VANCOUVER — Hana Mining's (HMG-V) share price dropped 68% after the company released a long-awaited first economic study on the Banana Zone and Zone 5 at its 70%-owned Ghanzi project in Botswana.
The company released the news after market on May 14 and, with the study not meeting expectations, Hana's share price fell 88¢ to 42¢ the following day with roughly 16.6 million shares traded.
Hana has set out plans for a 10,000-tonne-per-day conventional open-pit copper-silver mine in the northwest region of the country with a 13-year mine life. The mine is expected to produce 66.4 million lbs. copper and 878,000 oz. silver per year at head grades of 1.02% copper and 12.13 grams silver per tonne for life-of-mine production of 863 million lbs. copper and 11.4 million oz. silver. The company plans to produce a clean copper-silver concentrate grading roughly 46% copper.
Using somewhat bullish price assumptions of US$3.40 per lb. copper and US$30 per oz. silver, and an 8% discount rate, the financials of the project work out to an after-tax net present value of US$262 million and an internal rate of return of 19.3%. The after-tax rate factors in the country’s 22.5% corporate tax rate as well as a 3% net smelter return royalty for base metals and a 5% royalty for precious metals. Payback is estimated at 5 years.
Adam Low, a mining analyst at Raymond James, dropped his price target for the company from $2.10 to $1.65 on the news, noting that his modelled NPV for the project dropped from US$415 million to US$265 million after factoring in the latest information. The lowered valuation resulted in a decrease of the net asset value per share from $5.14 to $4.17.
Commenting on the PEA, Low wrote "Although Hana finally delivered on its long-awaited PEA, the results of the study identified a project that is not as economically robust as we had previously modeled."
Low identified the head grade, strip ratio and intital capital costs of the project as positive or satisfactory, but those were more than offset by higher operating costs.
Initial capital costs came in at US$285.5 million, while pre-production, sustaining, and deferred costs bring the total to US$399 million. Life-of-mine cash costs come in at US$1.82 per lb. copper net of by-product credits. The costs come in at US$1.96 per lb. for the first five years because the company will not yet be linked to the national grid and so has factored in using heavy fuel oil until the country extends the grid.
The life-of-mine strip ratio comes in at 6.8 to 1, with an average pit depth of 183 metres in the four pits. The company has factored in contract mining rates but will consider an owner-operated model in the feasibility study.
Other potential improvements in the feasibility study include linking to the power grid earlier, improving the resource with 2012 drilling, optimizing the pit design, and adding an underground mining operation.
The Banana zone currently hosts 40.9 million indicated tonnes grading 0.87% copper and 12.5 grams silver for 780 million lbs. copper and 16.4 million oz. silver, plus 191.6 million inferred tonnes grading 0.6% copper and 7.1 grams silver for 2.7 billion lbs. copper and 44.7 million oz. silver, all using a 0.4% copper cut-off. Zone 5 hosts 16 million inferred tonnes grading 1.47% copper and 13.2 grams silver for 520 million lbs. copper and 6.8 million oz. silver.
Mineralization on the project is characterized by a near surface oxide zone containing chrysocolla, chalcocite, and malachite, plus trace azurite and native copper, with the base of the zone lying at between 40 and 50 metres vertical depth; then a thin transition zone ranging from 3 to 10 metres in thickness separating the oxide and sulphide zones; and finally a sulphide zone at depth, where copper occurs as bornite, chalcocite chalcopyrite and minor native copper.
Hana, with $20-million in cash, plans to continue drilling the project in 2012 as it works towards a feasibility study. The company is targeting 2016 for full start-up of the mine.
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