Production costs Net Present Value (NPV) is a function of after-tax cash flow and is largely driven by cost of production. NPV is typically calculated at the pre-feasibility stage, when a company identifies all of the costs and expenses that go into the project (roads, machinery, utilities, labor, taxes, royalties, etc.) and proposes a mine plan – the order in which grades get processed through the mill over the mine’s life.
In order to calculate a NPV, one needs to identify both the capital costs and the costs of production. Although we don’t yet have a pre-feasibility report for Santo Tomas, other companies have calculated these costs over life of mine and this data is readily available through their published feasibility and pre-feasibility reports. I have been reviewing as many of these as I could locate, comparing average grades over the life of mine with the calculated production cost per pound of copper for each project. My goal was to find a good data set of comparable copper porphyry projects and use that data to help estimate the economics at Santo Tomas.
From the reports I reviewed, I further limited my data set to open-pit mine projects with Cu as the primary resource, a mill size of at least 65 kilo-tonnes per day (ktpd), and reports published within the past ten years. With these constraints, I worked with data from ten resource reports (see references and data at end of this post).
I located each project’s average grade of copper equivalent (CuEq) and average production cost per pound CuEq over the life of mine. CuEq is important because it has a positive impact on the mine’s economics. Some reports expressed cost per pound and average grades in Cu, and so I had to convert those values to CuEq.
The average production cost per pound for the ten projects over the life of mine ranged from $0.82 - $1.90 and the calculated average CuEq grade for each project over the life of mine ranged from 0.53% - 0.29%.
Although the data set spans a ten-year period, I didn’t attempt to normalize cost data for inflation because that ten-year period didn’t see significant inflationary costs changes. Eight of the reports are dated within the past four years. Inflation only really picked up this past year.
So for each project over the life of mine, I identified two data points – average production cost per pound and average grade CuEq. Plotting this data on a chart demonstrates that as grade increases, the cost of production per pound is lower. This is not terribly surprising. Feeding higher grades of ore through a mill produces more pounds of metal per day. Higher ore grades = greater revenue.
Figure 15 in the Santo Tomas technical report (“ST report”) includes Thornton’s analysis of the North Zone higher grade areas (≥ 0.35% CuT), proposing 280.5 million tonnes of ore at an average grade of 0.441% Cu.
While many folks on this forum have been focused on Brasiles, I was keenly interested in seeing assay data on Au, Ag, and Mo in order to get a sense of the CuEq lift from those metals. This is an important data point in helping to estimate a NPV because a 10-20% CuEq lift has a meaningful effect on revenue and consequently, NPV.
Oroco’s December 9 press release provided useful assay data that helps us understand the additional co-metal credits. In my December 12 post, I pointed out that grades in the ball-park of 0.40% Cu see a CuEq lift of about 0.10%.
So Thornton’s North Zone can be estimated to hold a 0.54% CuEq average grade resource. Much of the North Zone resource is at near surface, as indicated in figures 33 through 35 in the ST report. Although grade is important, near surface proximity of ore is perhaps even more important because having to remove a lot of waste overburden prior to accessing viable ore drives up the cost of production. With a good near surface grade, production cost will be biased downward.
From the industry historical cost data, a 0.54% grade CuEq would have production costs of around $0.80 / pound or so. Rosemont has an average grade at 0.53% CuEq, but suffers from a high strip ratio which explains why their calculated production costs are higher. If you plot the data yourself, you will see how Rosemont deviates from the mean noticeably.
Recall that Thornton’s North Zone was 280.5 million tonnes of ore. Expanding the ore resource to include other areas identified in the recent 3D-IP surveys as having high chargeability (and presumably mineralization) will increase the total tonnage.
We don’t yet know how the South Zone or Brasilles Zone will effect the final average grade. I will continue to update my estimates as additional drilling data becomes available. However it is fair to assume at this point that the average CuEq grade will be near 0.50%. Based on my studies, the near surface resource and expected low strip ratio of Santo Tomas, I expect the production cost to be between $0.80 - $0.90 / pound.
What is exciting about this low cost of copper production, is that it illustrates how the low strip ratio at Santo Tomas enhances the value significantly, and it is not just about grade.
In my next post, I will show how the NPV calculation is done and demonstrate what an average 0.50% grade translates to an NPV, based on different mill production rates. This should give everyone an idea of the real value of this unique resource.
Here are the reports that I studied to understand how strip ratios and grade effect production cost per pound.
Hudbay Mason 2021 PEA
$1.61 Per pound CuEq produced over life of mine
0.34 % CuEq average grade over life of mine
Hudbay Constancia 2021 Technical Report
$1.38 Per pound CuEq produced over life of mine
0.311 % CuEq average grade over life of mine
Josemaria 2020 Feasibility Study
$0.89 Per pound Cu produced over life of mine
0.41 % CuEq average grade over life of mine
Hudbay Rosemont 2017 Feasibility Study
$1.29 Per pound Cu produced over life of mine
0.53 % CuEq average grade over life of mine
Los Andes Vizcachitas 2019 PEA
$1.58 Per pound Cu produced over life of mine
0.451 % CuEq average grade over life of mine
Taesko Yellowhead 2020 Technical Report
$1.67 Per pound Cu produced over life of mine
0.29 % CuEq average grade over life of mine
Panaro Cotabambas 2015 PEA
$1.22 Per pound Cu produced over life of mine
0.46 % CuEq average grade over life of mine
Los Azules 2017 PEA
$1.28 Per pound Cu produced over life of mine
0.46 % CuEq average grade over life of mine
Copper Mountain 2020 Technical Report
$1.90 Per pound Cu produced over life of mine
0.32 % CuEq average grade over life of mine
Candente Copper Canariaco Norte 2011 Pre-feasibility report
$0.82 Per pound Cu produced over life of mine
0.47 % CuEq average grade over life of mine