The Red Metal and Acero-Martin in Peru
By Andrew K. Burger
29 Oct 2006 at 12:20 PM EST
resourceinvestor.com
DAMMAM, Saudi Arabia (ResourceInvestor.com) -- How much is an explorer with experienced management and large, promising copper and gold prospects in Peru’s copper belt worth? Well, if you look at stock prices, it depends seems to be the best answer.
Investors appear to be following the “a bird in the hand is worth two in the bush” maxim. With LME spot and December copper futures trending sideways around historic highs after a meteoric run-up in prices that peaked in May, stock market valuations for copper explorers cum producers vary greatly. Whatever premiums are to be had are being given to producers with proven reserves, while junior explorers’ share prices vary greatly on a case-by-case basis.
Take Acero-Martin Exploration Corp. [TSXv:ASD] for example. The company’s shares have changed little since peaking around September 20, when it filed a NI 43-101 (National Instrument Code 43-101) report with Canadian securities authorities detailing the positive results of a recently completed drilling programme at its Pinaya property in southeastern Peru.
Could it be that base metals and mining shares, which have led the way up, have now lost their luster? Not if you have faith in some of the research coming out of the investment banking community. The mineral resources group at Northern Securities in early September initiated coverage of Acero-Martin and issued their first research report. In it, they put together a comparative valuation of TSX-listed copper explorer/producers based on enterprise value and measured, indicated and inferred resource estimates as reported in Canadian NI 43-101 reports.
Based on what were deemed conservative assumptions as to metal prices, their calculations resulted in an initial price target for Acero-Martin of US$1.56 per share. Yet investors don’t seem to agree, or at least have reasons for their reservations: Acero-Martin’s shares have shown little if any upside since falling from their recent September peak or US$1.18; they last traded at US$ 0.68 on October 27.
The Pinaya Story
For a junior explorer with its sights set on moving into the ranks of producers, Acero-Martin’s is a strong and promising case. Management changed the company’s strategic direction in 2004, when it “switched gears from exploring the Canadian Yukon to a program of exploration for epithermal gold and porphyry copper-gold deposits in Peru,” recounts Donald Gee, Acero-Martin’s president and CEO.
For US$2.5 million in cash, $3 million worth of shares and an incentive of an additional one million if certain reserve benchmarks are reached, Acero-Martin acquired Peru’s Canper Exploraciones S.A., the owner of nine wholly-owned mineral concessions, and an agreement to purchase three mineral concessions from Compania Minear Andes de Pinaya S.A., a private company owned by the residents of the southeastern Peruvian village of Pinaya. The total land package - portions of which have been mined on a small scale by locals for many years - at the time of deal was 6,000 hectares.
Management has since moved quickly to establish itself in Peru and explore and further assess the mineral resources potential of its acquisitions. On September 20, the company announced the results of its initial NI 43-101 compliant resource estimate for its Pinaya property, which was based on drilling 70 holes over 15,000 metres.
Located in a proven rich copper-gold mining area near Arequipe, Peru’s second-largest city, Pinaya is located in a southern Andean region well-known for its large, accessible, low-grade copper and gold deposits, one that has attracted the likes of BHP Billiton [NYSE:BHP], Barrick Gold [NYSE:ABX; TSX:ABX], Newmont [NYSE:NEM] and Teck Cominco [NYSE:TCK; TSX:TCK-B].
“Southern Peru is home to a series of Tertiary intrusion-hosted copper porphyry deposits that are essentially a continuation of the world’s largest copper belt in northern Chile,” wrote Jeremy Link, the main author of Northern Securities’ first Acero-Martin investment research report.
“Acero-Martin’s Pinaya Project is located in Southern Peru on the southeastern end of the 300-kilometre long copper-molybdenum-gold Andahuaylas-Yauri Belt (AYB) (Figures 1 and 2). The AYB is emplaced in Tertiary volcanics and is emerging as a highly prospective area for copper and gold porphyry deposits. The AYB is currently host to at least 31 mineralized centres with porphyry-style alteration and mineralization.”
The results of the company’s Pinaya drilling programme included total Indicated and Inferred resources of 666,000 ounces of gold and 384 million ounces of copper, which equates to more than 1.7 million ounces of gold. The initial resource estimate is only a partial one, covering only 25% of the mineralization known to exist on the property, according to Acero-Martin management.
With more than C$2 million in the bank, the company has resumed drilling at the property and expects that a scoping study will be completed in Q1 2007. A pre-feasibility study and full bank feasibility study are expected to be completed by Q3 2007 and Q2 2008, respectively, and a producing mine is expected to come on-line later in 2008 or in early 2009.
