South32 (LON: S32) has the next 11 months to decide whether it wants to write a US$150-million cheque for a 50% stake in Trilogy Metals’ (TSX: TMQ; NYSE-AM: TMQ) two base metal deposits in Alaska — Arctic and Bornite.
To keep that option, the mining and metals giant has been required since 2017 to spend US$10 million a year on exploration at Bornite, which has an inferred resource of 5.45 billion lb. copper contained within 141.9 million tonnes grading 1.74% copper, and another 77 million lb. cobalt contained within 182.4 million tonnes grading 0.019% cobalt.
Bornite is just 25 km southwest of Trilogy’s Arctic deposit, the highest-grade, open-pit volcanogenic massive sulphide (VMS) in the world, where a prefeasibility study in early 2018 envisioned annual production of 159 million lb. copper, 199 million lb. zinc, 33 million lb. lead, 3.3 million oz. silver and 30,600 oz. gold over a 12-year mine life. Most of the mineralization at Arctic is within an area of 1 sq. km extending 250 metres below surface.
The two deposits — together called the Upper Kobuk projects — are in the state’s Ambler mining district, 322 km east of Teck Resources’ Red Dog mine, the largest zinc mine in the world.
Rick Van Nieuwenhuyse, Trilogy’s president and CEO, is confident that South32 will exercise the option and pour another US$150 million into the company’s coffers.
“If you look around the world for copper, there are not a lot of quality projects out there, apart from the Congo and what Mr. Friedland and the Ivanhoe team have been finding there, which is nothing less than spectacular,” he says. “But outside of that, it’s a pretty thin field of potential development projects, most of which are dominated by low-grade porphyries.”
“I kind of chuckle when I see project drill intercepts described as ‘high-grade,’ when they’re not even a percent,” he adds. “What we have is unique. Arctic is a 5% copper-equivalent, open-pittable, copper project — I haven’t seen anything else like it in the world.”
While there are certainly other massive sulphide deposits, he concedes, they’re all underground and their geometries are such that they would be relatively small-scale, while the Arctic deposit’s open pit will push 10,000 tonnes per day “very comfortably.”
Not only that, he says, “we know there are lots of VMS deposits in the Ambler mining district,” and the company has set aside a $2-million budget dedicated to exploring the district using geophysical methods. “There are over half a dozen other historic resources that are fairly significant in the district, so we’ll spend some time this summer investigating those,” he says.
“They don’t meet 43-101 standards, but they were done by companies like Cominco, Noranda, Kennecott, Anaconda and Sunshine Metals … we have 30 known prospects … it’s low-hanging fruit that could add years on the mine life.”
Meanwhile, Bornite “is shaping up to be quite a good deposit in its own right,” he says. “It’s 1% open-pittable and 3% underground, both very respectable grades in copper, and we haven’t found the edges yet, so we’ll do more drilling to expand and infill our confidence in the resource.”
The company expects to complete a resource update on Bornite before the end of February, along with a metallurgical report on recoveries for both copper and cobalt.
While the cobalt grades are very low and would represent only a small percentage of the overall value, perhaps 2–3%, he says, most of it is associated with pyrite, so the company is doing metallurgy work to see how much it can be upgraded with a simple flotation separation.
Looking ahead, Trilogy expects to complete a feasibility study in the first quarter of 2020. The prefeasibility study estimated initial capex of US$780 million and total capital costs of US$910 million, with a payback of just two years. The post-tax, net present value at an 8% discount rate was estimated at US$1.4 billion, and the post-tax internal rate of return, 33%.
The deposit has indicated resources of 36 million tonnes grading 3.07% copper, 4.23% zinc, 0.73% lead, 47.6 grams silver per tonne and 0.63 gram gold per tonne for 2.4 billion lb. copper, 3.4 billion lb. zinc, 581 million lb. lead, 55 million oz. silver and 730,000 oz. gold.
Inferred resources add 3.5 million tonnes grading 1.71% copper, 2.72% zinc, 0.60% lead, 28.7 grams silver and 0.36 gram gold for 131 million lb. copper, 201 million lb. zinc, 47 million lb. lead, 3 million oz. silver and 40,000 oz. gold.
Together, Arctic and Bornite offer 8 billion lb. copper and 3 billion lb. zinc over 1 million oz. gold-equivalent, and 77 million lb. cobalt.
Trilogy intends to obtain its main permits for Arctic later this year or early next year, but doesn’t anticipate problems.
“Alaska in general is a pro-resource development state,” he says. “It’s all about oil and gas, fishing, mining and tourism — that’s what we do here, and in terms of revenue, mining is the second most important to the state.”
He also notes that a Republican, Mike Dunleavy, was elected governor in the 2018 mid-term elections, and is an advocate of the Upper Kobuk mineral projects. The former basketball coach and school teacher is married to a woman from the local community in the region, and all of their three children have worked at the Red Dog mine.
“He has one daughter that continues to work at Red Dog, she’s a mining engineer, so probably more than any other governor, at least recently, he really understands mining.”
In addition, the Alaska Industrial Development & Export Authority (AIDEA) is far along the permitting process for a 322 km road connecting the Ambler mining district to year-round shipping from four ice-free ports (Anchorage, Mackenzie, Seward and Whittier.) A scoping study for the road was completed one in January 2018 and Trilogy expects a draft environmental impact assessment on the project in April, and a final environmental impact statement in December 2019.
AIDEA plans to finance the road with low-interest bonds and a 30-year payback period through tolls — similar to the road that links the Red Dog mine to the port.
“The road unlocks the whole potential of the district,” Van Nieuwenhuyse says. Concentrate will be trucked down to Fairbanks, where it can tag into existing infrastructure, which includes the Alaska Railroad, and then travel down to the port of Anchorage.
While South32 has 11 more months to make its mind up about the Upper Kobuk, it can do so at any time, Van Nieuwenhuyse says. And the miner has signalled that it’s willing to pull the trigger on new acquisitions after buying Arizona Mining last June for US$1.3 billion.
“The significance of the Arizona Mining deal is that it tells us they like North America as a place to invest, they like base metals and they don’t have a copper asset,” he says. “Right now I think we’re their only investment in the copper space, and they have made it clear in their presentations that they like copper — and for a very good reason.”
Moreover, he says, if you look at South32’s operating income, it generates US$1.5 billion in free cash flow a year.
“They’re not a small company. Graham Kerr, their president and CEO, has said they will dividend out that, they’ll spend one-third on existing brownfields, and then they have half a billion dollars left in their piggybank to look at new opportunities, so in the context of their US$150-million decision that’s coming up on Upper Kobuk, it puts that into perspective.”
This year the company has US$20 million in cash and another US$9.2 million from South32. Trilogy also has 6.5 million warrants held by large shareholders that expire this July, which at a $1.52 exercise price would generate another US$10 million.
The company is debt-free.
Key shareholders include Electrum Group (20.3%); South32 (12.5%); Baupost Group (9.9%); Paulson & Co. (8.8%); Selz Capital (7.9%); and Millennium (4.1%).