VANCOUVER — Mid-tier base metals producer Lundin Mining (TSX: LUN; US-OTC: LUNMF) has been hungry for copper over the past two years, and it’s hoping to have picked up a profitable red metal mine via the US$262-million deal for Freeport-McMoran’s (TSX: FCX) stake in the high-grade Timok discovery in eastern Serbia.
The companies have a history due to long-standing partnerships in Europe and at the larges-cale Tenke copper operation in the Democratic Republic of Congo, where Freeport serves as majority operator. In fact, the transaction marks the second deal for the joint-venture partners over the past two years, as Lundin picked up the Candelaria copper mine in Chile from Freeport for $674 million back in late 2014.
Under the purchase agreement, Lundin will acquire a 55% interest in the Upper Zone of the Cukaru Peki deposit, as well as Freeport’s interest in all the mineral licenses comprising the 232-sq.km Timok project. Cukaru Peki is essentially a high-grade, copper-gold epithermal deposit overlying potentially large porphyry-style mineralization.
And that’s where things get complicated. Freeport originally optioned the Timok concessions from project generator Reservoir Minerals (TSXV: RMC), and the junior still maintains a 45% stake in the project. Lundin would inherit Freeport’s right to boost its stake to 75% via delivery of a feasibility study (FS), but Reservoir also holds a right of first offer that could torpedo the deal.
In addition, Freeport is maintaining a 54% interest in the Cukaru Peki Lower Zone, which hosts deep-seeded, porphyry-style mineralization that is likely more amendable to block-cave, bulk-tonnage mining. So assuming the deal closes Lundin will have the right to 75% of the Upper Zone, with Reservoir ending up with a 25% interest. Meanwhile, Freeport has assured it will retain a 54% interest in the Lower Zone, with Lundin and Reservoir slated to end up with 21% and 25%, respectively.
The payment schedule isn’t any simpler. Lundin will pay Freeport US$135 million upon closing, with another US$20 million due in exploration and study work on the Lower zone. Upon a construction decision Lundin will pay an additional US$45 million, with another US$50 million due upon commercial production and up to US$12.5 million owed in recouped project expenditures.
“We’re really exicted about Timok and we’ve been following the asset since 2013,” commented Lundin president and CEO Paul Conibear during a conference call.
“We had our initial discussions with Freeport a long time ago, and assuming the deal closes it will really enhance our long-term growth pipeline, while preserving a strong balance sheet. It’s high-grade copper gold and it’s over-lying a potential tier-one lower zone porphyry. I see no need for us to do any further acquisitions in the medium term,” he added.
Freeport and Reservoir released a maiden resource for Cukaru Peki back in 2014, which totals around 65.3 million tonnes of 2.6% copper and 1.5 grams gold per tonne.
The estimate includes: the high-grade massive sulphide (HGMS) domain containing an estimated 6.8 million tonnes averaging 9.6% copper and 5.9 grams gold at a 1% copper equivalent cut-off; and “a significant proportion” of the semi-massive sulphide (SMS) domain containing 14 million tonnes grading 3.2% copper and 2.7 grams gold at a 3% copper equivalent cut-off grade.
The Timok asset package may appear relatively early-stage — and much of it is greenfield — but Freeport and Reservoir had been hinting a preliminary economic assessment (PEA) at Cukaru Peki could be released this year. The companies reported a 2015 exploration budget of US$18.7 million at the target, and Conibear said there were twelve drills spinning during his site visit in December.
One other wrinkle in the deal is Freeport’s back-in rights if another “large mineral discovery” is made on the property. Assuming a deposit in excess of 4 million tonnes of copper equivalent is found, Lundin will revert to a 21% interest on the discovery.
Reservoir’s right of first offer could put a wrinkle in the plans, however, as it grants the junior an opportunity to put in a bid for the Timok majority rights within 60 days. It’s unlikely that Reservoir could put together an offer on its own — though the company does have around US$30 million in its treasury — but it recently signed an earn-in and joint venture agreement on four other wholly-owned exploration permits in the Timok region with Rio Tinto (NYSE: RIO; LON: RIO).
Under terms of the deal Rio will spend US$3.1 million in Serbia by Nov. 2017, and can earn a 75% in Reservoir’s Nikolicevo, Kraljevica, Coka Kupjatra and Tilva Njagra concessions by sole funding US$75 million in project expenditures.
So Lundin’s conference call on March 7 was equal parts information session and sales pitch.
“Assuming Reservoir welcomes us into the project, which we hope they do, we’ll complete the transaction quickly and get people on the ground,” Conibear said. “I think this really flushes out both the medium-term and long-term pipeline for Lundin in terms of copper. I mean we own a stake in the Tenke operation, but we aren’t operator there and we don’t control the development stages. Our intention here is to get a perfectly-sized, high-grade copper operation going within five years, and Timok is ideal. This would be our marquee, highest-priority investment moving forward.”
Lundin finished 2015 with a cash position of roughly US$550 million. The company has traded within a 52-week window of $2.98 and $6.46, and closed at $4.43 per share at the time of writing. Lundin maintains 720 million shares outstanding for a $3.34 billion press-time market capitalization.
Canaccord Genuity maintains a “buy” recommendation on Lundin along with a $4.50 price target. Analyst Peter Bures said he believes Reservoir won’t exercise its right of first offer, and adds that “[the acquisition] demonstrates [Lundin’s] balance sheet strength, and could result in the addition of a long-life, high-grade copper and gold production within the next decade.”