Executive Summary
Arizona Sonoran Copper Company (“ASCC”) (TSX:ASCU) is a Canadian company aiming to achieve mid-tier copper production status by developing the Cactus and Parks/Salyer Projects. Cactus was formerly ASARCO’s Sacaton mine that processed 38 million tonnes (“Mt”) of primary ore from 1974 to 1984.ASCC is planning to treat the oxidised and supergene enriched portions of the mineralisation overlying the primary mineralisation.Treatment will be by leaching of the material on heap leach pads followed by solvent extraction and electrowinning (“SX/EW”) to produce copper cathode..
After acquisition of the old mine and associated waste dumps in 2020, Arizona Sonoran, started technical studies and exploration. The waste dumps contain oxide material that has been reclassified as a Stockpile resource. Other resource areas initially included the old Cactus West open pit area, and underground potential at Cactus East. A 2021 Preliminary Economic Analysis (“PEA”) outlined a 17 year staged operation. The PEA development sequence starts with the Stockpile while preparing the old open-pit, then mining at the Cactus Mine West open pit and finally opening the Cactus Mine East underground. Recent exploration has been particularly successful at defining additional underground potential in the Parks / Salyer area (“P/S”). In September 2022 a revised Mineral Resource Estimate (“MRE”) expanded the overall project resource base and included maiden numbers for P/S. Resources currently stand at 2.5 Blbs of leachable copper (inferred) at Parks/Salyer and 1.1 Blbs (indicated) and 1.2 Blbs (inferred) of leachable copper at Cactus and Stockpile.
The plan in 2023 is to carry out exploration and infill drilling, metallurgy, and permitting de-risking steps. In Q4 2023 or Q1 2024, Arizona Sonoran will publish a Pre-Feasibility Study, integrating the P/S resources into the study. Management has indicated that development is likely to start at P/S and Stockpile, with work on the Open Pit coming later.
The Cactus project hard rock deposits are copper porphyries. Both the Cactus and Parks/Salyer deposits are characterised by a zonation that varies with depth. At the top there is a Leached zone devoid of copper, followed by an Oxide zone and a subsequent Enriched zone. The weathered zones overly fresh mineralisation which is not in the development plan at present.
Crux Investor feels that the PEA is a poor technical report, for a number of reasons. The amount of material to be mined – the Mineable Inventory – exceeds stated resource estimates in key areas. Metallurgical testwork is partial, incomplete, and badly explained. Forecast metallurgical recoveries are aggressive. Acid consumption forecasts are inconsistent with test work. Operating cost estimates from the PEA are too low. The resources estimate and PEA reports were prepared by Stantec Consulting Services Inc. (“Stantec”), a US-based engineering company. The PEA does not reflect well on Stantec. The report was signed off by Arizona Sonoran, and it does not reflect well on Arizona Sonoran either. Crux Investor hopes that the forthcoming PFS report will be of a much higher quality.
Crux Investor stresses that much more metallurgical work is needed. Experience from other copper heap leach projects indicates that detailed geometallurgical mapping is required. Each resource block should be mapped for mineralogy, recovery, and grade.
Despite these concerns, fundamentally the overall Cactus project is encouraging. Using a number of more conservative assumptions in addition to the basic parameters provided by the PEA, Crux Investor arrives at an NPV8 of $445 million (“M”). At a copper price of $4.09/lb, the project is robust with a cash operating margin of 55%.
At the share price of C$1.89 on 10 February 2023 the diluted Enterprise Value is $107.8 M which is 76% lower than the NPV8 figure of $445 M. Using just preliminary numbers for the Cactus deposits, the shares are attractive. The project will probably only improve with the inclusion of the Parks/Salyer deposit in the production plan. The high value of the Santa Cruz deposit of Ivanhoe Electric Incorporated (“Ivanhoe”) at a short distance to the southwest provides a good comparable valuation for Cactus.
Introduction
Arizona Sonoran Copper Company (“ASCC”) (TSX:ASCU) is a Canadian company aiming to achieve mid-tier copper production status by developing the Cactus and Parks/Salyer Projects. Cactus was formerly ASARCO’s Sacaton mine that processed 38 million tonnes (“Mt”) of primary ore from 1974 to 1984. ASCC is planning to treat the oxidised and supergene enriched portions of the mineralisation overlying the primary mineralisation.Treatment will be by leaching of the material on heap leach pads followed by solvent extraction and electrowinning (“SX/EW”) to produce copper cathode that is directly marketable.
