Sierra Gorda Project
Sierra Gorda is a feasibility stage copper molybdenum project in the Atacama Desert, Region II of northern Chile with a resource estimate of 2 billion tonnes of Measured & Indicated Resources in sulfides. The mineral resource is inclusive of the estimated Proven & Probably Reserves of 1.275 billion tonnes of sulfide ores. The Feasibility Study identifies a project that has been designed as a conventional open pit operation with an initial planned throughput of 110,000 tpd, expanding to a throughput of 190,000 tpd in Year 4 of operations with a current mine life of 20 years.
| Location | District II, Northern Chile |
| Ownership | 55% |
| Type of Ore Body | Porphyry system |
| Primary Metal | Cu |
| Secondary Metals | Mo, Au |
| Processing | Flotation |
| Infrastructure | Road access |
Asset Profile and History
Location: The Sierra Gorda Project is located in the Atacama Desert, Region II, Chile and approximately 60 km southwest of Calama. The project is approximately 5 km by gravel road north of the village of Sierra Gorda which is on a paved highway and railway line.
The project is comprised of mineral properties acquired under eight option agreements entered into in 2004. During 2008, the Company exercised all eight option agreements to obtain a 100% ownership interest in the project. The approximate total area contained within the perimeter of the block of exploitation concessions at Sierra Gorda is 3.3 km2. In addition, the area of surface rights is approximately 13.8 km2 for a total of 17.1 km2 of ground controlled by Quadra FNX.
Geological Setting: The Sierra Gorda district is located approximately 50 km west of the classic "porphyry copper belt" in northern Chile. The Sierra Gorda copper - molybdenum deposits occurs in a 600 km long belt with porphyritic intrusives that host porphyry and/or breccia-pipe Cu-Mo deposits and associated hydrothermal alteration zones. This belt includes deposits such as Cerro Colorado, Lomas Bayas, Fortuna de Cobre, Inca de Oro, Cachiyuyo, El Bolsico, Relincho and Spence. These deposits are typically characterized by copper-dominant mineralization (both oxide and hypogene) with moderate to high molybdenum values and locally elevated gold and silver contents.
There are two main rock units in the region surrounding Sierra Gorda: a sequence of early Cretaceous volcanic rocks, and an early Tertiary batholithic intrusion. The latter extends over tens of kilometres, with local hypabyssal intrusive rocks of a variety of compositions and textures. The hypabyssal intrusions can be internal to the batholith, and have associated hydrothermal alteration, breccia facies and metallic mineralization. The mineralization at Sierra Gorda is part of that associated mineralization. The intrusive rocks have radiometric age dates in the range of 64 million to 57 million years.
Mineralization: The Sierra Gorda mineralized belt trends east-northeast and is approximately 30 km long and 1 to 3 km wide. It is developed along the contact zone between porphyritic volcanic and plutonic rocks. It hosts broad zones of hydrothermal alteration, porphyry-style disseminated and breccia-pipe hosted copper-molybdenum and copper-silver-gold veins.
There are four principal styles of copper ± molybdenum mineralization described at the Sierra Gorda property. These are:
- Porphyry-style primary (hypogene) copper and molybdenum mineralization - dominated by chalcopyrite, molybdenite and pyrite
- Supergene sulphides -- dominated by chalcocite, digenite, covellite, bornite
- Copper oxide hosted by acidic (intrusive) rocks - dominated by atacamite, chrysocolla and brochantite predominate
- Copper oxides hosted by basic (andesitic) rocks - dominated by chrysocolla, vermiculite and atacamite predominate
Project History: One of the properties within the Sierra Gorda project, Santa Catalina, was previously held by Outokumpu Oyj who carried out an extensive exploration program in the 1990s and identified a number of copper and molybdenum mineralized intrusives as well as copper oxide mineralization.
Quadra FNX acquired and consolidated the Sierra Gorda property in 2004, initially focusing on the oxide potential but also testing the concept of deep sulphide mineralization. In 2008, Discovery Hole 281 intersected 338 m of ~1.05% copper at a depth of 242 meters. Follow-up drilling delineated a classic porphyry system thereby shifting the focus to definition drilling of hypogene sulphides.
