SEVILLE, SPAIN -- Becoming the next Xstrata (XSRAF-O, XTA-L) may be the pipe dream of many a junior, but in the case of Iberian Minerals (IZN-V, IMINF-O), the idea may not be so far-fetched.
While the junior's market cap and asset portfolio of two producing mines pales in comparison to the Swiss-based giant's assets, the companies do have one thing in common.
Both are backed by the biggest metal traders on the planet.
While Glencore International has a 36% stake in Xstrata, Iberian has the famed metal trader's cousin, Netherlands-based Trafigura Group, behind it.
Founded in 1993 by former traders that were trained under Glencore's infamous founder, Mark Rich, Trafigura ranks third behind Glencore and Vitol in terms of revenues generated from oil and metals trading.
But if Iberian wants to use Trafigura's heft to help catapult it into the big leagues, it first has to get its Aguas Tenidas mine in Spain running on all cylinders.
While Iberian also owns the Condestable copper mine in Peru, Aguas Tenidas represents its most significant asset.
Reserves at Aguas Tenidas are divided between copper and polymetallic ore.
The copper zone contains 8.81 million tonnes in proven and probable reserves grading 2.27% copper, while the polymetallic zone has proven and probable reserves of 10.4 million tonnes grading 1.19% copper, 6.48% zinc, 1.95% lead, 69 grams per tonne silver and 0.8 gram gold.
The project also has a third orebody made up of copper stock-works, which has a measured and indicated resource of 2.82 million tonnes grading 1.8% copper.
Condestable, by comparison, has a total of 10 million tonnes in proven and probable reserves and stockpiles grading 1.27% copper.
But turning its key deposit into a company-building mine with wide profit margins has been a challenge for Iberian.
While Aguas Tenidas began production at the end of December last year, metallurgical issues were of such a magnitude that Iberian brought back the same consultant that did a November 2008 technical report to do another, which was released in September 2009.
The new report recommended a major revamp of the metallurgical process and while some of the modifications won't be finished until the end of this year, enough had been done by late October to get the mine into commercial production.
But issues on the metallurgical side meant less money coming in from the sale of metals, and more money being spent on getting things right. The situation resulted in a cash shortfall of US$20-30 million.
Having Trafigura in its corner proved to be a huge plus, however. The metal trader stepped up with a US$21-million bridge loan that will tie Iberian over until it can secure senior debt financing, which it plans to have in place by the end of the year.
Warrants issued in conjunction with the loan will allow Trafigura to takes its stake up to 49% from its current 46% level.
The increased position, along with the 7% interest Iberian will pay Trafigura, is a small price to pay for the benefits it is now set to reap from such a rich orebody situated in a region that has been one of the world's long-serving and most mining friendly jurisdictions.
Aguas Tenidas sits 110 km northwest of Seville and the company is in the midst of ramping up production to 2.2 million tonnes annually from this year's level of 900,000 tonnes. The projected mine life is 11 years.
Production is split between two different circuits, with 60% coming from a copper circuit and the remaining 40% coming from a polymetallic circuit.
The split in processing cycles mirrors the divisions in the ore being mined from the three distinct areas at Aguas Tenidas: the cupriferous, polymetallic and copper stockwork zones.
Both the cupriferous and the copper stockwork zones feed the copper circuit, while the polymetallic zone feeds the polymetallic circuit.
It is the latter circuit that has been the most problematic part of operations for Iberian over the last nine months.
So problematic that the circuit had to be shut down for most of June and all of July so that a new modular copper and lead separation circuit could be installed.
"The original design was extremely bad," Pedro Martinez Recio, processing supervisor at the plant says bluntly.
The approach outlined in the first feasibility study was a sequential flotation circuit that would separate the ore's pyrite, copper, zinc and lead.
But when the circuit didn't produce consistent saleable copper and lead concentrates or attain the recoveries outlined in the feasibility study, Iberian's management knew it had to be overhauled.
"In the sequential system, each mineral was floated separately, but pyrite was remaining at each stage," Martinez explains. "After one month, I knew we had to change it to a bulk system, but it is difficult to switch."
Martinez's realization was shared by mining consultant Adam Wheeler.
While Wheeler had been the one to recommend the sequential system in the first feasibility study, a visit to the plant over the summer convinced him that the problems in the circuit would be remedied by a bulk approach that separates the copper and lead together and afterwards separates the zinc.
By the end of the year, Iberian will have the ability to separate the copper from the lead, but for the time being, the company is selling the two metals in a bulk concentrate.
Happily, the new circuit fits into an open space area within the plant, so no major renovations were needed.
The new system recovers 65-70% of copper from the ore and produces a concentrate grade of 23% copper.
Tailings from the bulk copper and lead flotation circuit flow to the zinc flotation circuit, which produces concentrate grading 50% zinc. The zinc recovery rate from the ore is 65%.
Fortunately for Iberian, the copper circuit didn't present the same degree of challenge as the polymetallic.
The copper circuit is fully operational and even through the ramp-up phase, the circuit attained solid recoveries of roughly 82% and concentrate grades of 23% copper -- numbers in line with company expectations.
Ore for the circuit comes mainly from the cupriferous zone, which, in addition to the reserves already outlined, hosts measured and indicated resources of 9.43 million tonnes grading 2.4% copper, 0.9% zinc, 0.2% lead, 28.3 grams silver and 0.4 gram gold per tonne.