After acquisition of the old mine and associated waste dumps in 2020, Arizona Sonoran, started technical studies and exploration. The waste dumps contain oxide material that has been reclassified as a Stockpile resource. Other resource areas initially included the old Cactus West open pit area, and underground potential at Cactus East. A 2021 Preliminary Economic Analysis (“PEA”) outlined a 17 year staged operation. The PEA development sequence starts with the Stockpile while preparing the old open-pit, then mining at the Cactus Mine West open pit and finally opening the Cactus Mine East underground.
Recent exploration has been particularly successful at defining additional underground potential in the Parks / Salyer area (“P/S”). In September 2022 a revised Mineral Resource Estimate (“MRE”) expanded the overall project resource base and included maiden numbers for P/S. Resources currently stand at 2.5 Blbs of leachable copper (inferred) at Parks/Salyer and 1.1 Blbs (indicated) and 1.2 Blbs (inferred) of leachable copper at Cactus and Stockpile.
The plan in 2023 is to carry out exploration and infill drilling, metallurgy, and permitting de-risking steps. In Q4 2023 or Q1 2024, Arizona Sonoran will publish a Pre-Feasibility Study, integrating the P/S resources into the study. Management has indicated that development is likely to start at P/S and Stockpile.
Location and Mineral Tenements
The “Cactus project” has been used as a catch-all name for the old waste dumps (now classified as “stockpiles”), the Cactus West and East deposits, the Parks/Salyer deposit and all exploration targets in the area.
The project area is located 40 road miles south southeast of the Greater Phoenix metropolitan area and approximately 3 miles northwest of the city of Casa Grande, Pinal County, Arizona (see Figure 1). Immediately to the southwest, Cactus abuts the start of Ivanhoe Electric Inc. (“Ivanhoe Electric”) Santa Cruz claims. Ivanhoe Electric is a $1.2 billion exploration and development company with a number of assets, including the flagship Santa Cruz copper deposit.
The area is well serviced by infrastructure. The total tenement area is currently approximately 4,850 acres of which the area within the PEA mine plan subject to 3.18% net smelter return (“NSR”) royalties.
Geology and Mineralisation
The Cactus project hard rock deposits are copper porphyries which have been displaced in a north-easterly direction along a shallow dipping Basement Fault. The Basement Fault has, in turn, been affected by cross cutting faults resulting in the deposits present in “horst” blocks. Horsts are raised fault blocks.
Figure 2, below, shows a plan view location of deposits along the northeast / southwest-trending mineralised corridor. The cross-section A-A’ is a good illustration of the deeper Santa Cruz deposit (owned by Ivanhoe Electric) to the southwest, followed by Parks/Salyer in the middle, and the Cactus West open pit profile visible on the right of the section. Cactus East mineralisation is the deeper portion on the very edge of the cross-section.
The geology in the area has a history of oxidation and leaching through weathering. Both the Cactus and Parks/Salyer deposits are characterised by a zonation that varies with depth. At the top there is a Leached zone devoid of copper, followed by an Oxide zone and a subsequent Enriched zone. The weathered zones overly fresh mineralisation.See Figure 3, below for a cross section through the deposits to illustrate this zonation.
In the Oxide zone, copper is predominantly present as chrysocolla, brochantite and malachite. Chrysocolla is a hydrated copper silicate, brochantite is a copper sulphate and malachite is a copper carbonate. All three minerals are acid soluble and can be leached to produce high purity copper cathode with conventional hydrometallurgical processing such as solvent-extraction / electro-winning (“SX/EW”).
In the Enriched zone, copper is largely present as chalcocite and in the primary zone as chalcopyrite. Both are sulphides. Chalcocite is especially copper-rich and it is cyanide soluble and can be partially leached by sulphuric acid to produce high purity copper purity cathode in an SX/EW plant.
Chalcopyrite readily upgrades to copper-sulphide concentrates, but cannot be leached by sulphuric acid under atmospheric conditions. To recover copper from the sulphides, a separate flotation plant would need to be built, to generate a sulphide concentrate. A flotation plant is not envisaged. Accordingly, the most important grade across all resources is not the total copper grade (“CuT”) but the soluble copper grades (“Cu Sol”), and within that acid soluble (“CuAS”) and cyanide soluble (“CuCN”).
