Adastra advances Kolwezi

A definitive feasibility study gives a hearty thumbs-up to a 2.3-million-tonne-per-year operation at the Kolwezi copper-cobalt project in the Democratic Republic of the Congo (DRC).

The study, by Murray & Roberts Engineering Solutions and GRD Minproc, pegs the project’s after-tax internal rate of return (IRR) at 31.1%; the IRR of Adastra Minerals‘ (AAA-T, AAA-L) 65% stake climbs to 40.4%. The net present value of Adastra’s share in Kolwezi is estimated at US$284 million, (or C$3.93 per fully diluted share), based on a discount rate of 12%.

Estimated capital costs at Kolwezi ring in at US$305 million, including US$34 million for spares, first fill, buffer inventories, insurance, and a US$27-million contingency allowance. The study also suggest potential savings of around US$7 million; a “value engineering process” aimed at identifying further savings will be completed over the next two months.

The proposed operation would focus on two tailings dams containing resources of 112.8 million tonnes of oxide tailings grading 1.49% copper and 0.32% cobalt to annually produce 33,200 tonnes of copper and 5,900 tonnes of cobalt.

Murray and GRD estimate operating costs at US57 per lb. of copper and US$2.08 per lb. of cobalt, on a co-product basis.

Construction is expected to begin before yearend, with first metal production conceivable by the second half of 2008.

“The completion of the DFS is a major accomplishment that allows Kolwezi to move ahead, on schedule, towards first metal production in 2008,” said Adastra chief executive Tim Read. “We can now proceed to complete the project finance.”

Adastra and SRK Consulting have also completed an environmental and social impact assessment (ESIA) and environmental and social management plan (ESMP). International Financial Corp. (IFC), the financing arm of the World Bank, has confirmed that both meet the Equator Principles (environmental and social safeguards for project financing) and World Bank guidelines.

The ESIA concludes that “overall, the Project will generate significant benefits to the area both in terms of environmental improvements and socio-economic development.”

Says Read: This is another crucial step in the development of Kolwezi, and will permit the project financing to proceed. The approval by the IFC of this exhaustive document further emphasises Adastra’s commitment to best practice in project development.”

South African state-owned Industrial Development Corp. and Investec Bank have been mandated to arrange US$80 million to US$120 million in financing for Kolwezi; the Royal Bank of Scotland is working on orchestrating another US$60 million to US$75 million.

Adastra recently agreed to sell a 14.9% stake in Kolwezi to Japan’s Mitsubishi Corp. (MSBHY-O) in return for US$37.5 million in cash, US$12.5-million worth of shareholder loans to the project on Adastra’s behalf, and a completion guarantee to the project lenders. Mitsubishi would also buy all of Kolwezi’s copper production at London Metal Exchange grade-A prices (less a commission) for 15 years. It would also sell cobalt production in selected regions.

The deal is aimed at fending off a hostile takeover bid from First Quantum Minerals (FM-T, FQM-L), which is offering Adastra shareholders one of its own shares for every 17.5 Adastra shares tendered.

At current share prices, the offer values Adastra shares at around $2.07 apiece; shares in Adastra were off a nickel at $2.35 in late afternoon trading in Toronto following the news on Mar. 8. First Quantum’s offer also significantly lags the DFS study’s valuation of Adastra’s share in Kolwezi. First Quantum shares were 32 cheaper at $36.19.

The balance of the project is held by the IFC with 7.5%, the Industrial Development Corp. of South Africa (IDC) owning 10%, the government of the DRC with a 5% stake, and state-owned Gcamines retaining a 12.5% interest.