Augusta shares whipsawed on EPA commentary

Shareholders of junior outfit Augusta Resource (TSX: AZC; NYSE-MKT) got a little skittish after the release of a letter from the U.S. Environmental Protection Agency (EPA) by non-government organization Save the Scenic Santa Ritas (SSSR), a group that opposes the company’s development of the Rosemont copper–molybdenum project, 50 km southeast of Tuscon, Ariz.

On Nov. 20 the SSSR released a commentary on an EPA letter dated Nov. 7, which covers the company’s proposed compliance with Section 404 of the federal Clean Water Act. The NGO cited certain aspects of the inter-governmental correspondence, and concluded it had “dealt a dramatic and potentially devastating blow to [Augusta’s] proposal to build [Rosemont].”

The news triggered a significant sell-off of Augusta’s stock, which tumbled 63%, with over 2.5 million shares trading hands on Nov. 20. The company hit a 52-week low of 48¢ during intraday trading before closing at 63¢ per share.

The EPA letter, which was addressed to the U.S. Army Corps of Engineers (ACOE), appeared to reaffirm prior conclusions that Augusta’s proposed mitigation measures at Rosemont were “inadequate to compensate for the impact to water resources from the project, as set out in the guidelines of Section 404.”

Augusta is proposing a US$1.2-billion open-pit mine at Rosemont, which holds proven and probable reserves totalling 667 million tonnes grading 0.44% copper, 0.015% molybdenum and 3.4 grams silver per tonne, based on a US$19.42-per-tonne net smelter return royalty cut-off. The mine would crank out an average of 243 million lb. copper, 5.4 million lb. moly and 2.9 million oz. silver annually over its 21-year life.

Augusta responded to what it referred to as SSSR’s “inaccurate press release.” The company accused SSSR of making “inappropriate comments” and “distorted interpretations” related to the EPA letter, while pointing out that the document refers to outdated plans and issues stemming from discussions about Rosemont’s permitting.

Augusta says a final environmental-impact statement (EIS) is scheduled to be released soon, and includes five years of updated scientific work.

“The SSSR release was not only inaccurate, but another attempt to harm our company,” commented president and CEO Gil Clausen in a prepared statement. “This group has historically mischaracterized the level of impact that letters between agencies have, and obviously do not understand the permitting or the evaluation process. For example, nowhere in the EPA’s letter did they discuss discharges as ‘toxic mine wastes.’ The SSSR is fabricating information and attributing that information to EPA in an effort to scare our shareholders and disrupt markets.”

The EPA’s analysis was reportedly based on Rosemont’s Preliminary Administrative Final EIS completed in July 2013, and a Habitat Mitigation and Monitoring Plan dated September 2013. Though the EPA letter suggests that the ACOE does not permit Rosemont under Augusta’s proposed mitigation strategies, it appears that part of the mine plan remains in development and discussion. A decision on Augusta’s final EIS is expected by mid-December.

Augusta’s response appeared to reassure markets, as the company bounced back 98%, or 62¢, on Nov. 21, before closing out the day at $1.25 per share on 2.5-million shares traded.

Meanwhile, the company topped up its coffers to see it through Rosemont’s final permitting stages, before it can make a construction decision during the first half of 2014. Augusta has increased a US$83-million loan facility with Red Kite Mine Finance Trust by US$26 million.

The updated agreement is conditional on Augusta meeting permitting milestones at Rosemont.

The company will receive US$3.5 million upon signing the agreement, another US$10 million subject to the publication of Rosemont’s final EIS and a preliminary decision by the U.S. Forest Service (USFS), and another US$7.5 million when the USFS finalizes its approval. Augusta will receive a fourth, US$5-million tranche after issuing the final Clean Water Act Section 404 permit by the ACOE.

BMO Capital Market analyst John Hayes — who maintains a “market perform” rating on Augusta — writes in a Nov. 21 research report that the SSSR news is slightly negative, but notes that “the commentary by the EPA appears to come ahead of the filing of the final EIS and completion of the new mitigation plans. The debt financing provides the company with about six months of additional liquidity, while awaiting the final Record of Decision.”