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AZC - Augusta Resource

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November 25, 2007 – Comments (4)

Someone asked me why I underperformed this one.  

This one is has to raise the money to build the mine.  You NEVER know what the share/captial structure is going to look like after that.  I saw one that in the matter of how much the markets changed this past two weeks had to offer an additional 14 million shares to investors of $1000 bonds to close the funding deal, for a total of 91 million shares in addition to having to pay 11% interest on the bonds.  Augusta needs to raise about $800 million and what will the share/debt structure look like by the time they do that?

The world is showing signs of economic slow down everywhere meaning there is a good chance we are going into over supply of commodities and commodity prices WILL come down.

The metal grade is not that great, 0.47% copper, 0.015% moly, and 0.12 oz (3.7 g/ton) silver.  At today's prices it is about $43/ton.  Bingham by comparison mined 0.63% copper, 0.057 molybdenum, 0.49 g/ton gold and 3.5 g/ton silver in 2006.  In 2006 that grade averaged about $90/ton, but today it would be worth about $83/ton.  Bingham has in the range of double the metal values.

I don't know how you get better economies of scale than Bingham.  I guess close to 2/3rds of the metal values made it to profits for Bingham.  By comparison, as long metal prices stay as strong as they are right now only about 25% of the metal values of this one would make it to profits.  I don't care what their feasibility study says, as an investor comparing to Bingham is a better idea because it is a working mine in the region that is a highly efficient mine.  They are likely doing a lot of fudging if they suggest they can do better.

The risk involved in raising capital for a mine is such that 10-12% interest rates aren't uncommon.  Equity financing and they'll probably have to issue 250 million shares an another 125 million warrants to raise enough capital to bring the project to production, which would bring to into the range of 500 million shares fully diluted.

Alternatively, debt financing for mines generally costs 10-12%.  I think with the concerns in the economy it would probably be more likely 12%.  By the time carrying costs are paid for getting it going you'd be in for an extra $2-300 million in debt servicing, so by the time the mine opened there's be $1 billion of debt and $120 million of the $219 million would go to debt servicing.  Paying back the mine would be many more years than they suggest.

4 Comments – Post Your Own

#1) On November 25, 2007 at 4:54 AM, Katt47 (74.47) wrote:

> commodity prices WILL come down.

1 billion people in China
1 billion people in India
200 million in Indonesia
70 million in Malaysia
80 million in Vietnam
300 million in Russia
170 million in Brazil
150 million in Nigeria
65 million in Thailand

would disagree. They want houses, cars, roads, ... and they want it now.

 

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#2) On November 25, 2007 at 10:00 AM, dwot (67.31) wrote:

What ever you say Katt...

But I guess when I actually took at look at the emerging economies this was just an isolate incident...

http://www.thedailystar.net/story.php?nid=12098

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#3) On November 25, 2007 at 11:23 AM, dwot (67.31) wrote:

Anyone investing in commodities right now should be checking kitco metals regularly and it would also be very wise to read up on Frank Veneroso's stuff.  He's been expressing this stuff for a few years now, much like those who warned against the credit bubble were warning early that we would see what we are seeing in the credit market.  Indeed, the commodity boom and the credit bubble are part of the same thing.

There is strong evidence that China will not decouple from meltdown of the US subprime, meaning they will have a serious slow down as well, and there is evidence that India's booming economy is completely linked to China's, they have been the supplier of many of the parts that China has used in making their export products, and make no mistake, China is dependent on their export market, apparently leveraged about 3x to it.  That means a slow down of imports by the US is going to hit them hard. 

Furthermore, the government driven building bonanza driven by the 2008 Olympics will also be coming to an end. 

There is an abundance of metals in the ground far beyond what humanity will ever use.  There are many companies getting new projects going.  The economics of many of those projects look like, "I'm going to be filthy rich investing in this."  The ability to get materials to build those mines has slowed the industry down in building new mines, but those projects are coming online.

The 234 million pound plan is about 100,000 tonnes, or about two days of current world usage.

The problem is that there is about 400 lbs of copper used per house.  There is a housing slow down in the US, Europe, India, Russia, well, in a lot of places...

US housing starts were at a peak of 2.1 million units per year.  Now they are at 1.1 million units per year.  That's 400 million less pounds of copper by the US alone and house starts have not finished declining. That's about an 8 day world supply at the current rate of consumption.

To put into perspective how serious a slow down in the world economy, and commodities that this is, the Hunter brother controlled a mere 8% of the world silver supply in the early 80s and their control made the price of silver made it rise from $6/oz to $50/oz before it all came crashing down.

The industry is still increasing supply at 3-6% per year here and the US housing slow down takes away a minimum of 2% of the world supply that was being used.  I suppose those 2.1 million April housing starts would have still been buying the copper so the apparent decline in consumption that the data is telling you is there is not yet apparent, but it will be within the year.

I think my post on The Abundance of Minerals is worth a read.  

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#4) On November 26, 2007 at 7:05 PM, TheGarcipian (62.59) wrote:

Hi Deborah,

As I'd posted here in my blog, I love your outside-TMF posts. Very informative. If you get a moment between all your travels, I had a few questions that I posted at the above link/blog regarding copper & the commodities market. It sounds like you've been following this industry for years. Your insight would be very valuable to me. Thanks in advance for any advice you can provide.

Cheers! 

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