The cupriferous zone is made up of chalcopyrite, a copper-rich mineral that is 80% pyrite.
Such high levels of pyrite did present some challenges, as over the last 10 months, the company has striven to strike a balance between the amount of grinding needed to separate pyrite out and the higher costs such additional grinding brings.
Iberian found that it could grind the ore to 40 micrograms instead of 20 micrograms and still attain targeted recoveries.
Coinciding with the decision to grind less has been greater efficiency with the ball mill.
"We didn't use the (semi-autogenous grinding) mill properly at first and consequently we consumed a lot of balls," Martinez explains. "Now we've reduced ball costs and power costs."
Martinez chalks up such early difficulties with the SAG mill to plant workers not having enough previous processing experience at startup -- a situation that time has helped to resolve.
As for all the pyrite left behind, unfortunately the market for the mineral has all but dried up, with many mines recently shuttered due to oversupply.
But not all the ore coming into the copper circuit contains so much pyrite.
Iberian is also mining a copper stockwork zone that has much less pyrite -- 28% as opposed to 80% -- and a coarser-grained texture, making copper liberation easier.
The ore allows for a simplified extraction process during which the rock only has to be ground to 100 micrograms.
And not only is the rock cheaper to mill, but it also gets better recoveries, averaging 85-90% copper, as opposed to the 80-82% recoveries from the cupriferous zone.
For 2009, stockwork ore will make nearly 10% or 100,000 tonnes of the total ore to be mined this year.
Iberian's purchase of Aguas Tenidas came at just the right time. Bought in 2004, shortly before copper prices rose to record highs, Iberian was able to get the project from Spanish mining contractor Insersa for the bargain price of just $11.8 million.
Discovered in 1985 by Billiton and a Spanish partner, Aguas Tenidas is a volcanogenic massive sulphide (VMS) deposit and part of the famed 50-km-wide, 160-kmlong Iberian Pyrite Belt that runs from Seville to Lisbon.
The deposit is strongly affected by deformation, exhibiting a reverse fold structure, with sheared contacts between massive sulphide and host rock. The northern edge of the deposit is fault bounded by the easterly striking Northern Fault, which dips steeply northward.
And while the region has been one of the most consistently mined in Western history, that doesn't mean there isn't considerable exploration upside left.
In conjunction with infill drilling being done on the stockwork zone, new holes have been drilled to the west of the deposit which have returned up to 43 metres grading 2.4% copper and 33.6 metres of 2.6% copper.
For investors, one of the key points of interest around Iberian is its hedge book. While copper prices have soared, the company has offered little upside exposure to that price movement because of its hedges, and any share-price appreciation has been muted.
Iberian's shares have traded in the 30-58¢ range since this spring, while many of its copper-producing peers have seen their market caps soar.
In all, 61,000 tonnes of copper and 4 million oz. silver are hedged from 2009 until 2013, plus 59,200 tonnes of zinc from 2009 until December 2011.
Jeremy Weir, a senior executive with Trafigura, says the hedges have the benefit of ensuring continuity of production in adverse market environments.
That doesn't mean, however, that the book won't be actively managed.
Weir, who also sits on Iberian's board of directors, says the aim is to opportunistically manage risk by realizing hedge gains and restructuring hedges to reflect the company's market outlook.
An example of the strategy can be seen in Iberian's decision to maximize cash flow this year by rolling forward copper hedges due in September to February of next year.
The hedges were on 4,750 tonnes of copper for US$2.42 per lb. By putting them out to next year, Iberian now has a total of 20,100 tonnes of copper hedged at an average of price US$1.87 per lb.
The move is much in line with Weir's belief that base metals are due for a short-term correction, despite his being bullish on prices over the long term.
But if a correction doesn't come, and prices hold or rise in the next year, it will be hard for Iberian shares to make up ground on its peers.
Trafigura, however, is in a win-win situation.
If prices do correct, then Iberian's hedges look strong and Trafigura participates through its large holding in the company. If, however, prices hold or go higher, Trafigura as the counterparty to those hedges, gets to purchase the metal at significant discount to the spot price.
For the rest of this year, Iberian has 1,725 tonnes of copper hedged at an average of price of US$2.81 per lb.
Currently, roughly 78% of anticipated copper production for 2010 is hedged, along with about 70% of anticipated zinc production.
The zinc hedge for 2010 is 12,350 tonnes at US60¢ per lb. and 4,900 tonnes at US68¢ per lb.
The company also inherited significant hedges at Condestable in Peru. There, 80% of copper production is hedged until the end of 2011. Contestable processes 2.2 million tonnes of ore and produces copper concentrate with silver and gold credits.
Still, Weir laid out the case for the hedges from an Iberian perspective.
"Commodity markets have surged higher as investors have rebuilt long positions, but this is also triggering a supply-side reaction which could undermine the rally," he says.
A report issued by Trafigura, however, said the decrease in consumption of lead and copper hasn't been as severe as that for aluminum, zinc and nickel, making those metals the most vulnerable to a price correction.
Also, the report points out, copper enjoys an overwhelmingly bullish consensus around it over the medium term, meaning the market will look to buy on dips and prop up prices.
Whatever the near-term fluctuations in the price of copper, Iberian has shown resilience in getting Aguas Tenidas into optimal shape. And when combined with Condestable in Peru, the company is clearly building itself into a significant player on the copper-mining scene at a time when the long-term consensus on metals remains strong.
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