A Scoping Study, published in July 2009, described an 111,000 tpd open pit mining operation producing 250 - 400 M lbs per annum of copper over a 25 year mine life. The project was envisioned to have significant molybdenum production, averaging 33 M lbs pa over the first eight years, and declining thereafter.
Since completing the Scoping Study in 2009, Quadra FNX has been advancing Sierra Gorda through the feasibility and permitting stage. In 2010 the Company's principal activities have been those required to support a development decision including infill and condemnation drilling, geological modeling and reserve calculation, metallurgical and process test work, permitting, as well as infrastructure and engineering studies to establish capital and operating costs. These parameters were reviewed and updated as part of a Feasibility Study, the summary of which was released on May 16th 2011.
Sumitomo JV Partnership & Financing Structure
On May 14th, 2011 Quadra FNX and Sumitomo signed the Investment Agreement with respect to funding arrangements for the Sierra Gorda project. In addition, the parties have agreed to the terms of a JV, back-up financing, services and offtake agreements which are expected to close once all normal anti-trust approvals are in place but not later than December 31, 2011. A $360 million bridge facility from Sumitomo has also been agreed to cover costs subsequent to August 31, 2011. The Investment Agreement will govern the parties during the interim period.
The key terms of the arrangements:
- Quadra FNX and Sumitomo to conduct activities through the existing holder of Sierra Gorda, Minera Quadra Chile Limitada ("MQCL"), which will be owned 55% by Quadra FNX and 45% by Sumitomo.
- Quadra FNX will earn a service fee for operational and technical support over the life of mine. Sumitomo has the right and the obligation to purchase 50% of the copper concentrate and Quadra FNX has the right to direct the sale of the remaining 50%. The JV will manage the marketing of the molybdenum with oversight from a commercial committee.
- Both shareholders will have normal course super majority rights, including a right of first refusal if one party wishes to dispose of its JV interest. The JV will have a right of first refusal on any new properties within 25 kilometers of the project. In the event of a change of control of Quadra FNX, Sumitomo will have the right to take over or appoint a different party to provide JV support services.
- Quadra FNX retains the right to advance the development of the JV's oxide resources. However, Sumitomo has the right to participate through the JV.
- Normal dilution provisions apply to the interests in the JV should either party fail to meet shareholder cash call obligations after commercial production. Penal dilution will apply during the construction phase.
JV funding to production
Phase I - Construction of the project to 2014
The initial funding will match the funding schedule of the project over the period to 2014. The JV funding is structured as follows:
- Upon closing, Sumitomo will pay a minimum of $360 million into the JV, with the remainder of the $724 million on an as needed basis for construction activities before Quadra FNX has to provide any further funds.
- Sumitomo shall take the lead in efforts to arrange, and will guarantee, $1.0 billion in project financing for the JV, with no recourse to Quadra FNX. In the event, project financing is not satisfactorily arranged, then Sumitomo will provide a shareholder back-up loan for $800 million to the JV, with no recourse to Quadra FNX.
- The remaining funding will be met by the shareholders of the JV in proportion to their interest. Sumitomo and Quadra FNX have fixed the Phase 1 budget including capital costs, working capital, interest during construction and costs already incurred, at $3.0 billion of which Quadra FNX's share going forward would be approximately $650 million assuming $1billion of project financing. Quadra FNX has since announced that it has priced its private offering of US$500 million aggregate principal amount of 7.75% Senior Notes due 2019. The proceeds of the bond issuance together with cash on the balance sheet will satisfy Quadra FNX's $650 million obligation to contribute equity to the Sierra Gorda Project.
- If closing has not taken place by August 1, 2011, then Quadra FNX may draw from Sumitomo a "bridge loan" at $90 million per month, for up to a total of $360 million. The loan is repayable on the earlier of twelve months after termination, or December 31, 2012 if closing anti-trust approvals is not received. The bridge loan would be secured against 45% of the shares of MQCL.
The capital for the expansion to 190,000 tpd is expected to cost $818 million over three years. It is projected to be funded entirely from project cash flow. However, if needed, any balance would be funded by cash calls to the respective partners.
Other expansions
The JV will be responsible for any further expansion projects approved by shareholders. Any such expansion would be funded first from project cash flows and then from cash calls to the respective partners.
