Explore and Operate: the Right Package

While exploration companies struggle to fund their activities, operators battle to find new projects. Rodrigo Barbosa, CEO of Aura Minerals, believes that mining companies should aspire to carry out both. “The best business model for a mining company is to have exploration and operation activities,” he says. “Operations represent a sustainable cash flow generation that can partly be used to fund exploration,” he adds.
He says part of the income made from selling metals could be allocated to costly exploration activities to create a self-regenerating pipeline of projects. “The sustainable financial source allows dedicating funds on a regular basis to exploration according to cash flow generation,” he explains. This strategy has proven useful for companies such as Aura Minerals to shield against the risk of exhausting all financial resources without finding any exploitable discoveries. “This way companies can calibrate how much to spend on exploration depending on how much is made from the operations, enabling a more balanced cash flow.”
But undertaking both exploration and operations also implies assuming 100 percent the risk. The question becomes one of how to manage this gamble. Barbosa believes that mining companies can never be fully hedged from the risk of exploration. But he stresses that there must be balance between incomings and exploration outgoings. “Exploration is a high-risk business and companies may end up spending offshore cash on finding the resources and then not having the necessary cash to fund production,” he says.
Aura Minerals is an operator with business in Brazil, Honduras, Mexico and Colombia. It is conducting exploration in several of its operative mines, such as Sao Francisco in Brazil. Regarding Mexico, the annual expenditure on care and maintenance assets was US$3 million in 2017. As the Aranzazu mine was draining that amount of money from Aura Minerals’ pockets and the copper price has shown a recovery since 2015, the company started to carry geological and geotechnical analyses to find the right opportunity to restart the plant.
These finalized with the chance to reopen the Aranzazu on very attractive terms. “Instead on consuming US$3 million per year, Aranzazu will be able to provide us a significant source of cash generation in the near future,” he says. The company is already hiring people, carrying out the maintenance of the mine and some underground development. “We are in full speed to restart the plant in 4Q18,” he says.
To fund this ramp up, Aura Minerals made a partnership with IXM, formerly Louis Dreyfus. “We have a streaming agreement to sell it our concentrates for three years. In exchange, it gave us US$20 million in financing that we have already fully withdrawn to restart operations,” he explains. “We are looking forward to the Aranzazu ramp up. This could be a transformational project for our company and we are very happy with the investment we made in Mexico.”
The studies to restart the mine were initially focused on a little over a five-year period to prove reserves and provide enough funding for the ramp up but Barbosa says this plan has advanced since then. “We will be conducting near mine exploration in 2019 hoping to demonstrate more reserves and expand the mine life from five to 10-15 years,” he says. “We want to grow in Mexico and our priority remains exploration in Aranzazu. If we prove more productive life years, we will work consequently to expand the mine’s capacity.”
Aranzazu is a gold and copper mine, aligned with the company’s strategy to shift from only pursuing pure gold. “This strategy aims to secure a more stable cash flow in the future as we have two base metals,” he says. “We will also consider other base metals if the project makes sense to our company in terms of jurisdiction and size of our current operations.”