Lundin Deal A Boost To Southern Hemisphere Mining

Advanced Chilean copper exploration play, with attractive projects that have attracted major farm-in interest from Lundin Mining (TSX: LUN), with aggressive exploration drilling underway.

Corporate Details
Status: Advanced Explorer
Size: Small Cap
Commodity Exposure: Copper
Share Price: $0.066
12-month Range: $0.033 – $0.122
Shares: 249m, Options: 38m
Top 20: N/A
Net Cash: $2.5m
Market Value: $16m

We introduced emerging Chilean copper play, Southern Hemisphere Mining, to our Portfolio during October 2012 based on the company’s strong technical credentials, quality asset portfolio and strong exploration track record. Despite share price volatility that reflects the ups-and-downs of the junior exploration sector over the past couple of years, we remain unconcerned. What’s been particularly impressive from our perspective has been the company’s ability to deliver on its exploration goals and resource targets.

The company’s exploration progress importantly hasn’t gone unnoticed. During late 2012, Canadian-based global base-metal miner, Lundin Mining (TSX: LUN), agreed to a commitment to spend up to US$35 million on exploration at SUH’s flagship Llahuin copper-gold project in central Chile. The deal will allow Lundin to earn a direct stake of up to 75% in the project over a six-year period. Lundin also acquired a strategic 11.5% stake in SUH by way of a US$5 million share placement at C$0.25 a share during November 2012.

The company has a specific exploration focus on Chile, but it does not operate in the more technically-challenging, much higher altitude and thus higher capex Andes region – which remains the domain of Tier 1 miners like BHP Billiton and Rio Tinto. Instead, the company prefers to concentrate on copper exploration plays at lower elevation levels that are more commercially palatable for a company of its modest size. Its current focus is its Los Rulos and Llahuin joint venture projects with Lundin Mining.

Project Overview

The Los Rulos Project and the Llahuin Project are located within the Coquimbo region of Central Chile, within the lower Coastal Cordillera, which provides logistical advantages over the higher Andean projects. Los Rulos and Llahuin are respectively 35km and 55km from the coast and the Pan American Highway at elevations of <1,000 metres and 1,300 metres respectively.

Southern Hemisphere and Lundin have sought to build a dominant mineral concession position within the Coquimbo region and currently have rights or option agreements over ~14 sq km at Llahuin and ~24 sq km at Los Rulos.

Los Rulos Copper-Gold Project

During November 2013, SUH entered into a 50/50 joint venture with Lundin Mining, which acquired an interest in three prospects (Armandino, Polvareda 2 and Guayacan) within the Los Rulos area. In addition to the prospects under option, the Los Rulos Joint Venture has also pegged properties in its own right, in particular securing the El Che prospect.

Armandiño and Polvareda 2 are key sectors within the Los Rulos Project area, which also includes the El Che Prospect. To date, significant exploration activity has been undertaken on the Los Rulos Joint Venture concessions, including regional mapping, magnetics, IP surveys and detailed channel and rock chip sampling. Los Rulos is an exciting regional play exhibiting historical and current mining activity, where exploration has defined several areas of widespread alteration and copper-gold mineralisation capable of hosting bulk mineable mineralisation if continued exploration is successful in discovering and outlining an economic resource.

Latest Drilling Activity

SUH has advised that the first six diamond drill-holes have been completed at its Polvareda 2 and Armandino prospects, which both from part of the Los Rulos Joint Venture. This initial program is the first stage of a 4,000-metre drilling campaign, approved by the Los Rulos Joint Venture Technical Committee.

The first six drill-holes have demonstrated the presence of a large IOCG system, with concentrations of copper, gold and anomalous zinc.

The system is the product of intense metasomatism, which has highly altered the original texture of the rocks – and is evidenced today as garnet skarn, amphibole skarn, pyroxene skarn, silica skarn and conjugations between them. Biotite metandesite and silica metandesite are also present.

This complex geological event presents opportunities for high-grade mineralization, but also challenges in terms of the presence of numerous folds and faults which make targeting of the mineralised units difficult. Analysis of the core and down-hole surveys indicate that the orientation of these initial drill holes may not be optimum to the mineralised sequence and the latest data will assist in locating subsequent holes.

The drilling targeted geophysical (IP) anomalies near-mine workings and coincident with surface alteration and rock sampling anomalies. In general, the IP response was identified as being due to magnetite and chlorite mineralisation within which low- to medium-grade copper and gold mineralisation was intersected.

The exploration team is modelling the results of these drill holes to better understand the IOCG system and will use the interpretation to plan the next phase of drilling.

Next Steps

Results received to date from the secondary targets are encouraging, however the remaining budgeted ~2,700 metres will be retained with a view to drilling what will be the largest and most prospective target within the Los Rulos portfolio of copper-gold prospects – the Polvareda 1 prospect. Polvareda 1 covers an area of 120 hectares and is adjacent to the Polvareda 2 prospect.

The drill rig is nearby to Polvareda 1 and will commence work as soon as the documentation is completed. Both Polvareda 1 and 2 are located in the gap between two plutons and immediately south of a prominent north-east trending structural break. Further details on Polvareda 1 will be provided once the acquisition is completed.

Llahuin Project

Farm-in partner Lundin Mining is a diversified Canadian base-metals miner with operations in Portugal, Sweden, Spain and Ireland – producing copper, zinc, lead and nickel. Lundin also maintains a development pipeline that includes an expansion of its Neves-Corvo mine in Portugal and an equity stake in the Tenke Fungurume copper-cobalt mine in the Democratic Republic of Congo (which is currently undergoing a major expansion).