Summary of Feasibility Study
On May 16th, 2010 Quadra FNX released the key development parameters for the Sierra Gorda project. Sierra Gorda has been designed as a conventional open pit operation, using drilling, blasting, loading with rope shovels, and truck haulage. The process plant has an initial planned throughput of 110,000 tpd using high-pressure grinding rolls crushing ("HPGRs"); ball milling and conventional flotation to produce both a copper and molybdenum concentrate. An expansion to a throughput of 190,000 tpd is planned for completion in Year 4 of operations.
The molybdenum head grades are highest during the first three years. The initial throughput rate was selected to constrain molybdenum production to levels that were judged to have limited impact on the global molybdenum market. Molybdenum production will be 54 million pounds per year during the first three years of operation. An expansion to a throughput of 190,000 tpd is planned for completion during the third year of operations, after which molybdenum production will average 20 million pounds per year for the balance of the mine life.
The bulk of the copper concentrates will be sent to the port of Mejillones, from which it will be shipped to global smelters. Molybdenum concentrate will be bagged on site for sale locally and overseas. Oxide mineralisation will be stockpiled separately for treatment in a possible future heap leach operation.
Life of Mine Plan
The mine plan is designed in six phases in order to reduce waste mining and manage ore grades and production starts in the Catalina Zone and progresses eastward. As mining progresses into the lower-grade areas, the focus changes to maximizing ore grade to the mill, which is accomplished by stockpiling lower-grade ore. Once the higher-grade 281 Zone is developed, waste mining drops off substantially and copper feed grades increase. In the last year and a half of mine life, production is derived from stockpile re-handling.
The waste dumps are set back approximately 500 metres from the pit rim to allow for pit expansion in the event of operating margin increases. The dumps have extra capacity to allow for possible expansion and include an oxide stockpile with sufficient capacity to hold oxide material for possible future processing.
A summary of the life of mine project parameters is outlined in the table below:
Sierra Gorda Life of Mine Plan
| LOM Total | ||
| Mining | 20 yrs. | |
| Ore to Mill | kt | 1,274,832 |
| Cu | % | 0.393 |
| Mo | % | 0.024 |
| Au | g/t | 0.065 |
| Ore Mined | kt | 1,274,832 |
| Waste & Pre-strip | kt | 3,400,798 |
| Strip Ratio | ratio | 2.7 |
| Total from pit | kt | 4,675,630 |
| Mill Recoveries | ||
| Cu | % | 87% |
| Mo | % | 74% |
| Au | % | 48% |
| Mill Recoverable Metals* | ||
| Cu | M lbs | 9,653 |
| Mo | M lbs | 500 |
| Au | k ozs | 1,275 |
Capital Costs
Initial capital costs for the Sierra Gorda project are estimated at $2,877 million, with an additional $818 million of capital required from 2015 to 2017 for the expansion from 110,000 tpd to 190,000 tpd. All costs are expressed in Q4 2010 U.S. dollars. The contingency added to the capital cost estimate reflects an 85% probability of completing the project within the amount estimated. Mine and plant sustaining capital is estimated to total $1,038 million (average approximately $52 million per year across the 20-year mine life.)
Operating Costs
Life-of-mine operating costs for the Sierra Gorda project are expected to average $11.48 per tonne of ore processed. Life-of-mine mining costs are estimated at $1.07 per tonne of material mined. The operating unit cost estimates are summarized in the table below:
Key Infrastructure
The key offsite infrastructure areas are: power supply, power transmission to plant site, concentrate transportation, concentrates loading at the port, and fresh and seawater supply. These services will be predominantly supplied through build, own, operate ("BOO") contracts with the exception of the seawater pipeline which is expected to be operated by the JV. Quadra FNX and Sumitomo will provide certain BOO contract guarantees when necessary.
Water
Except for specific areas, the process plant has been designed for seawater. Quadra FNX has contracted the services of BRASS Chile S.A. (BCSA) to develop the seawater delivery system from the coastal town of Mejillones to the mine site through a 140 km pipeline. The transport pipeline system was designed for the project life, with a maximum transport capacity of 1,200 L/s. Initially, 750 L/s of seawater will be pumped from Mejillones to the seven-day seawater pond located at the plant site. This capacity will be increased to 1,200 L/s for the expansion phase. The JV has 30 L/s of fresh water for site, which will be supplied by Ferro Carril Antofagasta Bolivia, S.A. for a 20-year contract. This water will arrive at site by means of a pipeline that runs alongside the rail to the Sierra Gorda mine site.
