Tony Rovira
Managing Director
Azure Minerals
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View from the Top

From Exploration to Production: the Steps

Wed, 10/16/2019 - 18:15

Q: What are the main considerations when an exploration company becomes an operator and how is Azure Minerals adapting to take this step with Oposura?
A: To define how much ore was in the ground at Oposura, we fully focused on exploration until June 2018. After completing that part of the project, we undertook the pre-feasibility study to take it to production. The pre-feasibility study is expected to be finalized by the end of 2019 so we should be at full-scale production for zinc and lead-silver concentrates by early 2021. But we also saw the opportunity to mine very high-grade zinc mineralization earlier than that timeline so we decided to launch a smaller-scale operation in mid-2019.
This enabled us to begin small and then expand our operation, instead of having to wait for the pre-feasibility study to be completed. This means that we will produce a positive cash flow that will fund the completion of the pre-feasibility study and contribute to the capital costs of building a stand-alone mining and processing operation, while reducing the need for dilutionary fundraising by the more traditional financing routes, such as issuing shares.
As for how we are adapting our business to become an operator, we needed to bring in more engineers and miners. Our project manager for Oposura is an Australian mining engineer who has been involved in building many mines in Australia and Africa. We also grew our team in Sonora from 10 geologists and assistants to a larger team composed of engineers and metallurgists. The company also employed a mining contractor that uses its own people to do the mining.
Having a mining contractor as a partner for this project was a good way for us to start because it already owned all the equipment and we could avoid that huge cost for the moment. The current cash flow from the project covers the cost of paying the mine contractor. We are also buying their operational experience while we adapt to production. We are very good at making discoveries, so we will continue with that part of the business, but our goal is to develop into a mining company.
Q: How has the smaller operation performed and why did you choose to start it before completing the pre-feasibility study for the entire project?
A: The smaller operation started with 100t/d and has now expanded to between 200 and 300t/d, compared to the 1,500t/d expected of the full-scale project scheduled to be in production in 2021. The mined material is being trucked to nearby processing facilities, which will produce the zinc and lead concentrates for sale. In Australia, we call this agreement a toll-treatment arrangement, which is a low-cost, relatively easy way for smaller companies like Azure to get into production. The production costs for our operation are around US$100 to US$120 per ton of ore and our income is approximately double this, so our profit margin is around 100 percent.
This smaller project has yielded several benefits for our company. First, because we were able to start selling product, the company gained cash flow to cover expenses. Also, the production and the positive cash flow demonstrate to our investors, the banks financing us and the market that Oposura is a real project with the right mineralization continuity. Finally, we could prove to the banks financing us that we could improve the financial costs of borrowing money.  
Another perk of the smaller operation is that it is very high grade. There is a 300m-long tunnel built on the property by Peñoles in the 1970s that goes right into high-grade mineralization. This allowed us to start mining at the richest part of the ore body instead of at the surface, as we normally would be doing during Year One of a project. The smaller operation is expected to last from 12 to 18 months, during which time we will build the full-scale mine and roll straight from a small operation to a large one.
Q: Oposura is expected to be in the lowest-cost quartile of global zinc producers. What factors give this project the chance to become a very low-cost operation?
A: The beautiful thing about the Oposura deposit is that the mineralization is very high-grade zinc and starts right at the surface, allowing us to start mining very high-grade zinc from Day One. Therefore, the cost is very low and in its first full year of large-scale production.
Oposura will probably be one of the cheapest zinc mines in the world. The project will be three years of open-pit and three years of underground mining. The expected mine life at the moment is about six years but we will be doing some more drilling to enlarge the size of the resources.
Q: Noah’s Rule was recently appointed as funding adviser for Oposura. What financing schemes are appropriate for the project?
A: Noah’s Rule is an Australian-European firm that specializes in advising companies on the best financial terms for their projects. Our partnership with the firm has been and will continue to be key in assessing all the funding offers that emerge for this project. It is also very good at providing advice on hedging options and hedging negotiations.
As for the financing of the project, it is part debt and part equity. The equity portion is money that we will have to come up with, either by issuing more stock or by selling some of our assets. Around 50 percent of the project will be debt funded by banks and 50 percent by Azure Minerals. The small-scale mining is already adding money to fund the project.
Q: Sara Alicia, in Sonora, may be the highest-grade cobalt exploration project in the world. What is the state of this project?
A: Given the recent low performance of cobalt prices, we looked to sell Sara Alicia but did not receive any attractive offers. However, we did get a proposal from KoBold, a North American private equity organization, to explore for cobalt throughout Mexico. We agreed on a joint venture to which we contributed by putting up Sara Alicia as an asset and providing two geologists to explore all of Mexico for cobalt projects. KoBold will provide the financing and own 85 percent of the venture with Azure Minerals taking the remaining 15 percent. While it is uncertain how cobalt prices and demand will behave in the future, organizations like KoBold want to develop a mining and processing cobalt industry in North America.
Q: What have been the main milestones of your relationship with Teck Resources regarding the Alacrán project?
A: We did some exploration in Alacrán and discovered a very good silver deposit containing about 32 million ounces of silver and 150,000 ounces of gold. Teck Resources got excited about this discovery and exercised its right to buy back into the project after having sold it to us. The company has been busy drilling for copper and if it succeeds, Alacrán will become a world-class copper deposit. If it does not succeed in this endeavor, Teck will probably pull out of the project and we will proceed with development of a silver mine.