Mineral Resources
An understandable evolution
The mineral resources at Cactus were calculated at two separate dates and using two different copper prices. The Cactus resource estimation, which includes the stockpiles, dates from 31 August 2021 and uses a copper price of $3.15/lb. The Parks/Salyer estimate dates from 26 September 2022 and uses a price of $3.75/lb.Crux Investor has cross-checked that the cut-off grades applied reflect the different input assumptions.
Both resource estimates and the PEA were prepared by Stantec Consulting Services Inc. (“Stantec”), a US-based engineering company.
Table 1, below, shows a complete resource statement for the Stockpiles and the Cactus deposits, compiled by Crux Investor analysts.The tons are short tons, not metric tonnes.
Note that the bulk of the resource lies within the open pit (2,860 Mlbs of copper), of which 1,590 Mlbs Cu is classified as leachable, with a grade of 0.48% Cu Sol. The underground portion of the resource is relatively small, at 515 Mlbs Cu.
Table 2 shows the Inferred resources estimated for Parks/Salyer, effective 26 September 2022. Note the grade and the size of the resources amenable to SX/EW leaching. The Parks/Salyer deposit is potentially at least as important a contributor to leachable copper resources as the Cactus West open pit, but at much higher grade.
Mineable Inventory
Unexplained discrepancies with Resource Estimates
No reserves have yet been defined at Cactus. The project is at the PEA level of de-risking, and can use Inferred Resources in projections of Mineable Inventory. Remember that inferred resources cannot be used in studies at the Pre-Feasibility level of de-risking or higher. Pre-Feasibility Studies must use Measured and Indicated Resource categories to define Reserves.
The Mineable Inventory included in the PEA schedule only includes the leachable portion of the mineral resources at Cactus and Stockpile: Oxide and Enriched mineralisation.
Note that the Parks/Salyer resource estimate had an effective date of September 2022, but the PEA was published over a year earlier in August 2021. Accordingly, Parks/Salyer does not contribute to the mineable inventory in the PEA.
Conversion rates are inconsistent
Crux Investor has compared the material that is included in the PEA mineable inventory category (Table 3, below) against the material in the resource estimate (Table 1, above) to determine the ratios for tonnage, grade and contained metal: the conversion rates. It is a measure of how much of the resource estimate is going to be mined and at what grade. The conversion rates are shown in Table 3, below.
For reasons not explained there are several serious discrepancies between the Resource Estimate (Table 1) and the Mineable Inventory (Table 3).Note that the Mineable Inventory tables in the PEA do not distinguish between Indicated and Inferred resources for underground mining. Therefore, Crux Investor can only calculate the conversion rates for the aggregated resource totals.
More stockpile mined in the PEA than is in the Resource Estimate
The first discrepancy evident from the Table 3 is that mineable inventory of Stockpile (taken from table 17-1 of the PEA) is 81.2 Mt, which is larger than the available resource figure of 77.4 Mt (taken from Table 14-9 of the PEA). How can the amount of material and the amount of contained copper that is mined exceed the resource base? The conversion rates are 106 (6%) and 104 (4%) for Tons and Contained Soluble Copper respectively.
Moving on to the Open Pit, another discrepancy arises. The conversion factors for the Open Pit resources show that both the amount of material and the grade in mineable inventory are much lower than for the figures shown in the resources statement.Table 1 shows Leachable open pit resources of 166 Mt at a grade of 0.48 % Cu Sol, for 1,590 Mlbs of soluble copper. Table 3 shows the PEA plans to mine 70 Mt at a grade of 0.26 % Cu Sol, for 370 Mlbs of soluble copper. In other words, the PEA is only going to target 20% of the accessible copper from the resource estimate. More information please.
An unexplained drop in open pit grade
And why is the grade so much lower? The cut-off grades used for mineable inventory are only slightly lower than those for mineral resources and dilution from bulk-tonnage open-pit mining is usually relatively low, probably below 5%. The grade difference in the mine-plan is approximately 29% lower than the grade in the mineral resource estimate. More information please.
