary crusher would be next to the mine on the opposite hillside of the valley just south of the main zone open pit, at a base elevation of 2,494 metres above sea level.

Due to the steep topography between the primary crusher and the rest of the concentrator, the conveyor that transfers the crushed ore to the crushed ore stockpile — which feeds the grinding circuit — would pass through a 3.6 km tunnel.

The rest of the concentrator and major facilities such as the crushed ore stockpile would be terraced down a ridge. Other buildings, such as the camp and general administrative buildings, would be located downhill.

AQM describes the layout as “compact, but adequate for the facilities.”

Tailings would be placed 1 km southeast of the concentrator and total 396 million tonnes in time.

AQM, the operator, says that due to the favourable topography in the tailings management facility area, which provides a natural basin for the impoundment, only one embankment would be required initially (in the southwest of the impoundment), with a small embankment required later in the northwest.

Sand cycloned from the tailings would be used to raise tailings embankments as needed.

Zafranal’s measured and indicated resources stand at 467.3 million tonnes grading 0.4% copper and 0.07 gram gold per tonne for 3.9 billion lb. copper and 1.05 million oz. gold, with inferred resources adding 21.4 million tonnes averaging 0.2% copper and 0.06 gram gold for 114 million lb. copper and 0.04 million oz. gold. The resource is based on a 0.2% copper cut-off grade and long-term copper and gold prices of US$3.50 per lb. and US$1,400 per ounce.

The operation would require 410 litres per second of makeup water and AQM says that a brackish-water aquifer within 35 km of the proposed process plant site could satisfy the project’s process water requirements. The water is unsuitable for human and animal consumption or crop irrigation, and AQM says that test work suggests that the water is suitable for concentrator processing.

“Water is always the biggest challenge in Peru, either you’ve got too much of it, or you don’t have enough,” Turner says. “We’ve located three sources of brackish water at different distances from the plant site, and one of the most promising of these is the aquifer 35 km away, with a large volume of stored water. We would need 250 million cubic metres over the 19-year mine life, so we think it’s only a small part of what the aquifer contains.”

Much of the next round of work will be completing hydrogeological studies in the areas of tailings management and potential water supply.

As for power, a proposed 96 km  transmission line from a substation near Arequipa to a proposed 220 kilovolt substation near the mine’s concentrator would have to be built.

Ioannou of Haywood Securities says in a research note that the study (“vetted by two major partners”), argues well for AQM’s future cash flow, and could turn the junior’s stake in the project into an asset coveted by other mining companies.

“We acknowledge a 15.9% base-case after-tax IRR stands to attract scrutiny in the context of current copper market sentiment,” he says. “Nevertheless, the project is well-positioned for expedited development through Teck and Mitsubishi’s involvement.

“While a passive 30% project interest stands to potentially garner significant cash flow for AQM over time, we anticipate the meaningful position will attract attention from potential suitors with a stronger-for-longer copper price outlook, whether it be the company’s existing partners looking to consolidate a larger share of Zafranal, or other third parties looking for exposure to copper in an established mining jurisdiction.”

When asked to address the Haywood comment, Turner said he didn’t know, but noted that AQM has to do something about funding if it wants to finish a feasibility study.

“Raising money in this market is difficult and it’s dilutive for juniors, so we’ll look at all options, and our partners are looking at their options, as well.”

Turner said it is possible the project will be ready for the next commodity cycle, given that the company is looking at turning out its first concentrate in 2021, although admittedly, “a lot of things can get in the way” before that.

“I don’t think things are going to get much better in the copper space until the end of next year, and I don’t think the recovery will be quite as dramatic as you would have experienced earlier. There will be an increase in price and that will gradually improve over the following years, so us coming on in that market is good. Most of our higher-grade copper is in the first six years, so if we continue with higher copper prices this project will do very well.”