Great article on ACUAFRICAN Copper is a company on the move. Shareholders have just approved a placement of shares that has provided the company with a $US108 million ($A144.4 million) war chest to start the development of its flagship Dukwe copper project in Botswana and get things moving at a number of other advanced prospects in the southern African nation. By Michael Vaughan - RESOURCESTOCKS*
In 2004, the company formalised a business plan to make it a significant copper producer through the development of a number of small mines rather than setting off on the difficult task of trying to find one "company-making" mega-project.
The first step to African Copper realising its strategy involves bringing its Dukwe copper mine online in late 2007, where the company will produce 35 million pounds of the red metal in its first year of operations before production is ramped up to full capacity of 44Mlb in the second year.
African Copper has adopted a staged approach to the development at Dukwe in order to fast-track its transition from explorer to producer. The company will initially concentrate on exploiting the close to surface oxide resources at the project while it continues to assess deeper sulphide mineralisation.
The oxide and supergene material the company plans to mine comes from four discrete higher-grade zones, which together total 4.24 million tonnes at 2.43% copper for about 103,000t of contained metal (diluted and cut for mine-call).
These resources will provide African Copper with enough ore for a mine life of about four and a half years, though the company is confident of extending this mine life with the addition of sulphide resources in the future.
The company believes successful delineation of the sulphide resources will not only extend Dukwe's mine life but also greatly enhance the project's economics should the resources show better grades or better metallurgical recoveries.
African Copper will spend $49 million (including working capital) on constructing a 1Mt per annum processing plant for Dukwe and then a further $32.3 million assessing the underground sulphide resources at the project.
The assessment will involve driving a ramp 275m below the surface in order to conduct further drilling and underground trial mining of the sulphide resources over a two to three-year period.
All of this will be funded from the recent equity placement, meaning the company does not need to engage traditional bank debt financing and therefore will avoid having to lock in any onerous hedging commitments.
This is particularly significant because of the recent strength of the copper price.
Copper, the third most used industrial metal, has been leading the metals charge in the current commodities boom and the price of the red metal reached almost unthinkable levels during the first half of 2006.
At the time of publication, the price of copper had eased from its meteoric high of $3.90 per pound reached in mid-May, though it was still trading at highs above $3.30/lb.
Despite the strength in the copper price, African Copper has adopted a conservative approach to its financial modelling. The company used a copper price of $1.80/lb for the first year of mining, $1.50/lb for the second year, $1.30/lb for the third year and $1.20/lb thereafter.
Even at these greatly discounted copper prices against today's levels, Dukwe remains an extremely robust project, delivering a net present value of $8.1 million (7.5% discount rate), an internal rate of return of 16.9% and a payback period of 2.1 years on the cost of constructing the processing plant.
African Copper chief operating officer Joseph Hamilton believes there are other benefits for shareholders from the company's choice to take the equity path rather than debt, to finance Dukwe.
"All too often, companies raise equity to develop a large project, then immediately put a large amount of debt on the project," Hamilton said.
"This has the effect of immediately putting the new investors at the back of the queue, behind banks and hedge managers.
"Cash flow in initial years is used to pay interest coupons and to make principal payments.
"Rising interest rates will further impede the ability of a small company that is attempting to build a large project, since balance sheet covenants and cash sweeps will invariably restrict their ability to show meaningful growth.
"The result for investors is a stagnant company with a share price that is linked to commodity prices – unless the debtors have insisted on a fully hedged company – in which case there would seem to be little upside for investors," he said.
Outside of Dukwe, there is still a lot to like about the African Copper story.
Southeast of the Dukwe property, African Copper holds the 4000 square kilometre Matsitama project. Matsitama contains a number of known copper deposits including the Thakadu-Makala deposits – the focus of much of African Copper's current activities.
The company will spend close to $9 million on delineation drilling and a pre-feasibility study for Thakadu-Makala this year, with the aim of completing both tasks by the end of 2006.
"African Copper has 10 drill-ready targets in the Matsitama belt, and a further 35 secondary priority targets," Hamilton said.
"We have a full geochemical and airborne geophysical database, as well as numerous ground grids with follow-up work conducted by Anglo-American between 1999 and 2001.
"We will not be conducting grassroots or greenfields exploration but will instead be focusing our efforts on drilling out resources and moving projects through feasibility stage as quickly as possible.
"The Matsitama belt is our project of choice – a 100%-owned 4000sq.km Proterozoic-fold belt that contains indications of sedimentary strata-bound copper mineralisation, carbonate hosted lead-zinc deposits, iron oxide copper-gold (IOCG) targets and shear-hosted hydrothermal deposits.
"We believe the Matsitama concession has sufficient targets to keep us busy for 10 years, without the need to look at any other corporate activity.
"With cash flow established from Dukwe in 2008, we should be able to fund a consistent exploration effort over this time period."
For this reason, African Copper is happy in Botswana and has no immediate plans to look outside of its borders.
Botswana boasts the oldest continuous multiparty democracy in Africa and as such does not have many of the foreign investment concerns held by so many African nations.
The country has sound infrastructure, including an 8800km road network, half of which is bitumen sealed and well maintained, along with digital telephone and mobile networks.
Botswana's economy is one of the most robust in Africa, with the country maintaining the only "A" sovereign credit rating in Africa. The country has also recorded economic growth levels of 5.4% and 6.7% in the past two years, making its economy one of the shining lights in Africa.
African Copper one of the few foreign companies listed on the Botswana Stock Exchange and is also listed on the AIM and the Toronto Stock Exchange.
* This report, first published in the June 2006 edition of RESOURCESTOCKS magazine, was commissioned by African Copper