The El Teniente mine in the Chilean Andes has been producing copper since 1904, and Codelco believes the underground copper mine — the world’s largest, with more than 2,400 km of subterranean tunnels — has many more decades to run. The state-owned miner plans to invest several billion dollars — a portion of which will come directly from the Chilean government — to develop a new underground level at the operation by 2025 that will push the mine’s lifespan from 2028 to 2065.
So it was not surprising that shares of Amerigo Resources (TSX: ARG; US-OTC: ARREF) jumped 8% after news that the Vancouver-based junior received a contract extension to process tailings from the mine until 2037 — 16 years past its current contract expiration date of 2021.
Perhaps more importantly, the new agreement gives the junior the right to process old tailings from the Cauquenes tailings pond facility, where tailings from the mine were poured from the 1930s until the 1970s. Up to now, Amerigo has processed old tailings from El Teniente’s Colihues tailings pond — where tailings were sent from the 1970s to 1991 — as well as fresh tailings from the mine’s concentrator. Adding the Cauquenes deposit to the contract terms means the junior will be processing tailings from the mine for the next quarter of a century.
With the new agreement, Amerigo can double its annual copper and molybdenum production within two years after starting the capacity expansion at its plant to accommodate the extra material, management says.
“It was a long time coming, but we finally got it,” Klaus Zeitler, the company’s president and CEO, said in a telephone interview. “This has been quite a process . . . but they know that we have twenty years of experience in doing this, and that is why they negotiated with us, rather than going for a public tender process. There really is nobody else around who has the experience and the proven track record that we have, so it was clear to them that the best deal was to work with us.”
Colihues sits 50 metres above Amerigo’s processing plant, which is nestled in a central valley 750 metres above sea level. Cauquenes is 50 metres above Colihues, while the mine is located 2,000 metres above sea level.
Last year Amerigo produced 51.7 million lb. copper and 1.1 million lb. moly from old and new tailings from the mine. Fifty percent of Amerigo’s copper and moly production came from the tailings that are produced daily from the mine’s concentrator (about 130,000 to 140,000 tonnes a day), and the remaining 50% from the 3.68 sq. km Colihues tailings pond.
Zeitler notes that that percentage is likely to shift to 25–75% (fresh and old tailings), because the grade of the tailings from Cauquenes is higher than the grade available from the fresh tailings. And one important thing about that, he adds, is that it gives the company much more flexibility and independence from the mine’s day-to-day operations, leaving it less vulnerable to work stoppages, or other production delays.
There is also a difference between the old tailings in the Colihues dam and those from Cauquenes, Zeitler notes. The Colihues tailings are located in an area where water collects from the mountains, so Amerigo has had to deal with water issues when mining Colihues. In the last quarter, for instance, the company contended with a slide in one of the working areas as a result of the water problem, which was exacerbated by heavy rainfall in the region. The company was forced to redo its mine plan, which it expects will lower production for 2013.
But unlike Colihues, the Cauquenes tailings dam is completely dry, which could result in mining costs that are up to 20% lower than at Colihues. The plan is to concentrate on mining Cauquenes as soon as the company receives its environmental permits, and the company would postpone mining Colihues until probably the 2030s, Zeitler estimates.
When asked if he thinks Amerigo might have a hard time nailing down its environmental permits, given Barrick Gold’s (TSX: ABX; NYSE: ABX) recent troubles at Pascua-Lama, Zeitler says that “I wouldn’t say it’s completely a slam dunk, but the fact that we went through the process with Colihues gives us a lot of confidence that there shouldn’t be any problems with Cauquenes.”
Zeitler also notes that in some ways their treatment of the tailings from Cauquenes will alleviate some of the environmental issues that come from storing the tailings. “Since there is no water there, there’s a dust problem,” he says. “You have to imagine a tailings pond that is 6 to 7 km long and 2 to 3 km wide, and you have these fine tailings sitting there with no water cover, so when there are high winds, you have quite a dust problem, and by us going in there and mining it, we will mitigate the problem.”
Zeitler estimates the company will have to spend between US$100 million and US$150 million to accommodate the extra tailings from Cauquenes and the fresh tailings from the mine’s concentrator. The money will be used for more extraction equipment and grinding facilities, among other things.
Under the agreement, copper production from Cauquenes, which should reach full production in 2015, will be subject to a sliding scale royalty for London Metal Exchange prices from US$1.95 to US$5.50 per lb, with a 16% base rate that will vary with the copper price. There will be an adjustment mechanism in the formal agreement for prices outside the LME price range for the Cauquenes royalty.
The fresh tailings royalty will also be changed to a sliding scale and modified to remove disadvantageous foreign exchange rate provisions, the company says. The base rate for the fresh tailings royalty will be 13.5% and the threshold increased from US80¢ per lb. to US$1.95 per lb. — the same minimum level as that for the Cauquenes royalty.
The minimum price level for paying royalties is based on Amerigo’s operating costs, including depreciation and financing costs, and will be adjusted to actual costs one year after Cauquenes reaches full production.
According to Latin American news portal BNamericas, Codelco’s El Teniente division is the miner’s most profitable division. It notes that the new mine level at El Teniente “will allow El Teniente to maintain its processing capacity of 137,000 tonnes per day for output of 430,000 tonnes a year of fine copper.”
“Codelco is spending more than US$3 billion on El Teniente and increasing the mine life for decades,” says Michael Kuta, Amerigo’s general counsel and corporate secretary. “El Teniente is the biggest orebody of its kind ever to be discovered.”
The planned expansion at El Teniente is just one of four new projects Codelco is embarking on over the next decade, for a total capex of US$17.5 billion.
Last year Codelco posted a pre-tax profit of US$7.5 billion — the third-largest pre-tax profit in the company’s history. (The results included an extraordinary US$3.5-billion gain after acquiring a stake in Anglo American Sur in August of that year.)
At press time Amerigo was trading at 45.5¢ per share within a 52-week trading range of 40¢ to 75¢. The company has 172 million shares outstanding.
Mining analyst Raymond Goldie of Salman Partners has raised his 12-month target price on the stock to $1.50 per share from his previous 82¢-per-share target, and calls Amerigo “very much a ‘buy.’”
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