Iron ore explorer Cuervo Resources (FE-C) may be on to something big as it drills off the Bob 1 zone, one of the two large targets on its flagship Cerro Ccopane iron ore property in southern Peru.
“We think Bob 1 is a big, solid anomaly, and that is what we are hoping for,” Cuervo’s key founder and CEO Brian Berner says during a June site visit, noting that geophysics has the target at a billion tonnes.
Formed in 2005, the little-known explorer has been scouring the country’s rugged terrain for iron ore prospects, with the intention of capitalizing on growing international iron ore markets, specifically in the Pacific Rim.
In May 2007, it debuted on the Canadian National Stock Exchange, raising $2.5-million in its initial public offering. It then built infrastructure to explore Cerro Ccopane — a project it acquired in 2006 by staking aeromagnetic anomalies.
“Iron ore deposits are not that exciting, but they’re definitely lucrative,” company chairman Gordon Watts tells The Northern Miner on a flight from Toronto to Lima in June. Watts is a former director of Nunavut-focused Baffinland Iron Mines.
China’s import iron ore fines 62% Fe spot went from around US$28 per dry tonne in 2005 to US$113 a tonne in October 2012, after peaking at US$186 last February.
Cuervo says that while prices have slumped lately, they should recover as steel consumption picks up and Asian steelmakers look for new sources of iron ore.
Majors Vale (VALE-N), Rio Tinto (RIO-N, RIO-L) and BHP Billiton (BHP-N, BLT-L) control about 57% of the global iron ore export market, according to recent reports by London-based Roskill Information Services.
While Cuervo wholly owns over 250 sq. km of iron prospects in Peru, its main focus is the Cerro Ccopane property, which it has grown through grassroots exploration to 190 sq. km.
Cerro Ccopane is 65 km south of Cuzco, the ancient capital of the Incan empire, and 600 km from Lima, the country’s capital.
The drive to Cuzco from Lima takes about 24 hours, but a commercial flight between the two cities cuts the commute to little over an hour.
Once in the historic and vibrant city of Cuzco, driving to the property takes roughly six hours, as it sits high up in the Andes, at an elevation ranging from 3,500 metres to 4,600 metres above sea level. The climate in the mountainous area is relatively cool and dry.
The property comprises 23 mineral claims with five known target areas, including Bob 1, Huillque Norte — another 1-billion-tonne anomaly — along with the smaller Huillque, Orcopura and Aurora zones.
Each target area has the potential to contain 100 million tonnes averaging 45% iron, 2.5% sulphur and 0.10% copper, Cuervo says, outlining that the grades are similar to Peru’s sole producing iron ore mine, Marcona, which is owned by one of China’s largest steel companies, Shougang Group.
During the site visit, Watts, along with Cuervo’s manager of community relations Karina Yavar, showed The Northern Miner around the area, stopping first in the rustic town of Accha, a three-hour drive from Cuzco, where the company has a small establishment that serves as an office and guesthouse. Cuervo’s other offices are in Toronto, Lima and Cuzco, where it has a core processing facility.
From Accha, we drove another three hours on the mountain roads taking in the scenic valleys, gorges and gentle hills, pausing briefly at a vicuña reserve to see the country’s national animal. Other animals common in the area include: llama, alpaca, sheep, cattle and horses.
The closest community to the Cerro Ccopane property is the village of Huillque, some 6 km away, with roughly 500 people. The project’s Huillque and Huillque Norte zones lie in the Huillque territory, where Cuervo is negotiating a new exploration agreement with the locals.
The Bob 1 target is 15 km away from Huillque, with 80% of the target sitting in an area owned by the village of Misanapata, which has a population of 200.
In January this year, the Toronto-based outlet signed a three-year agreement with Misanapata to kick-off advanced exploration activities on Bob 1.
“We’ve made a major breakthrough going forward with Misanapata,” Berner says.
The contract led Cuervo to begin its first phase of drilling on Bob 1 in June to test the target’s 1-billion-tonne potential indicated by a 3 km belt of magnetite outcropping and promising geophysics.
The firm aims to complete at least 4,500 metres of drilling using two rigs, as well as additional geophysical surveying and mapping, infrastructure construction, community programs and permitting. (Under the current exploration permit the company can build 20 drill platforms at Bob 1. But once it’s repermitted, it can build up to 60 platforms.)
The camp at Bob 1 is set up at an elevation of 3,900 metres on the side of the mountain. From there, drillers were seen putting in one of the first holes on the zone in June.
Between then and September, Cuervo completed 2,900 metres in 13 holes in the central area of Bob 1. (Hole No. 9 was abandoned due to poor ground conditions.)
The latest three holes, No. 11 to 13, were published mid-November. Cuervo reported a weighted-average iron grade of magnetite and mixed magnetite-intrusive of 30.55% iron over a combined 284.9 metres in the three holes, whereas the previous nine averaged 39.19% iron over 1,216.8 metres.