Power
The Company is currently finalizing a life-of-mine offtake Agreement with a local power provider who will construct a coal-fired power plant located in the port of Mejillones. The power for the Sierra Gorda project will be supplied by a 140 km overland power line that will provide 220 kV of power at 50 Hz to an on-site substation. During the construction (2012 thru 2013) the operation's power needs (i.e., approximately 30 MW) will be supplied by local power providers.
Concentrate transport
Copper concentrate will be transported from the site and to the port of Mejillones where a port facility will be constructed.
Project Upside & Risk Mitigation Opportunities
Oxide Leach Cap
Based on a cutoff grade of 0.2% Cu, the Measured and Indicated oxide resources at the Sierra Gorda project total 237 Mt of oxide material grading 0.34% Cu. Currently approximately 200 Mt of this material is treated as waste and will be stockpiled to be potentially processed at a later stage. The possibility of processing oxides resources, using heap leach and SX-EW processing was included in the EIA permits. The JV agreement gives Quadra FNX the right to advance the development of the project oxide resources on its own. Sumitomo has the right of first refusal to participate or allow Quadra FNX to proceed with the development of the oxide potential with or without a third party.
Exploration potential
There are numerous other exploration targets that exist in the vicinity of the Sierra Gorda project area and the Company believes that, with additional exploration, the mine-life of the Sierra Gorda project will ultimately improve.
As an example, the Salvadora area is not currently included in the reserve because of its higher strip ratio, although it is possible that it could be added into a future mine plan.
Risk Mitigation
On-site pilot plant
In advance of the project start date, confirmatory metallurgical and pilot plant test work will continue to be conducted on the Sierra Gorda project in order to further develop the flotation model, with a focus on the molybdenum-rich transition ores, as well as optimizing reagent and blend strategies. A core drilling program to develop additional ore for the test work is ongoing, with the first test work scheduled for September 2011. The Company believes that this additional technical due-diligence will significantly de-risk the ramp up of the Sierra Gorda project.
Technical report (NI 43-101) - English
Financial Analysis and Commodity Price Sensitivity
The financial analysis of the project is based upon two pricing cases: the Base Case and a Spot Case closer to current prices. Details of the price assumptions are shown below. The economics are shown both pre-tax and after the Chilean Mining Tax and First Category Tax (After-Tax), and using various discount rates. Cash flows are discounted to January 1, 2011.
Financial Summary for Base and Spot Metal Price Cases
| Base Case | Spot Case | ||
| Metal Price Assumptions | |||
| Copper | $/lb | $2.50 | $4.00 |
| Molybdenum | $/lb | $12.00 | $15.00 |
| Gold | $/oz | $1,000 | $1,200 |
| After Tax | |||
| NPV 0% Discount | $M | $5,950 | $16,858 |
| NPV 8% Discount | $M | $780 | $5,076 |
| After Tax IRR | % | 11% | 24% |
| First Five Years Operations* | |||
| Average Annual Cash Flow ** | $M | $642 | $1,233 |
| Average C1 Cash Costs | $/lb Cu | $0.56 | $0.28 |
| LOM*** | |||
| Average Annual Cash Flow** | $M | $648 | $1,386 |
| Average C1 Cash Costs | $/lb Cu | $1.15 | $1.12 |
The analysis is presented in US dollars but a material portion of the capital and operating costs are based on local Chilean derived inputs, payable in Chilean pesos. A fixed exchange rate of 512.82 Chilean pesos (CLP) was used for the capital costs. A significant portion of the site operating costs is based on local Chilean costs. For the purposes of the financial evaluation, the costs subject to CLP variations were assumed to be 30% of total operating costs. A monthly analysis of LME Cu prices since 2002 shows an R-squared correlation of 0.79 which was used to determine the relationship between the copper price and CLP. Based on this correlation at a Cu price of $2.50/lb, the CLP would be 560 and that rate has been used in the financial model. At $4.00/lb Cu, the model indicates a 471 CLP exchange rate, which has been used for the Spot Case economics
Resources & Reserves
Sierra Gorda Resources (as of June 2011)
The Mineral Resource estimate was prepared in compliance with requirements set out in National Instrument 43-101 by Steven Ristorcelli, C.P.G. Mine Development Associates ("MDA") of Reno, Nevada and in accordance with the "CIM Definition Standards On Mineral Resources and Mineral Reserves", and the CIM Estimation of Mineral Resources and Mineral Reserves Best Practice Guidelines, using geostatistical and/or classical methods, plus economic and mining parameters appropriate for this operation. Definitions and guidelines can be found at www.cim.org.