>2x Enriched underground ore in the mine plan as there is in the resource estimate
The numbers for the underground portion of the schedule proposed in the PEA are perhaps the most problematic. For Cactus East, Table 1 shows a resource of 25.6 Mt at a grade of 0.9 % Cu Sol, for 462 Mlbs of contained soluble copper. Stantec, in the PEA, proposes processing greater quantities of higher-grade ore, as shown in Table 3 below: 27.5 Mt at a grade of 1.24 % Cu Sol, for 684 Mlbs of contained soluble copper. Going into even greater detail on the comparison between Table 1 and Table 3 it is evident that the amount of underground oxide material accessed is much less than is contained in the resource estimate, just 45% of the total. And that the mine plan includes accessing more than twice the amount of enriched mineralisation than is in the resource estimate. How does that work? This is a major discrepancy that needs to be explained.
Garbage in, Garbage out?
With inadequate explanation of the relationship between the resource statement and the mineable inventory, the input into the PEA is highly questionable. Garbage in, garbage out? The discrepancies between resources and mineable inventory place a question mark behind the economic assessment of the PEA. More information please.
Mining Operations
Conventional and standard
The mining methods proposed in the PEA are conventional. Crux Investor accepts the mining operation at face value.
The Stockpile is planned to be mined in the early years by a contractor with its own dedicated mine fleet.The average haul distance to the leach pads is 2,440 m, which is substantial for the grade of the material. Material will be removed from the Stockpile Project from a series of sequenced production faces.
Open Pit mining is planned as a conventional drill-blast-haul open pit operation. The overburden does not require drilling and blasting.Mining will be by contractor.Oxide and Enriched mineralised material will be send to the leach pad, Primary mineralised material will be send to a stockpile for possible later treatment and the waste is sent to the waste dumps.
The Underground mine is accessed by twin declines, developed from the wall of the open pit.Due to the high daily production rate required, the declines will use one way traffic to minimise traffic congestion. Pre-production development will excavate the twin declines down to the centre of the deposit and split to opposite ends of the deposit (see Figure 4, which indicates the Oxide material in green and Enriched in purple).
Once the top sublevel is established, the main ventilation raise can be driven to surface. Dual internal ramps will be driven down to the midpoint of the deposit at 15 Level.
The 15 Level will define the first horizon.Ventilation from the initial vent raise will be carried down through the sublevels from the top level to the first horizon.Production of the initial stopes will begin once the ventilation circuit is established.All the mined-out stopes on the 15 Level will be filled with cemented rock fill (“CRF”) to establish a sill pillar and separate the two mining horizons within the mine. While production mining on the 15 Level begins, development of the two internal ramps will continue to the lowest level where the second mining horizon can begin.
Metallurgical Test Work
Incomplete, inconsistent, unconvincing
Crux Investor is troubled by the metallurgical section of the PEA. Primarily there is a lack of clarity on the test work carried out on the Enriched (sulphide) material and the final recovery assumptions. Nomenclature is incomplete and inconsistent. Detail on the work carried out is lacking. Results are either poor or very poor, and yet the conclusions are deemed to be positive. Discussion about the test work and gaps in understanding is completely absent. Stantec does provides a caveat in stating that “the metallurgical testing program for the Cactus mine resources is ongoing, with preliminary testing completed in some areas”. But Stantec does not go on to explain the problems. Instead, it falls to Crux Investor to highlight the situation. Here goes.
Acid consumption figure discrepancies
The Stockpile test work all seems in order, with the work carried out on three samples of varying mineralogy, and both by Bottle Roll and by Column tests. The low-grade stockpile material responded well to leaching, giving recoveries in the range of 72%. Gross acid consumption was found to be 25-30 lb/t of material treated with net acid consumption (after recovery of acid returned from the SX/EW plant) suggested at 18-21 lb/t.
So far so good, but Crux Investor notes that the Stantec cash flow model uses acid consumption of 14.5 lb/t for the Oxide portion of the stockpile in years 1-5 and 13.4 lb/t for Enriched. Why was the lower acid consumption figure used? More information please.
Sulphide or Enriched?
The data on the Open Pit Materials is even more problematic. Remember the three basic types of mineralisation classifications? One is “Oxide” which is a mix of minerals that are not just oxides, but sulphates and silicates. One is “Enriched”, which is a mix of sulphides, primarily chalcocite with lesser digenite. [Chalcocite and digenite are sulphides, albeit secondary sulphides]. One category is “Primary”, which is also sulphides, mostly chalcopyrite.The PEA in not clear in its distinction between “Oxides and Enriched”, and “Oxides and Sulphides”.
