Augusta sold for $550 Million, Oroco?

A few comments on Peter Bell’s look at the news releases from Exall as they optioned and explored Santo Tomas, after going through those same releases from Exall from between 1993 and 1996.

The option price would seem to be reasonable, as at time copper prices were relatively low, about 1/3rd lower than current prices adjusted for inflation. Santo Tomas was then at a much earlier stage of exploration that it was after all the work Exall did, and in the context of the time would have been considered low grade. Average copper grades being mined have fallen a lot since then – from over 1% then to just above 0.5% now. A resource with a grade of 0.4-.5% wouldn’t have moved the dial in 1993.

But today……….in 2011 a resource of 950 million tonnes owned by Augusta, with an average grade of about 0.4% was bought by Hudbay for $550 million (ST looks to be >900 million tonnes, currently estimated at <0.40% with lots of potential and an expectation for increases in both numbers.). And, in 2015 Southern Copper bought El Pilar, 290 million tonnes of 0.3%, for $100 million and called in “opportunistic.” And, in 2011 Hudbay also acquired Norsemont and its Constancia deposit – 400 million tonnes, 0.42% Cu – for $363 million. There are plenty of other examples of similar acquisitions. I digress, but the point is that ST is lot (!) more valuable now than it would have been in 1993/4. Exall then starts a process that sees 4,000 meters of drilling, metallurgy testing, scoping of all aspects of a mine…. pretty major stuff and all conducted by firms that would have been the gold standard of the day – Mintec, Bechtel, Bateman, Lakefield Research. So, I see where they would have spent the kind of money they raised, and as the project grew to be something much bigger than they had originally bargained for, they would have needed to go bigger with the reports and the costs would have risen, likely exponentially. But in the end, they got some very credible names to do work that advanced the project from a small oxide Cu play into a major porphyry copper deposit that was economic at the time but still likely then considered low grade, but with numbers that today look world class. And just as they would have been scratching their heads figuring out how to advance the thing, along comes the Sumitomo copper market rigging scandal in 1995. Copper prices were seen to have been manipulated and inflated for about a decade. Copper prices then slid for 6 years, gold did as well, and the junior mining market was a ghost town. By 2001 copper prices were at a century low, and gold was an irrelevant relic. Exall had no chance. Britannia seemed to get involved just as the scandal and resultant collapse in copper prices started, so I would filter their response through that lens. Aside from these observations, a few things from Exall releases jumped out at me. Peter mentions trenching results were announced but he didn’t cite the numbers. Here they are: Trench 1 25m 0.41% Cu 0.11 g/t Au Trench 2 50m 0.81% Cu 0.68 g/t Au Trench 3 50m 0.70% Cu 0.52 g/t Au Trench 4 125m 0.85% Cu 0.50 g/t Au Average 250m 0.76% Cu 0.501 g/t Au In equivalent terms, that average is about 1% Cu. All of these are well above the average grade of the deposit. This suggests that 1) the grades overall reported by Exall, may not accurately reflect the deposit and will increase with infill drilling, and/or, 2) higher grades exist in what would be an area at surface that could be mined initially. To these two points, in the Exall releases it is stated, “Both areas are open at depth and on strike and indications are that reserves and head grade will increase significantly with additional drilling.” – by both areas, they mean N and S. This is likely just a function of the methods used to estimate resources that use a discount from the grade in a given drill intersection to calculate resources at a given distance from that insection. So, as these areas of the deposit get filled in the grade in these discounted gaps rises. Ever notice how Reserves and M&I Resources tend to be higher grade than Inferred? This is often the reason. Also in Exall’s releases…. “a high-grade core of 300 million tonnes @ >0.5% Cu exists.” In another release they restate, “The drilling has also confirmed the zoning that was previously suspected and a high-grade core exists.”

In another release and likely referencing a different resource estimate using a different cut-off they say…”“Indicated reserves have been increased from the reported 195 million tonnes grading 0.52% copper to 480 million tonnes grading 0.40% copper, 0.0016 opt gold and 0.0031% molybdenum.

And…”Hole numbers 14 and 25 showed 160 meters of 1.14% copper.”

So, while I think Peter’s walk through those releases is a good idea, my takeaway from the same process is to think that ST is a world-class deposit, with enough “high” grade within the global resource to set it apart, and with positive production qualities – strip, metallurgy, location and infrastructure, etc.