Augusta Resource (AZC-T, AZC-X) is slowly but surely pushing its Rosemont project in Arizona towards production by securing the sixth major permit needed to start building the primarily copper project located in Pima County, 50 km southeast of Tucson.
The junior recently received an aquifer protection permit from the state’s department of environmental quality. This permit ensures the groundwater is protected by setting operating standards and controls.
Chief operating officer Rod Pace comments in a statement that the permit “clearly shows that our project stands up to thorough and intense scrutiny.” He adds that it puts the company “one major step closer to completing the permitting process and starting construction” at Rosemont, which is expected to create 2,900 jobs in Arizona and inject US$1 billion a year into the U.S. economy.
“Since 2008, the Rosemont project has been scrutinized by local, national and international interests including public, private, agency and tribal interests,” James Sturgess, Augusta’s senior vice-president of corporate development and government affairs, explains in an email.
“Throughout this process, the robust project economics, stable long-term copper production and selection of the most progressive of modern technology have withstood investigation,” he continues.
While analysts see the recent permit as an “incremental positive” to the project, they note the company has the section 404 Clean Water Act permit outstanding, which is issued by the U.S. Army Corps of Engineers (ACOE).
In January 2012, following the public comment period for the draft environmental impact statement (EIS) and the 404 permit, the U.S. Environmental Protection Agency’s (EPA) regional office in San Francisco advised ACOE that the Rosemont draft EIS should be further reviewed by both agencies’ headquarters.
Some of the concerns EPA cited include the “hydrological impacts from the project and biological assessments to determine whether there is a risk to listed or endangered species,” writes BMO Capital Markets’ analyst John Hayes in a note to clients.
“Consequently, the 404 permit is in the midst of a conflict resolution process between ACOE and the EPA,” he observes. “It is unclear how long this process will take to resolve.”
Sturgess says in response to EPA’s comments the company is preparing an update of the Rosemont regional water studies with an integrated analysis for the two agencies and the U.S. Forest Service (UFS). It also intends to include this update in its final EIS.
Augusta expects the 404 permit and an air quality permit by the third quarter of this year. Last September the County denied the air quality permit just after it released a draft permit. In November the company submitted the permit application to the State, which was "deemed administratively complete" in February 2012. Augusta says the State, unlike the County, saw the application to be without flaw. By late 2012, the company also anticipates getting the UFS’ record of decision for Rosemont.
Construction at the project is planned by year-end, with production set for 2014.
The company planned getting the project up and running by 2013, but project delays pushed the timeline back.
As a result, Laurentian Bank analyst Christopher Chang revised his timeline for the permits and development in January 2012. He forecasts that Rosemont will complete the permitting process by mid-2013 and start production in mid-2015, noting that this would be a one-year delay from the company’s official timeline.
Once all the permits are in hand, which Chang says is the biggest overhang for the company’s share price, he believes Rosemont could garner some takeover attention.
“Augusta represents a very attractive acquisition target due to its relatively large resource size, low political risk jurisdiction, excellent local infrastructure and low capital intensity,” he says.
According to an updated 2009 feasibility study, the project is envisioned as an open-pit mine producing 220 million lbs. copper, 4.7 million lbs. molybdenum and 2.4 million oz. silver a year over a more than 21-year mine life.
Applying an 8% discount rate, it is projected to have a US$3.3-billion after-tax net present value at a copper price of US$4 per lb.
The company says the deposit is on track to become the fourth-largest U.S. copper producer, accounting for 10% of domestic output.
The cost to build the project is estimated at US$900 million.
Given the recent capital cost inflation in the industry, Chang predicts the project’s capex to be slightly higher at around US$1.1 billion.
The company, which plans to update the capex numbers and resource estimate by mid-year, says it doesn’t anticipate a huge increase in costs.
To help fund the project the company has a joint-venture agreement with Korea Resources and LG International, and an offtake agreement with Silver Wheaton (SLW-T, SLW-N).
The Korean consortium has agreed to acquire 20% of Rosemont by infusing US$176 million into the company’s coffers, with US$70 million earmarked for development pre-construction, and US$106 million for construction. It would receive 30% of Rosemont’s copper concentrate and 20% of its copper cathode and molybdenum concentrates produced annually at market terms.
The streaming company would acquire 100% of Rosemont’s life-of-mine gold and silver output by paying US$230 million upfront in cash, and then US$3.90 per oz. silver and US$450 per oz. gold delivered over the mine life, or the prevailing market prices if lower. The project is estimated to churn out an average of 2.4 million oz. silver and up to 15,000 oz. gold per year.
More recently, Augusta has lengthened its US$43-million Red Kite loan facility by about a year to April 14, 2013, or until the closing of a senior debt project financing, Chang says.
The loan has the same Libor interest rate, plus 4.5%. However, as part of the extension, Augusta has agreed to sell 80% of Rosemont’s copper cathode production to Red Kite Mine Finance Trust for the first six to eight years at Comex market pricing. Copper cathode production is estimated at 20 million lbs. a year.
The company has also extended the expiry of 1.8 million warrants with a $3.90 strike price held by Red Kite to April 23, 2014.
So, regardless of possible capex hikes, the company looks to be in good shape in respect to funding.
News of the recent permit boosted the company’s share price 10% to close April 10 at $2.54.
Chang has a “speculative buy” on the stock and a $5 target price.
Some of Augusta’s top shareholders include its management and the board, which own 15%, followed by Hudbay Minerals (HBM-T) at 14%, Goodman & Co. at 9%, mining magnate Ross Beaty at 9.25% and JP Morgan at 6.48%.
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