Arizona Sonoran states that for Enriched Material recoveries are expected to be 72%. These are the recovery figures presented in the summary of the PEA, in the Mineral Processing Section of the PEA, and in the Cash Flow model used in the PEA.
Variable metallurgical testwork with low copper recoveries from sulphides
The 72% recovery assumption is not evident from metallurgical testwork to date. Bottle Roll test copper recoveries of 8.8% and 11.3% on enriched material. Two column tests on the same enriched material show copper recoveries after 200 days of one in the high 60s and the other in the low 50s. Crux Investor realises that the column testwork on the chalcocite ore was still in progress at the time of the PEA study. Figure 5, below, shows that the red and the green curves are still rising, which indicates that the leaching process was still active after 200 days.
For the PEA a projection forward to 720 days is made, and it is assumed the copper recovery is 72%. Crux Investors feels this is an aggressive suite of assumptions given the following reasons:
i) the end recovery date 720 days for 72% recovery is 3.6 times longer than the initial leach test – it is a very far-dated prediction
ii) 3 m column tests are not representative of the 6 m leach kinetics of the planned heap lifts
iii) Two samples are not representative of the mineralogy of the overall deposit
Much more metallurgical testwork needed
From the PEA it was evident that much, much more testwork is needed to establish the viability of leaching, whether bio- or not, for the sulphide material. This fact is especially critical given the make-up of the Parks/Salyer resource. Remember that the Parks/Salyer resource is predominantly enriched sulphide material. See Table 2, above. Of the 2.5 billion pounds of leachable copper at P/S, 2.2 billion pounds are in the Enriched material category.
Geometallurgical mapping is crucial
For any future economic study of the Cactus Project it is imperative that more metallurgical testwork is carried out on the leaching of chalcocite, Enriched resources. The testwork to date does not inspire confidence. In fairness, Arizona Sonoran seems to be addressing the problem with its work plan.
On 10 January 2023, Arizona Sonoran announced its plan for 2023. With regard to metallurgical testwork it includes testing twelve 20 ft (6 m) columns on site. The materials from the Stockpile, Cactus and P/S deposits have been separated into different rock types, copper grades and mineralogy for assessment. Additional materials from P/S are being prepared off-site for the ongoing testing program. Based on the Cactus met testing, Arizona Sonoran expects P/S to follow a similar timeline of 90-day oxide leach cycle, and ~200-day enriched material leach cycle. Using Figure 5 as a reference point, Crux Investor notes that the leach cycle may need to be longer still.
In addition to the twelve 20 ft columns, a further five 30 ft (9 m) columns will test both oxide and enriched materials from P/S and Cactus. Rio Tinto, a shareholder, will operate columns related to its proprietary Nuton leaching technologies.
Crux Investor takes little comfort from the test work carried out in the PEA on the enriched material. The results are contradictory and lack detailed discussion and analysis. For the sake of this Analysts’ Note, Crux Investor is taking a leap of faith that the enriched material will leach, because it is known that chalcocite and digenite are leachable in other operations worldwide. Crux Investor repeats that much more work is required. Experience from other copper heap leach projects indicates that detailed geometallurgical mapping is required. Each resource block needs to be mapped for mineralogy, recovery, and grade. Extensive testing for heap-leach processing is required.
Mineral Processing Options
Standard copper oxide heap-leach process flowsheet
The technical report indicates that two different leach pads are planned, one for Oxide material and another for Enriched material.The Oxide resources will be processed on a lined leach pad suitable for H2SO4 leaching. The Enriched materials will be processed on a second leach pad, employing bioleaching and H2SO4 technology. Note there is no discussion on how bioleaching will be performed.There is no information on things such as bacteria addition, curing time, nutrient addition, or the effectiveness of sulphide oxidation over time.
At this PEA level of analysis, no crushing is planned as test work shows that recovery is only affected at very coarse particle sizes.Placement of materials on the leach pads will be by truck dump-and-push methods.Surfaces will be ripped, and cross-ripped to a depth of 6 ft (~2 m) to minimise surface compaction and surface permeability degradation.Fresh materials will be placed over previously leached materials, in 20 ft (~6 m) lifts.The height of the leach material on the pad will eventually reach 200 ft (61 m) in overall height.
