Wednesday, November 5, 2008

Augusta – Focus on Advancing Copper Rich Deposit in Arizona

Augusta Resources (AZC) is primarily focused on the Rosemont Copper deposit near Tucson, Arizona, one of the largest copper mines currently in development in the North America. Augusta is headquartered in Denver, Colorado, and their Rosemont property is 50 km southeast of Tucson, conveniently located for mining operations via highway, a network of unpaved roads, and proximity from major transmission line and main rail lines to key ports. Their President & CEO, Mr. Gil Clausen, was in New York City on October 29th to discuss their strategy and growth potential of their resources.

In the past week or so, Augusta has two important announcements. They first announced on October 31st that a silver off-take financing arrangement with Silver Wheaton is to be re-structured upon completion of the Updated bankable feasibility study which is expected to be complete by yearend. My expectation is that the term will be likely more favorable than the previous agreement elected back in April, 2008, due to higher resource estimates and thus better economic value. Then this Monday (Nov 3rd), they announced that they have received significant strategic interest regarding their 100% owned Rosemont Copper/Moly project.

The Rosemont Copper project for Augusta is a very large low cost open-pit copper deposit. The total resources (M&I and Inferred) are estimated to be 7.7 billion lbs of copper, 190 million lbs of moly and 80 million ounces of silver, which turns into about 11 billion lbs of copper equivalent. The cost estimate is expected to be in the neighborhood of $0.5 per lb of copper, net of by-product credits (the net by-product credit is calculated based on very conservative long term $12 moly and $8 silver). Even without including the by-product credit, the cash cost is still only $0.9 per lb of copper. With today’s depressed commodity prices across the board, there is still a good profit margin due to its high grade and low cost. This puts Augusta well below other median and marginal cost producers and give them a large competitive advantage. Strategically, the major U.S. copper producer Freeport-McMoRan is also operating near Augusta’s property, and this location, the low-risk jurisdiction and its copper/moly rich mines make Augusta well situated for future options.

The production is expected to start in the 2nd half of 2011, assuming permitting and construction on schedule, with average annual planned production of about 230 million lbs of copper, 5 million lbs of moly and over 3 million ounces of silver which ties to the silver-backed financing deal with Silver Wheaton mentioned above. This level of output will account for 10% of US copper output once in production, and propel Augusta to become a solid mid-tier copper producer, probably the 3rd largest in the US.

The capital expenditure of their Rosemont project costs about $800 million total, with 40% of the capital committed under fixed price contracts. According to the last bankable feasibility study (BFS) back in 2007, which will be updated by yearend, with conservative assumptions on commodity prices for the whole life of this mine: $1.5 for copper, $15 for moly, and $10 for silver, and with a discount rate at 10%, the net present value (NPV) is still around $460 million, more than 4 times higher than the current Augusta’s market cap of $96 million. The payback period is also impressive with less than 3 years. The upcoming BFS is likely to be more favorable due to increased level of resources.

Even with the recent reduced forecast of copper demand, the copper mine supply still falls short for foreseeable future years. No doubt that the current slump in commodities has depressed the stock prices of many developmental mining firms like Augusta. But financially Augusta is strong, and had $15 million cash at the last Q2 report. The previous April Silver Wheaton deal has satisfied about 20% of total capital requirements for the Rosemont project by only sacrificing 2% of the total future project revenue. Then on June 17 this year, Augusta has secured another $40 million loan with Sumitomo. Both deals have minimized equity dilution for existing shareholders. What might happen in the near future, maybe Q1 next year when an updated BFS is available, it is very typical for a junior to sell partial interest in its project to a major in exchange for financing to continue the construction of their mining operations. The latest press release indicates the possibility of such joint venture potential.

More importantly, if we believe the recent copper price was oversold and has reached the bottom, and will stay above $2 on average for many years into the future, the operating leverage provided by Augusta will substantially increase the value of its Rosemont project. It won’t surprise me that Augusta would triple or even quadruple from the current $1 price level to somewhere in the $3-4 range, which only brings them back to the price level this time last year.

Disclosure: I don’t own Augusta Resources, but I believe AZC is currently undervalued and provides a good opportunity for a diversified mining portfolio for long term capital gain.

Thomas Tan, CFA, MBA

Disclaimer: The contents of this article represent the opinion and analysis of Thomas Tan, who cannot accept responsibility for any trading losses you may incur as a result of your reliance on this opinion and analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions.

1 comment:

Eminia said...

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