Southern Hemisphere Mining (ASX: SUH) has secured a pivotal farm-in agreement with global base metals group Lundin Mining Corporation (TSX: LUN) for the flagship Llahuin Copper-Gold Project in Chile.
The two companies have executed a terms sheet that will see Lundin Mining spend up to US$35 million (A$34 million) on exploration at Llahuin to earn a direct stake of up to 75% over a six-year period.
Lundin Mining will also take a strategic 11.5% stake in Southern Hemisphere by way of a US$5 million share placement at C$0.25 (A$0.25) per share on the TSX-V, representing a significant premium to Southern Hemisphere’s current share price.
Trevor Tennant, managing director, said the agreement would bring a host of benefits for the company and the Llahuin Project.
“Lundin Mining’s extensive experience in exploration, mine development and mine operations, as well as its immense financial standing, means this deal is a game-changer for Southern Hemisphere and Llahuin.”
Lundin Mining is a diversified Canadian base metals miner with operations in Portugal, Sweden, Spain and Ireland, producing copper, zinc, lead and nickel.
The company’s development project pipeline includes an expansion at its Neves-Corvo mine in Portugal and an equity stake in the world class Tenke Fungurume copper/cobalt mine in the Democratic Republic of Congo, which is currently undergoing a major expansion.
A total of US$6 million has been committed to in-ground expenditure at Llahuin within a maximum of three years – US$3 million from the share placement and US$3 million from Lundin Mining.
The terms sheet is conditional upon exchange approvals and definitive agreements being executed by November 1, 2012 or a later date mutually agreed by Southern Hemisphere and Lundin Mining.
Farm-in terms
Under the terms sheet, Lundin Mining will fund the Llahuin project expenditures in stages with an initial commitment of US$3 million to be spent within three years of the effective date of the definitive agreements.
A further US$3 million from the proceeds of the placement to Lundin Mining is to be spent on the Llahuin Project, providing a US$6 million total initial committed expenditure.
After the total initial commitment is expended, Lundin Mining has the option to sole-fund a further US$10 million towards Llahuin Project expenditures within three years to earn a cumulative undivided 51% interest in the Project.
After completing this earn-in, Lundin Mining has the option to sole-fund an additional US$10 million within one year to earn a further 14% interest for a total undivided 65% interest in the Llahuin Project.
Lundin Mining can then choose to sole fund the last US$12 million, within three years of obtaining a 51% interest, to earn an additional 10% interest in the project for a total undivided 75% interest in the Llahuin Project.
Llahuin
Last month Southern Hemisphere announced a 36% increase in resources at the Llahuin Project.
The Measured and Indicated inventory is now sitting at 144.9 million tonnes at 0.4% copper equivalent for 435,650 tonnes of copper and 459,180 ounces of gold.
The high confidence Measured category now hosts 88.9 million tonnes at 0.42% copper equivalent, and there is an additional Inferred Resource of 16.7 million tonnes at 0.33% copper equivalent.
In addition to the substantial resource upgrade, recent drilling at the Llahuin Central Porphyry Zone has delineated a high grade core, currently showing 51 million tonnes at 0.5% copper equivalent, which will be easily accessible and has the potential to provide higher grade feed during the early stages of production.
Importantly, this corresponds to more than four years higher grade feed during the initial stages of production, and significantly enhances the financial robustness of the project.
Southern Hemisphere’s wholly owned Chilean subsidiary, Minera Panamericana Sur SCM, has completed option arrangements to obtain ownership of all six Amapola licences, covering 13.72 square kilometres and the three zones of interest – the Central Porphyry Zone, Cerro de Oro Zone and Ferrocarril Zone.
Drilling at the Llahuin Project began in June 2011 and 33,812 metres has been completed within 15 months.
Mineralisation commences at surface and remains open at depth. Recent focus has been on the higher grade core within the Central Porphyry Zone.
Southern Hemisphere is continuing its diamond core drilling campaign at the Llahuin Project which will be accelerated with the completion of the Lundin Mining share placement and farm in arrangements.
Analysis
The farm-in deal with Lundin Mining is a significant event for Southern Hemisphere and the Llahuin Project.
Today’s deal provides for substantial funding, potentially for the next six years, to advance the project towards development. It also greatly reduces the funding risk in the near to medium term.
Lundin Mining brings top skills to the Llahuin Project, with experience and operations in Portugal, Sweden, Spain and Ireland, producing copper, zinc, lead and nickel.
The company’s Neves-Corvo mine in Portugal is currently undergoing expansion, with the copper production target for 2012 55,000 to 60,000 tonnes of contained in concentrate.
The share placement to Lundin Mining at a significant premium is also a vote of confidence in Southern Hemisphere and its operations. We expect the share price of Southern Hemisphere to soar on this game changing, value accretive deal.
SUH Price at posting:
18.5¢ Sentiment: LT Buy Disclosure: Held