Lundin therefore brings a wealth of base-metals experience to the table.

The Llahuin copper-gold project lies just 20km southeast of the Los Rulos Project. SUH has previously announced during a revised JORC-compliant resource for the Llahuin Project, which was based on 54,520 metres of drilling. An Environmental Application was approved during March 2014 to allow for further drilling and the joint venture is now reviewing adjacent higher-grade satellite opportunities which could add higher-grade feed to the overall Llahuin resource.

Resource Growth

Southern Hemisphere reported a 36% increase in the resource inventory at Llahuin during September 2012, with drilling outlining a high-grade core with the potential to significantly enhance overall project economics. The independently-calculated resource base now includes 436,000 tonnes of copper and 459,000oz of gold, focused on the Central Porphyry Zone, the Cerro de Oro Zone and the newly- discovered Ferrocarril Zone.

Encouragingly, the updated JORC-compliant resource was achieved within just 15 months of the commencement of initial exploration drilling – and represents a 37% increase in contained copper and a 50% increase in contained gold compared with the maiden JORC Resource announced during April 2012.

The upgrade resource supports the company’s plans to develop a substantial copper-gold operation at Llahuin, underpinning the progress of the Scoping Study, which is targeting initial production of 45,000 – 50,000 tpa of copper metal, as well as gold credits. SUH’s stated target is a mine with an annual throughput of 12 million tonnes which would require the identification of 180 million tonnes of mill feed. This is similar mineralization and tonnage potential to Teck Cominco’s Carmen de Andacollo Copper mine, located 120km north of Llahuin, which has 476Mt grading 0.35% Cu and 0.12g/t Au and produces 66ktpa copper and 55kozpa gold. I anticipate a revised resource announcement by mid-2013.

The drilling results that underpin this resource determination provide for a flexible approach to production scheduling. Recent drilling at the Llahuin Central Porphyry Zone has delineated a high-grade core, currently estimated at 51Mt grading 0.50% Cu Eq, which will be easily accessible and has the potential to provide higher-grade feed during the early stages of production. This would significantly enhance the financial robustness of the project.

Potential Project Economics

SUH has completed a desktop study on potential economic outcomes for the Llahuin Project, based on the current resource estimate. As part of the exercise, total order-of-magnitude capital costs were estimated to be US$680 million, of which the concentrator plant was estimated to be US$290 million and the mining fleet to be US$90 million. Mining costs were estimated to be US$1.85 per tonne and general administration costs US$4.6 million per annum. Order-of-magnitude process operating costs were estimated to be US$7.85 per tonne. The most significant cost input representing 50% of these costs is power and we allowed a delivered energy cost of US$0.14 per KW/hr.

The envisaged process plant is a typical crush, grind and float plant, producing a copper concentrate with gold credits, with the potential for a separate float segment to recover molybdenite. Metallurgical test-work indicates a low work index and a clean premium grade concentrate, which will be trucked to point of sale. The project lies midway between La Serena and Santiago so export ports are available at either Coquimbo or San Antonio.

Favourable Infrastructure, Metallurgy and Access

Importantly too, the results from preliminary metallurgical test-work indicate that the Llahuin Project mineralization is highly amenable to a conventional flotation process, with a low-unit energy requirement expected for crushing/grinding and copper recoveries of up to 91% achieved. These characteristics, together with the ability to produce a concentrate grading 28-32% Cu with low levels of deleterious materials in concentrate, support the commercial development potential of Llahuin.

Importantly, project infrastructure is excellent – access is good and a high-tension electricity line lies within 5km of the project. A currently disused railway line near the project extends to two ports (Los Vilos and Coquimbo), whilst two airstrips in good condition are located within 16km of the project. The supply of food, water, fuel and communication is available from the towns of Combarbala and Illapel. Water is available in from surface springs and underground aquifers, whilst water for exploration purposes is readily available.

The company also recently signed a landmark 30-year easement agreement with the El Espino Community, the local owners of the Llahuin area surface land rights. Under the terms of the agreement, Southern Hemisphere is allowed access for all exploration, exploitation, mining, processing, plant, utilities and infrastructure activities within a 2,500 hectare area, which includes the 1,372 hectares covered by the Llahuin Mining Licences. This represents a key milestone for the future development of the Llahuin Project.

Lundin Farm-in

With respect to the terms of the Lundin Mining farm-in deal, Lundin will fund the Llahuin project expenditures in stages, with an initial commitment of US$3 million to be spent within three years of the effective date of the definitive agreements. A further US$3 million from the proceeds of the Lundin placement will be spent on the Llahuin Project, providing US$6 million in initial committed expenditure.

After the total initial commitment is expended, Lundin has the option to sole-fund a further US$10 million towards Llahuin within three years in order to earn a cumulative undivided 51% interest in the project. After completing this earn-in, Lundin then has the option to sole-fund an additional US$10 million within one year to earn a further 14% stake for a total undivided 65% stake in the project. Lundin can then sole-fund the last additional earn-in by spending a further US$12 million within three years to move to 75%.

Summary

Southern Hemisphere Mining is a high-quality, big-picture resource play for serious investors. To attract an investor and project partner of the calibre of Lundin Mining is a tremendous achievement and bears testament to the quality of the work already conducted by the company’s technical team, along with the vast scale of the perceived upside to the company’s farm-in partners. Accordingly, we are happy to maintain our Speculative Buy recommendation for those investors without existing exposure around current price levels of $0.066.