Cyprus-Lac partnership wins bid for El Abra project

In the largest foreign investment project in Chile’s history, joint-venture partners Lac Minerals (TSE) and Cyprus Minerals (NYSE) have beat out eight competitors for the right to buy a 51% stake in the copper mine known as El Abra.

The companies have agreed to pay US$404 million to Codelco, Chile’s state-owned copper company. In return, they will have the right to develop the copper porphyry deposit which is in Chile’s northern desert, about 230 km northeast of Antofagasta.

In addition to the initial payment, Cyprus and Lac have agreed to pay Codelco’s share of the equity, estimated at $150 million. Codelco will also receive 5% of the incremental profit before taxes, arising from the exploitation of the non-leachable, sulphide ores contained in the deposit. Oxide reserves are reported to be sufficient for 20 years of production at an annual rate of 225,000 tonnes of refined copper cathode. Production costs for the solvent extraction-electrowinning operation are estimated to be in the low US40 cents-per-lb. range. Development of the large, underlying, sulphide reserves could begin in about 10 years if economic conditions warrant. The mine, which will require an investment of about US$1 billion, is expected to be in production within 39 months after closure of the deal. The partners anticipate about US$700 million of limited recourse debt financing will be arranged for development.

To many, the partnership seems like a good match since Cyprus is the second-largest copper producer in the U.S., while Lac has extensive operating experience in Chile through its 85% ownership of El Indio, a gold mine. But investors seem cool to the idea, with Lac shares off $1.25 at presstime, down from a high of $11.13 before news of the deal was released. Michael Jalonen, an analyst with Midland Walwyn Capital, believes that the drop in share price is probably a reflection of investor concern over the company’s long-term strategy. “Although the acquisition fits in with the corporate strategy of acquiring low-cost, long-life orebodies, it is unclear whether they (Lac) want to be a gold or base metal company,” Jalonen said.