The reported cutoff grade(s) for the Resource is 0.20 % Cu equivalent for the sulphide and oxide mineralization. The Cu equivalent calculation was based on long-term average Mo/Cu metal price ratios to arrive at a ratio of 5 to 1 and a Au/Cu price ratio of 0.55 to 1 (g/t to %) using a long term metal price for copper of US$2.50/lb. Cu equivalent calculations reflect gross metal content and have not been adjusted for relative metallurgical recoveries or relative processing and smelting costs. In all cases, MDA considered metal prices, metallurgical recoveries, mining methods and costs, and economics to derive the reported cutoffs. These resources are inclusive of the reserves.
Sierra Gorda Reserves (as of June 2011)
The Mineral Reserve estimate was prepared in accordance with the "CIM Definition Standards On Mineral Resources and Mineral Reserves", and the CIM Estimation of Mineral Resources and Mineral Reserves Best Practice Guidelines, using geostatistical and/or classical methods, plus economic and mining parameters appropriate to each operation. Definitions and guidelines can be found at www.cim.org.
Ore reserves for the Sierra Gorda deposit were developed by applying relevant economic and engineering criteria to estimated Measured and Indicated resource model to define the economically extractable portions. Cu, Mo and Au were all included in determining economic value. A net-value calculation methodology was used to estimate profitability of material in the block model, where a net value is calculated for each of the model blocks based on grades, recovery and estimated costs for mining and processing and metal prices. The resulting values, stored in the model blocks, are used to generate the ultimate pit shells and to determine ore and waste. The long term metal prices used for the Mineral Reserves were: Cu at US$2.50/lb, Mo at US$12.00/lb, and Au at US$1,000/oz.
Current Activities
Following the announcement of the Sumitomo JV, Quadra FNX announced that it has closed a private offering of US$500 million aggregate principal amount of 7.75% Senior Notes due 2019. Quadra FNX intends to use the net proceeds from the offering to fund Quadra FNX's $650 million obligation to contribute equity to the Sierra Gorda project Quadra FNX is also continuing to advance the permitting of the Sierra Gorda project.
On July 6, 2011 Quadra FNX announce that the Environmental Impact Assessment (EIA) for the Sierra Gorda project in Region II, northern Chile was approved and site preparation commenced.
Fluor has been retained as the EPCM contractor for process plant and related construction activities and by the end of Q3 2011, over 130 engineering, construction and service contracts have been awarded while 14 additional contracts are under bidding and evaluation process. A total of over 600 employees and contractors are on site. The project has also successfully recruited key management positions for participation in the project design and ahead of the pre-stripping activities as well as for future operation. The recruiting of operating personnel will continue throughout the construction phase.
Mass earthworks activities have commenced. Specifically, construction has started on project offices, camp facilities, potable water and sewage facilities, and equipment laydown and assembly areas. The first two Bucyrus shovels were delivered to site, with assembly scheduled for the next quarter.
During Q3 2011, the JV has also contracted for most of its requirement of tires and replacements to support the pre-stripping activities. Commencement of pre-stripping is scheduled for the beginning of Q2 2012.
As of September 30, 2011, the Sierra Gorda JV has made contract commitments of $131 million. In addition, purchase orders for mining equipment (including shovels, drills and trucks) and infrastructure of $294 million have been made.
The JV has also been negotiating several of the major key outsourced operation contracts including the water supply system, railway transportation, transmission lines, port facilities and power purchase agreement with terms of these contracts expected to be finalized by year end.
Health, Safety & Environment
Sierra Gorda achieved a Total Medical Injury Frequency Rate of zero during 2010, and the project has not experienced a Lost Time Accident (LTA) since exploration began in 2004. On April 31, 2010, Sierra Gorda reached One Million Manhours without a LTA. Sierra Gorda reported no environmental incidents during the calendar year 2010. We are committed to and strive for Zero Harm -- for our employees, our communities and the environment. We believe that the best mines are the safest mines.