Rosemont mine prospect costs jump 25%

The projected construction cost for Hudbay Mineral’s Rosemont copper prospect has jumped another $300 million to $1.5 billion, according to Hudbay CEO David Garofalo.

The projected cost of the mile-wide, half-mile deep open pit copper mine planned for the Santa Rita Mountains on the Coronado National Forest 30 miles southeast of Tucson has increased $600 million since 2009.

The previous owner of the Rosemont prospect, Vancouver, B.C.-based Augusta Resource Corp., projected the mine would cost $897 million in 2009. Augusta raised the estimate to $1.2 billion in 2012. Hudbay purchased Augusta last summer to acquire rights to Rosemont.

In comments to investment analysts during a Feb. 20 conference call, Garofalo said Hudbay expects to fund Rosemont through cash flow generated from its three Manitoba mines, the Constancia copper project in Peru and existing debt capacity.

“Even in a $2.50 to $2.60 price environment, we can fund Rosemont internally with cash flow and available debt capacity,” Garofalo said. Spot copper prices closed Friday at $2.61 a pound.

Garofalo told analysts that under the $1.5 billion cost scenario for Rosemont that “we’d have to come up with about $900 million and our streaming and joint venture partners would come up with the rest of the capital.”

Garofalo also stated that Rosemont’s joint venture and streaming partners would be providing the $600 million as upfront capital to start construction.

“So we wouldn’t really be funding Rosemont significantly until a good six months or so into the construction program,” Garofalo stated in the conference call.

The $600 million in Rosemont joint venture and streaming commitments that Garofalo indicated is available is much higher than the $336 million in such financing commitments that Augusta Resource had in place prior to being acquired by Hudbay, according to Augusta’s last Management Discussion & Analysis report filed in 2014.

It is unclear where the additional $264 million in joint venture and streaming agreements cited by Garofalo is coming from.

Hudbay has not announced any changes to Rosemont’s agreements with Silver Wheaton or United Copper & Moly that would increase their construction financing commitments in Rosemont from the $336 million arranged by Augusta to the $600 million that Garofalo told investment analysts was available.

Augusta entered into a $176 million joint venture agreement with United Copper & Moly, a consortium made up of KORES, the Korean government’s mining investment arm, and LG International. The $176 million investment would give United Copper a 20% share of Rosemont.

United Copper has invested $70 million to fund pre-construction costs to earn a 7.95% stake in Rosemont. The joint venture agreement called for United Copper to invest an additional $106 million in Rosemont to fund construction once all permits were in place.

Augusta also had a $230 million metals streaming agreement with Silver Wheaton to fund construction once all permits were in place.

Hudbay confirmed in its 2014 Management Discussion & Analysis report that United Copper has earned a 7.95% percent stake in Rosemont “and may earn up to 20% interest.” Hudbay’s MD&A did not mention Silver Wheaton’s $230 million streaming agreement for Rosemont.

Silver Wheaton is still reporting in its latest MD&A that it has a $230 million streaming agreement with Hudbay for Rosemont.

“The Company is committed to pay Hudbay total upfront cash payments of $230 million, payable on an installment basis to partially fund construction of the Rosemont mine once certain milestones are achieved, including the receipt of key permits and securing the necessary financing to complete construction of the mine,” Silver Wheaton stated in its MD&A for the Third Quarter, 2014 ending Sept. 30.

Hudbay’s stated in an investor presentation on its 4th Quarter earnings that the company’s 2015 goal for Rosemont is to “advance permitting and technical work.”

Alan Hair, Hudbay Chief Operating Officer, told analysts during the Feb. 20 conference call that Hudbay continues to expect to receive final approvals for the U.S. Forest Service and the crucial Clean Water Act Section 404 permit from the U.S. Army Corps of Engineers.

“It’s fair to say there’s no change to our expectations,” Hair said.

Hudbay provided an analysis of Rosemont permitting issues in an April 14 investor presentation including:

• A Final Record of Decision (ROD) issued by the Coronado National Forest is “subject to judicial appeal” under the Administrative Procedure Act (APA).

• The U.S. Army Corps of Engineers had determined that the Clean Water Act Section 404 mitigation plan submitted by Augusta was “unsatisfactory”.

• Hudbay noted that the U.S. Environmental Protection Agency “has veto authority” over the 404 permit and that it is subject to “judicial appeal” under the APA.

• Rosemont’s Aquifer Protection Permit issued by the Arizona Department of Environmental Quality “will likely need to be amended based on” the Coronado National Forest’s (CNF) recommendations in the Dec. 2013 Final Environmental Impact Statement (FEIS).

• Rosemont’s state Air Quality Permit “will likely need to be amended” base on CNF’s recommendations in the FEIS.

• There is no statutory timeline for the Forest Service to complete review and acceptance of Rosemont’s revised Mine Plan of Operations incorporating all the requirements from the Final ROD.

• Rosemont’s funding plans are “contingent upon all material permits being in place without challenge or appeal.”

The CNF issued a “draft” Final ROD  in December 2013.  The draft ROD may be revised pending the results of renewed Endangered Species Act consultations between the CNF and the U.S. Fish & Wildlife Service that have been underway since last May.

The Army Corps has not issued the Section 404 permit and Hudbay has not publicly released any changes it is proposing from Augusta’s failed mitigation plan.

Hudbay reported spending $17.7 million in the 4th Quarter on the Rosemont project.

The company completed a 43-hole confirmatory drill program at the Rosemont site in December, with a total of approximately 93,000 feet drilled. A metallurgical test program has commenced with initial results expected in the second quarter of 2015 and final results expected in the third quarter of 2015, according to the MD&A.

Hudbay reported profit and earnings per share during the full year of 2014 of $71.9 million and $0.34, respectively. This compares to a loss and loss per share of $109.3 million and $0.59 in the full year of 2013, respectively.

Hudbay stated that lower copper prices are expected to reinforce a lack of investment in new copper production that has been ongoing since 2013. The company projects “copper market deficits” will occur after “mine supply growth” peaks in 2016, assuming continued global and Chinese economic growth.