The pregnant leach solution (“PLS”) is collected in ponds and pumped from there to the SX/EW plant.First the solution in mixed with an organic solvent into which the copper is preferentially absorbed.Thereafter the enriched copper solution is rinsed by a concentrated acid solution to extract the copper, which solution is pumped to cells for electrowinning of copper onto cathodes.
Crux Investor has no especial faith in the process flowsheet proposed by Stantec in the PEA because of the lack of discussion around the metallurgical test work. Crux Investor accepts the flowsheet on the basis that it is a relatively standard process flowsheet for oxide copper.
Financial Modelling of The Cactus Project
Underground mining kicks in at Year 6
This study has considered two price cases.One case uses the metal prices in the PEA, allowing a comparison between the taxes as the study cash flow model and the PEA model. The second case using the spot prices on 10 February 2023 as Base Case for the study cash flow model.
Figure 6 shows the overall mine production of ore, waste and the copper grade mined over the LOM.
The advantage of the Cactus project is that no pre-stripping in the pre-production period is required. Waste stripping at the open pit occurs in Year 1 concurrently with treatment of stockpile material.Against that is the requirement of very high stripping in the early years to access open pit mineralisation.In Year 1 a total of 13.9 Mt waste releases only 0.4 Mt mineralised material.In Year 2 waste removal ramps up to 17.5 Mt releasing 1.29 Mt mineralised material.Peak waste removal is reached in Year 3 with 18.6 Mt releasing 3.1 Mt mineralized material.After Year 4 waste removal rapidly drops.
The mine plan for underground operations is expected to ramp up to an initial production rate of 3,500 tpd starting in Year 6 and reach a daily production of 7,000 tpd (2.5 Mtpa) in Year 8 until the end of LOM. To achieve this production rate, the deposit will be split into two mining horizons. Given the size of the deposit, both laterally and vertically, each mining horizon will be capable of 3,500 tpd.
Figure 7 gives the recoverable copper mine production from all sources over the LOM together with copper produced as cathode.
The graph shows that the copper production in the early years is around 25,000 short tons per year, increasing to 45,000-50,000 short tons between Year 8 and Year 12, dropping back to 30,000 short tons thereafter. A short ton is 2,000 lbs.
Operating Cost
Operating costs rise after Year 5 as underground mining kicks in
Table 4 shows the cost structure suggested in the PEA study and used for this valuation.
The PEA distinguishes cost rates in terms of two production phases: the first 6 years and the period thereafter. Crux Investor brings the change in costs one year earlier since the stockpile is forecast to be depleted halfway through Year 5.
Regular readers of Analysts Notes that Crux Investor focuses on operating costs used in economic study assumptions. Table 4 shows costs of $0.78/t and $0.50/t for ore and waste material respectively from the stockpile. Crux Investor agrees that the cost rate should be low compared to mining as no drilling and blasting is involved, but notes that there will be costs for grade control and some haulage and handling. Furthermore, when the work is outsourced, the contractor needs to recoup the investment in equipment and take a profit margin. Crux Investor uses an amended figure of $1.25/t and $0.75/t for ore and waste respectively.
Contract mining means lower upfront Capex but brings higher ongoing Opex
Similarly the open pit cost rates of $1.89/t initially and $2.57/t after five years are also low considering mining will be the responsibility of a contractor. Contractors effectively spread the financing cost of the equipment across the operating cost for the life of the equipment; with a profit margin. Crux Investor has amended the figures by adding approximately 10% to the PEA numbers, to arrive at open pit costs of ore and waste of $2.08/t initially and $2.83/t after five years.
The underground mining cost rates of $28.93/t of ore are low, but potentially achievable. Factors include the massive nature of the deposit which requires little in terms of development, the relatively short haulage distances, and low fuel costs in the United States.
Crux Investor takes a conservative approach to acid consumption and costs
Crux Investor is more concerned in the estimation of leaching costs.Estimated net acid consumption for both stockpile and open pit material (Oxide and Enriched combined) is indicated at 18 lb/t (Section 13.6.1 of the technical report). Yet for the cash flow model the PEA uses rates of 14.5 lb/t for the Oxide portion of the stockpile in years 1-5 and 13.4 lb/t for Enriched, dropping thereafter to 6.0 lb/t for Oxide and 1.0 lb/t for Enriched material. Even accounting for the possible of acid-generating sulphides as the heaps advance these feel like aggressive assumptions.