“Pinaya is clearly a new discovery in a region that hosts significant porphyry and epithermal deposits. Considering the drilling intercept thicknesses, grades, and Acero-Martin’s conceptual geologic model, we feel that Pinaya has great potential. For valuation purposes, we believe an order-of-magnitude target potential total resource of one billion pounds of copper-equivalent is very reasonable,” the Northern Securities’ analysts opined.
Should things work out well, that would put Acero-Martin firmly in the ranks of growing copper miners in Peru, such as Candente [TSX:DNT] and Norsemont [TSXv:NOM].
Source: Northern Securities; Company Reports
Acero-Martin’s management has also been doing its part to be a responsible corporate citizen. According to management, it is adhering to internationally and new, recently introduced Peruvian environmental regulations and has successfully compensated and relocated artesenal miners who had been working the property illegally for years to sites of their choosing.
“We have excellent relations with the local community. We employ a number of the local residents at the project site and this number will increase over time. We have commissioned a social engineering study that indicates that the development is overwhelmingly supported by local residents,” Gee also told Resource Investor.
Since Acero-Martin became involved in the development of the property, the local community is also benefiting from the installation of satellite telecommunications equipment and access to the mining camp’s full-time doctor.
“At 5,000 metres above sea level in the Andes, these services are greatly appreciated, as are the jobs the project is generating for the villagers,” he added.
Investor Reticence
Yet investors have been unmoved by the positive results of Acero-Martin’s drilling and exploration programme and management’s constructive negotiations with government and labour in the area and in Lima.
“Peru has been politically stable since the recent election of Alan Garcia, who is very much pro-business,” Gee said. “Soon after his election this year, he signed a free trade agreement with the U.S., announcing that Peru is open for business and welcome to foreign investment. With respect to environmental concerns, we have already engaged a consulting engineering firm to conduct environmental baseline studies as a prelude to mine development.”
Peru’s Ministry of Energy and Mines in late October announced that July production of copper, silver and iron had grown at a healthy clip on a comparable year-over-year basis. Production of copper rose 6%, while that of silver and iron grew 14.7% and 13.2%, respectively. Molybdenum production increased 6.7%, while production of gold, zinc and lead declined slightly.
July national copper production reached 87,494 metric tonnes, explained the country’s director general of mines in the announcement, driven by higher production at Compañía Minera Antamina S.AS., Compañía Minera Condestable, Sociedad Minera Cerro Verde, Southern Perú and Xstrata Tintaya.
Northern Securities’ analysts have rated Acero-Martin’s shares a “speculative buy,” based on the positive drilling results, the general risks associated with commercialisation of mineral resources and Acero-Martin’s dependence on the advancement of this one project in particular.
In coming up with their initial share price target, they used conservative structural approximations of the ore zone at Acero-Martin’s initial Pinaya prospect area, as well as cut-off grades and average future metals price assumptions, to determine a copper-equivalent grade.
The latter included $1.15/lb for copper, $4.50/lb nickel, $0.58/lb zinc, $0.40/lb lead, $7/lb molybdenum, $12/lb cobalt, $500/oz gold and $8/oz silver. They also noted that they placed zero value on other prospective targets at Pinaya and the company’s other assets, which include two additional properties in Peru (Minas Lucho and La Mamita) and another in the Yukon (Red Mountain).
“For valuation purposes, we believe an order-of-magnitude target potential of one billion pounds of copper-equivalent in situ to be reasonable for Pinaya,” Link and the Northern Securities team concluded. “This implies an enterprise value of US$59.6 million, or US$1.56 per share.”
The assumptions built into their valuation model and the resulting initial price target appears prudently conservative. Copper prices traded sharply higher on the New York Mercantile Exchange during the third quarter, averaging $3.54 a pound compared to $1.70 a pound a year ago.
Looking at LME futures and forwards prices, market participants don’t expect recently reached levels to hold, however. The copper price curve is downward sloping and approaches the $3.00/lb level fifteen months out. Even this is well above the Northern analysts’ average copper price assumption of $1.15/lb, however.
Conclusion
Despite recent investor reticence, management’s own take on Acero-Martin’s prospects is upbeat.
“The company is currently drilling and focused on expanding its already published resource numbers. We anticipate getting to one billion pounds of copper equivalent or in excess of two million gold-ounce equivalent (indicated and inferred) in the very near term…There is always the specter of a JV (joint venture) with a senior company, but for now the company plans to go forward on its own. Access to capital does not seem to be a hurdle,” Gee concluded. |