All the holes to date contained values of sulphur and copper, which Cuervo says is common in skarn-type mineralization.
So far, Bob 1 has a 1 km strike length of magnetite mineralization, which may be further extended as the company wraps up drilling by the end of November.
Once completed, the firm will prepare a maiden resource estimate on the Bob 1 target, expected by February 2013.
Cuervo points out the drill results on Bob 1 so far show coarse-grained sulphides within the magnetite mineralization to that found on the smaller Orcopura, Huillque and Aurora zones, 10 km south.
The company completed 21,000 metres of drilling in more than 160 holes on the three zones between July 2007 and April 2009, and published an updated resource in February 2012.
Using a 20% iron cut-off grade, the Orcopura zone contains 55.5 million tonnes at 46.75% iron in measured and indicated, and another 50.8 million tonnes grading 43.68% iron in inferred. The Huillque and Aurora zones host a total inferred resource of 72 million tonnes at 52.6% iron, based on a 30% iron cut-off.
Cuervo has spent $18 million at Cerro Ccopane to date, which includes the first stage of funding from its potential partner, Strike Resources (SRK-A).
Last July, the Australian firm, which also holds iron ore prospects in Peru, agreed to lend up to $15 million in two stages to cover Cuervo’s estimated three-year exploration program at Cerro Ccopane.
So far, Strike has handed over $5.25 million for the initial 15 months of exploration, and may pony up another $9.75 million for the remaining 21 months. The second payment is optional, unless Cuervo reports a minimum inferred resource of 700 million tonnes grading at least 40% iron at Bob 1.
In return, Cuervo gave Strike two blocks of share-purchase warrants, each with initial three-year terms. The first block of warrant is for 17.5 million shares at 30¢, while the second is for 17.7 million shares at 55¢.
If Strike doesn’t provide the additional payment, the second warrant will be cancelled. However, if both warrants are exercised, Strike will own 46% of Cuervo on a fully diluted basis.
At the end of the third quarter, Cuervo reported a cash balance of $1.2 million, adding that it would be enough to carry out its exploration activities for the remainder of the year.
Around this time, Watts says the firm should release the results from the stepout drilling at Bob 1.
Meanwhile at Huillque, the firm hopes to hammer out a new three-year agreement in 2013 with the community so that it can test the 1.2-billion-tonne potential at Huillque Norte, admitting the process is taking longer than planned.
Yavar, Cuervo’s manger of community relations, says her “objective is to keep the people happy, and help them benefit from the mining activity.”
“That’s how we work and operate,” she says. “We care about the community and protecting the environment.”
And part of maintaining healthy community relations includes offering employment opportunities, along with land-use compensation, infrastructure and various community initiatives.
Cuervo has retained up to 50 locals from Misanapata to help with exploration.
Back at the Bob 1 camp, a foot trail zigzags along the side of the mountain where Misanapata employees hike to the site. The journey takes an hour and a half each way.
The company’s manager of logistics and transportation consultant Greg Liddy says that the “remoteness is what is going to make lemonade out of lemons.”
A transportation study completed in March 2009 by Vancouver-based firm Sandwell Engineering suggests that a pipeline will be the best way to transfer material from the site to a cape-class port site, making use of the elevation drop and abundance of water on the property. The nearest tidewater port at Matarani is located 320 km from the project. Shipment from there to Asian ports is estimated to take 33 days.
“The pipeline makes a lot of sense,” Watts says. “It’s expensive to build but really cheap to operate.”
The cost to build the pipeline is pegged at around $1 billion, with total operating costs averaging US$8 to US$10 per tonne, including recovery of capital costs.
While the company has completed preliminary assessments on a direct slurry pipeline, building it is out of the picture as it doesn’t fit the junior’s “find it, prove it, sell it” motto.
“There is no way juniors can put together a project like this [in production],” Berner says, who aims to further define Cerro Ccopane’s resources to attract the financial support of a major.
In recent years, China has been scooping up iron ore prospects in Peru to lock up future supply. Of note is Cardero Resources (CDU-T, CDY-X), which sold its Pampa de Pongo iron ore deposit to a Chinese firm for US$100 million in 2009. At this time, the deposit contained 863 million inferred tonnes grading 41.4% iron.
“If we can walk away with $1 billion, that is nirvana . . . that is the jackpot,” Berner says. “If we can walk with $200 million — that is good too. So we are hoping to walk away with all the drilling [on Cerro Ccopane] with $200 million.”
In September, Cuervo unloaded two non-core land parcels totalling 1.6 sq. km in the costal province of Trujillo to a Chinese company for US$200,000. It still has an inventory of 66 sq. km of unexplored and unrestricted claims that it aims to sell.
Cuervo recently closed at 14¢ within a 52-week range of 12¢ to 24¢. It has a market capitalization of $5.28 million.
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