The recent deal between TSX-listed miner Quadra FNX (TSE:QUX) Mining and the Japanese giant Sumitomo underlines the intense interest in South American copper at the moment.
It possibly also serves as a blue-print for other deals in the sector – one in which an ambitious explorer is able to finance a world class project without giving away too much of the upside.
Their joint venture covers the Sierra Gorda copper-molybdenum deposit in Chile.
Sumitomo will pay Quadra US$720 million and will provide the first US$1 billion of debt finance for the project. In return, it receives a 45 per cent stake in the project.
Investors in the sector will no doubt have one eye on this particular transaction as they watch the development of the Los Calatos copper-molybdenum porphyry project, which is located further north in Southern Peru along the Andean metallogenicbelts.
It is owned by London and ASX-listed Metminco (LON:MNC, ASX:MNC), which last week unveiled a US$50 million placing and open offer ostensibly to fund a fourth phase of drilling at Los Calatos comprising an in-fill drill programme of 100,000 metres.
It has a JORC-compliant resource of 926 million tonnes comprising an indicated resource of 111 million tonnes at 0.39 per cent copper and 380 parts per million molybdenum, and an inferred resource of 815 million tonnes at 0.37 copper Cu and 260 parts per million moly.
There is every indication this resource will increase “significantly”, with the primary objective of the recently completed 35,000 metre Phase 3 drilling being to define the geometry and scale of the deposit.
“What we have also found from our Phase 3 drilling is that the width of the ore body increases with depth from 700m near surface to around 1,000m at a depth of 1,500 metres.
"The strike length of the orebody has also been increased during this phase of drilling, while drilling to a vertical depth of 1,700 metres has established that mineralisation is still open at these depths,” said Steve Tainton, Metminco's head of investor relations.
As well as expanding the size of the resource, Metminco hopes to see a large percentage of the resource being upgraded into the higher confidence indicated and measured categories when Phase 4 infill programme gets underway.
Holes will initially be drilled on a 200 by 100 metre grid, before reducing down to a 100 by 100 metre grid.
More than 60 per cent of the cash raised will be spent on Los Calatos to fund a total of 100,000 metres of drilling.
An interim resource statement is planned for the second quarter of next year with a second estimate expected in the first three months of 2013.
“We had a very positive response to the fundraising, particularly from tier-one institutions in London,” revealed Tainton.
“What we need to do now – and this is our present thrust – is to understand the inherent value of this asset.
“That will put us in a strong position to plan our way ahead.”
There are similarities between Los Calatos and Sierra Gorda, both in terms of scale and type of deposit. Meanwhile, the deal negotiated by Quadra has not gone unnoticed at Metminco.
“One of the possibilities for the eventual development of Los Calatos is that of establishing a strategic alliance. And this is why I refer to the Sierra Gorda example.
“Through Sumitomo, Quadra FNX has the opportunity to fund and develop the Sierra Gorda Project, whilst retaining management and a controlling interest.”
Of course not all of the cash is going into Metminco’s flagship asset.
The remainder has been earmarked for the Mollacas and Vallecillo projects in Chile - which offer the potential of near term production and cashflow.
Mollacas is a modest copper deposit in comparison to what’s being developed in Peru with a JORC-compliant resource of 17 million tonnesconsisting of an indicated resource of 7.2 million tonnes at 0.56 per cent copper and an inferred resource of 9.8 million tonnes at 0.52 per cent copper (at a 0.2 per cent copper cut-off grade).
But it is one which has the potential to support an open pit, low-cost, heap leach, solvent extraction and electro-winning operation producing around 13,500 tonnes of copper cathode per year. This could be up and running during 2014, Tainton said.
A diamond drilling program has recently been completed at Mollacas. “With this additional infill drilling we are going to complete a final resource estimate by the end of the year that will have a higher level of confidence than prior estimates, in addition to undertaking further metallurgical testwork,” Tainton said.
“Thereafter we will initiate a feasibility study to bring it into production. Of the funds from the capital raising, approximately US$5 million will be used in support of the feasibility study and certain pre-development activities at the Mollacas project.
“Mollacas will be a low cost operation with high returns and low capital requirements.”
Vallecillo, meanwhile, is described as a “very interesting project”. The polymetallic discovery contains gold, silver, zinc, copper and lead.
SRK resource estimates the La Colorada deposit, or target V1 as it is known, contains 10.1 million tonnes with an Indicated Resource of 7.9 million tonnes at 1.14 grams per tonne of gold Au, 11.4 g/t of silver, 1.32 per cent Zinc and 0.29 per cent lead.
The company has an active drilling campaign here with a 9,000 metre programme on the La Colorada area set for completion in the first quarter of next year.
Porphyry targets V6 and V7 are the focus of a further 4,000 metres of reverse circulation drilling.
The La Colorada resource estimate, which dates back to a 2009 and work carried out by SRK, will be updated at some point in the first quarter of 2012. A pre-feasibility study for the project will get underway in the second half.
Hopefully the news flow in the coming weeks and months will provide some traction to the share price, which has been dragged down by the broad based sell-off of supposedly riskier small-caps.
The equity market has been closed to most companies looking for funds. So Metminco’s ability to raise cash in the current climate must be regarded as a ringing endorsement of the group and its projects.
Richard Knights of Liberum Capital sums up the investment proposition eloquently in one sentence.
“Metminco offers exposure to large-scale copper discoveries in the world’s richest copper belt, underpinned by a large existing resource base and smaller scale but fundable near-term production.”