Signs of Life Return to Chile’s Mining Sector
Investment in Chilean copper and gold projects slowed in recent years but a flurry of recent deals suggests that life is returning to the country's mining sector, writes Paul Harris in Santiago…
Any investment sleep was wiped from the eyes earlier this year when Goldcorp (TSX: G) opened its chequebook to buy two projects with a big-picture approach that could become the modus operandi for the sector. Goldcorp bought the Caspiche deposit from junior explorer Exeter Resources (TSX: XRC) and 50% of the Cerro Casale project (25% from Kinross Gold (TSX: K) and 25% from Barrick Gold (TSX: ABX). Both deals were for $260million and a 1.25% royalty interest amongst other conditions. Goldcorp sees these deals as providing great opportunities for synergies as the projects are just 10km apart. Cerro Casale has been permitted and shovel ready for over a decade but capex creep to about $6billion has been a financial hurdle too far. The capex for Caspiche, whilst under $1billion, was out of reach for a company of Exeter’s size.
"Neither of us can take on the burden to develop these projects on our own but we can combine these two large projects…"
Goldcorp’s plan is to merge the deposits into a single project with resources of over 60 million ounces of gold and several million tonnes (Mt) of copper as a 50-50 joint venture with Barrick, to generate synergies to make the development more possible. “Neither of us can take on the burden to develop these projects on our own but we can combine these two large projects, share infrastructure and reduce the footprint to make them more palatable from a community and environmental point of view,” Goldcorp president and CEO, David Garofalo, told Mining Journal.
Goldcorp will now spend a minimum of $60million in the next two years on technical trade-off studies to identify synergies to make the development case. But it already has a track record with this type of project tie up following the El Morro and Relinche joint venture with Teck Resources (TSX: TECK). “What we did with the El Morro and Relinche projects was take proximal deposits and look to significantly reduce the capital burden on them and by so doing we significantly enhanced the expected returns”, he says.
For Barrick, with a portfolio of medium-term projects in Nevada, Peru, Chile and Argentina, it is a chance to breathe new life into a backburner project, with no direct capital outlay. “This is an opportunity to bring in a partner that will fund the work for the next 18-24 months giving us a huge option on higher gold and copper prices to see if the project can be developed”, says a Barrick spokesperson. Indeed Barrick likes the JV concept so much that it then announced a partnership with China’s Shandong Gold Mining Co to sell 50% of its Veladero mine in Argentina, for $960million and look at the joint development of the Pascua-Lama deposit.
Less mega projects
Chile has been the top dog in copper production for years but output is starting to decline. Production fell 3.8% in 2016, some 218,000 tonnes, says state copper commission Cochilco, with falls at 11 of Chile’s 15 largest copper mines. Whilst still the world’s largest producer at 5.5 Mt of copper per year, investors are wondering where new production will come from.
The mega copper development projects of previous years are increasingly scarce. “Many of the projects have taken place so the investment pipeline going forward is very thin”, says Vanessa Davidson, director of copper research and strategy at CRU. The key to future investment is the copper price, with industry observers fixing on $3/lb as the magic number to untie the purse strings. “The [current] copper price does not allow majors to fund greenfield exploration yet but should copper break $3/lb greenfield could come back”, says BTG Pactual mining analyst, Cesar Perez.
"Many of the projects have taken place so the investment pipeline going forward is very thin…"
Exploration has been unable to provide new projects due to budget cuts through the commodity bear market. In 2016 exploration spend in Chile fell by $172million to $443.4million - the fourth consecutive year of shrinkage, according to SNL Metals & Mining. “Are there any new projects capable of producing 400,000 tonnes a year?” asks Perez. “Everyone talks about potential but I don’t see the projects.”
That analysis is backed up by recent comments from Richard Adkerson, president and CEO of Freeport McMoran (NYSE: FCX). “Until we get global economic uncertainties in better focus we will constrain capital. … We are actively analyzing the many brownfield opportunities we have in the Americas and teeing them up to go forward.”
A steady stream
But while there is a shortage of elephant projects, industry insiders have been buoyed by a steady stream of medium-sized investments. After years of declining capital budgets Antofagasta Plc (LSE: ANTO) is working to complete two development projects at its Centinela mine that will add 45,000 tonnes per annum (tpa) of production, and a 2,400 tpa molybdenum plant. Mantos Copper also plans an $832million investment at Mantoverde to process sulphides and produce 270,000 tpa of copper concentrates and 28,000 ounces per year (oz/y) of gold from 2021. Meanwhile at Mantos Blancos it will invest $132million to expand the concentrator plant and extend mine life from 2024 to 2029.
State copper company Codelo is still pushing ahead with an $18billion investment programme over the next five years, although these are mainly structural projects to maintain production at its aging mine portfolio. Codelco has looked to reduce capex and so has limited the scope of some projects as well as cutting out pure expansion projects. For example, the El Teniente New Mine Level project has been reformulated and will focus on developing into ore from the existing mine level rather than going deep for a new mine level as per the original plan.
Meanwhile a couple of juniors are investing in the exploration needed to find the next major resources. Coro Mining (TSXV: COP) is looking to double the copper resource at its Marimaca project and has eyes on becoming a producer in 2019 having recently bought the nearby 10,000 tpa Ivan SX-EW plant. Coro will spend $3million this year including resource expansion drilling, infill drilling and geotechnical drilling. “The target is to get the resource to the 75-100 Mt range and convert resources to reserves. We are looking to expand the plant to 24,000 tpa,” says president and CEO Alan Stephens.
Chilean Metals (TSX: CMX) is drilling its Zulema copper and gold project near Copiapo that it thinks has a similar geological footprint to the Candelaria mine owned by Lundin Mining (TSX: LUN), the world’s second largest IOCG (iron oxide copper gold) deposit. “It has all the earmarks of Candelaria and similar alteration. The rocks are looking good and the drilling is showing that the alteration is there,” says president and CEO Patrick Cruickshank.
It is a far cry from the heady days of the commodity boom, when international investors were vying to participate in billion-dollar projects, but Chile’s mining sector is showing signs of renewed life. For those with a bullish outlook on copper prices, now could be the time to look to acquire assets.