Sizing Up the World’s Mega Copper-Gold Projects 

• MineFund.com

Published 6/28/2010

ST. LOUIS (MineFund.com) -- Paul Ehrlich, the ecological scold and natural resources cassandra, must be fretting about the new giga scale mining projects being readied for market. Far from running out of minerals, the world is looking forward to large sustained new supplies of several metals.

In what might eventually be regarded as a unique era, eight copper-gold projects are expected to come on stream by the end of this decade. Collectively they represent 76 million tonnes of copper resources; 6,000 tonnes of gold; 11,000 tonnes of silver; and 1.8 million tonnes of molybdenum - and that excludes 80% of the reported inferred resources. Their aggregate gross metal value is a staggering $846 billion at current metal prices.

Like planets in a solar system, the new projects literally orbit the Oyu Tolgoi project in Mongolia. Owned byIvanhoe [CA:IVN : NYSE.A:IVN], which is in turn owned in considerable part by Rio Tinto [NYSE:RTP], Oyu Tolgoi is now cementing the status conferred on it years ago by Ivanhoe founder Robert Friedland – a mineral deposit that would surpass Freeport McMoran’s [NYSE:FCX] mightyGrasberg mine.

Oyu Tolgoi is not the largest deposit in development. That honor goes to the Pebble project which is equally owned by Northern Dynasty Minerals[TSX:NDM | NYSE.A: NAk] and Anglo American [LSE:AAL | NASQ:AAUK]. However, Oyu Tolgoi is vastly richer.

It is nearly four times smaller than Pebble in terms of the total mineral resource tonnage, but its gross metal value is fully half of Pebble’s. When measured by gross metal value per tonne, nothing comes close to Oyu Tolgoi which boasts nearly $100 per tonne in contained metals at today’s prices.

The current closest analogues for Oyu Tolgoi in terms of development stage are Cerro Casale, owned by Barrick Gold [TSX:ABX | NYSE:ABX] and Kinross Gold [TSX:K | NYSE:KGC], and Seabridge Gold’s [TSX:SEA | NYSE.A:SA]KSM project. All three have recently published technical reports laying out their economics.

Despite massive capital expenditure requirements approaching $6 billion, Oyu Tolgoi boasts an internal rate of return after tax of 16.3% for its base case. That compares rather favorably against the 11.4% and 11% for KSM and Cerro Casale respectively. Those two projects are expected to cost $3.4 billion and $4.2 billion to build respectively.

However, the KSM project economics are aggressively priced by comparison. For example, its base case moly price is pegged at $16.5 per pound whereas the metal is changing hands for 12% less at $14.51/lb at the moment. Likewise, the base case copper price is a lofty $2.95/lb compared with a market price of $3.08/lb. It’s base case gold price is reasonably conservative at $878 per ounce. KSM’s relatively heavy weighting toward gold shouldn’t affect the base case rate of return too much despite the underwater moly metric and premium placed on copper; but investors need to be careful with their valuations.

By contrast, both Oyu Tolgoi and Cerro Casale have left plenty of room for error with their base case metals pricing; Oyu especially. The Mongolian project averages 47% below current spot prices, whilst Cerro Casale comes in at 35% shy of market rates. KSM is more marginal 16% below present prices, although it has a 45% cushion on the gold price.

Both Oyu and Cerro should show a significant rise in value at current prices although our estimates suggest IRR would leap considerably higher for Oyu, especially when it’s inferred resources are included and presuming its moly resources are brought to account.

As rich as Oyu is, it may ultimately be outshone by Goldcorp’s [TSX:G | NYSE:GG] Peñasquito project that should reach accelerated commercial commissioning this year.

The original bankable feasibility study used a gold price of $594/oz, silver price of $11.15/oz, lead price of $0.61/lb, and zinc price of $1.11/lb. The zinc price is presently well below the base case, but the other metals trading much higher today - fully one third more in terms of the value-weighted average for the whole deposit. Indeed, the deposit has transformed - in value terms - into a gold and silver play compared with the original zinc dominated profile (40% of resource value).

With a 20.4% after tax IRR for Peñasquito in the final feasibility study, it is not hard to see the IRR topping 30% which would make it one of the finest deposits to own. So much more if the zinc price ever finds itself again.

Reko Diq is the big unknown right now. Owned by Barrick Gold and Antofagasta [LSE:ANTO] with a minor stake held by the Pakistani province of Balochistan, the project is suffering title wobbles.

The chief minister of Balochistan said in February that the government was cancelling Barrick / Anto’s license and planned to develop the project itself. However, the commercial partners say they continue to work the project as they retain the exploration license. It could get ugly though with the exploration license set to expire next February.

Meanwhile, the bankable feasibility study is expected imminently. The project has a massive copper resource exceeding 15 million tonnes, and some $32 billion worth of gold; nearly $150 billion altogether. It is expected that Reko Diq will cost around $4 billion to bring to account. The stakes could not be higher for the companies or Pakistan.