Metminco well placed to ride copper rebound BY: FITZGERALD From: The Australian April 18, 2012 12:00AM Increase Text Size Decrease Text Size Print
International electrification will drive copper prices well into the future. Picture: Bill Mcauley Source: HWT Image Library THE Chicken Littles out there would have you believe that copper's retreat to three-month lows of $US3.65 a pound means it is all over, red rover for the metal.
Metminco (MNC)
But it is worth remembering that while copper is off last year's highs, it did spend most of its time below $US1 a pound up until 2003, which is when demand in China and other populous developing nations really got going.
So even allowing for cost pressures and inflation since, the current price is doing very nicely, thank you very much.
More to the point is that the world's electrification underpins reasonable growth assumptions for copper demand.
When that is viewed against various supply constraint factors, there is good reason to assume that a long-term average price of more than $US3 a pound is needed to ensure the required new mines are brought on in a timely manner to keep everyone happy. Equity values for copper stocks have nevertheless been under severe pressure because of the concerns the Chicken Littles have about Europe and the slowdown in China from ultra-fast to just plain fast.
The good news in all that is that copper stocks are clearly better value than they were 12 months ago, when $US4-plus a pound copper prices drove equity values to crazy levels.
ASX-listed Peruvian copper stock Metminco is an example.
About a year ago you would have paid 45c for the stock. Yesterday, you could have picked it up for 17.5c.
Apart from the Chicken Littles getting hold of market sentiment for the time being, there is no rational explanation for the share price dump.
If anything, it can be said that Metminco's value story has become three times as good as it was 12 months ago. That's because the company is within a couple of weeks of announcing an updated resource estimate for its Los Calatos copper-molybdenum project in southern Peru.
The last resource statement, released in August 2010, was a none-too-shabby 926 million tonnes grading 0.51 per cent copper equivalent for a contained 4.7 million tonnes of copper equivalent.
The expectation is that the new resource estimate could be as much as 3 billion tonnes of material. Assume a similar grade and you are talking about some 15 million tonnes-plus of copper equivalent. It is little wonder, then, that Metminco has been the subject of takeover speculation involving Poland's 32 per cent state-owned KGHM, which has pushed in to the Andean copper belt across in Chile with the $US2.9 billion ($2.8bn) acquisition of Canada-based Quadra FNX.
KGHM has said it wants more Andean copper and because of the wide-open share register, the increasing size of Los Calatos and its eventual need for billions of dollars in development capital, Metminco was a natural for overseas speculators to settle on.
In this market, the interest is more squarely on the pending resource upgrade.
Last year, Metminco completed a 34,000m drilling program at Los Calatos, the so-called phase 3 program. It was successful to the extent that it delineated the mineralised envelope associated with the Los Calatos porphyry system, which is similar to other low-grade but big systems mined in the region by the likes of Southern Copper and Freeport McMoran.
Towards the end of last year, Metminco's big-time potential allowed it to top up its cash by $40 million from a placement of shares and a rights issue to fund another 100,000m of drilling at Los Calatos this year.
The program for this year is in two stages: 4A and 4B.
Phase 4A, which kicked off in December, involves 30,000m of drilling. It is understood that most of that is now complete.
So it is results from phase 3 and phase 4A -- 64,000m of drilling all up -- that are being modelled to produce the new resource estimate, most likely before the end of the month.
Having all the copper in the world does not amount to much unless investors -- and would-be takeover predators -- can get their heads around the likely economics of a project.
To that end, it won't surprise if the resource update comes with thoughts on a optimised pit shell around what could reasonably be expected to be mined by open-cut methods, ignoring for the time being that mineralisation has been traced down to 1.7km.
It will give investors an indication of likely project economics and some of the envisioned stripping ratios.
The latter will be worth watching, as they have assumed that a big pre-strip is on the cards.
But drilling has been showing that there is mineralisation close to the surface, and that could well be the focus of a starter pit.
After the resource upgrade, there will be another 70,000m of drilling before the year is out in the phase 4B program.
The point of that is to increase the confidence ascribed to the resource by elevating much of it from inferred status to the indicated category.
So by the end of this year or early next year there will be a second stock exchange-compliant resource estimate for Los Calatos, one with greater confidence.
That will allow Metminco to kick off a prefeasibility study that should be completed next year.
Having said that, preparation for mining has started anyway.
The company has taken up residence in one of the local towns and has started studying a likely route for a pipeline to the coast, one that will have the dual purpose of providing seawater for processing at Los Calatos, as well as delivering a concentrate slurry to the port.
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