In addition, a cost discrepancy is evident. Back calculating from total cost and unit cost it seems the cost implications for acid in the PEA cash flow model assumes an average treatment rate of 17.8 Mtpa for the first 6 years. Elsewhere in the PEA cash flow model, the throughput is 18.5 Mtpa.Crux Investor has therefore increased the leaching cost for acid consumption only which adds $0.35/t processed in the first 5 years and $0.98/t thereafter.
Crux Investor does not have sufficient information to comment on the SX/EW cost rate and has adopted the PEA figure at face value.
The PEA study has modelled G&A expenditure as a function of milled throughput. This resulted in annual cost varying between $2.4 M and $3.8 M during the first 5 years.Considering that the expenses are almost all fixed, Crux Investor has modelled G&A expenses on an annual basis.Even for a very small and simple operation it is highly unlikely such cost can be below $4.0 M.Whereas the PEA considerably increases the cost rate after Year 5, the annual amount varies from $2.1 M to $10.7 M, which is not credible.Crux Investor has increased this to $10.0 M annually.
Corporate office cash expenditure was almost $6.4 M in 2021.Crux Investor has adopted this rate for its cash flow model as this valuation is of Arizona Sonoran and not the Cactus project alone.
Nothing of the capital provision stand out as not credible given the available information.
Crux Investor has provided for working capital peaking at $17.5 M and calculated taxes for the PEA case that are 17% lower than suggested by the PEA which uses an assumed tax rate of 24%.
Financial Model
Table 5 summarises the LOM results for both mining scenarios for base case metal prices and the input parameters set out above.
Using the PEA parameters the project has a very good operating margin of 52%.The higher operating cost rates of Crux Investor and inclusion of corporate expenses are more than compensated by a higher copper price of $4.09/lb in the model, raising the cash margin to more than 55%.Despite a tax model that results in higher overall taxes and the slightly higher capital expenditure numbers the net cash flow increases by almost 38%.The project looks very robust.
However, there is much uncertainty surrounding the cost inputs.A sensitivity analysis demonstrates that sensitivity to changes in operating cost is low (the NPV8 changes by 1.2% for a 1%-point change) and capital expenditure (the NPV8 changes by 0.8% for a 1%-point change). Should the operating cost be 15% higher and capital expenditure 25% higher, the NPV8 is still an attractive $278 M.
At the share price of C$1.89 on 10 February 2023 the diluted Enterprise Value is $107.8 M which is 76% lower than the NPV8 figure of $445.4 M. Whereas the share seems to be attractive based just on preliminary numbers for the Cactus deposits, there are a number of upsides such as inclusion of the Parks/Salyer deposit in the production plan and the prospects of two other identified exploration targets.Moreover, there may be a possibility for synergies with the Santa Cruz deposit of Ivanhoe Electric Incorporated (“Ivanhoe”) at short distance to the southwest.
Conclusion
Arizona Sonoran offers a mixed bag to the investor. On one level the historic work does not flatter the Company. Crux Investor feels that the PEA is a poor technical report, for a number of reasons. The amount of material to be mined – the Mineable Inventory – exceeds stated resource estimates in key areas. Metallurgical testwork is partial, incomplete, and badly explained. Forecast metallurgical recoveries are aggressive. Acid consumption forecasts are inconsistent with test work. Operating cost estimates from the PEA are too low. Crux Investor hopes that the forthcoming PFS report will be of a much higher quality.
Crux Investor stresses that much more metallurgical work is needed. Experience from other copper heap leach projects indicates that detailed geometallurgical mapping is required. Each resource block should be mapped for mineralogy, recovery, and grade.
Despite these concerns, fundamentally the overall Cactus project is encouraging. Crux Investor arrives at an NPV8 of $445 million (“M”) which is about four times the current Enterprise Value. At a copper price of $4.09/lb, the project is robust with a cash operating margin of 55%.
In addition, the Parks/Salyer deposit is large, relatively high grade, and it should be amenable to low-cost mineral processing. When P/S is included in the production plan it should enhance the economics of the overall project. The trajectory of the Company should be onwards and upwards.
If you are a Family Office investor, or an Institutional investor, and you would like the full report behind this article, please contact matthew@cruxinvestor.com
Executive Summary
Arizona Sonoran Copper Company (“ASCC”) (TSX:ASCU) is a Canadian company aiming to achieve mid-tier copper production status by developing the Cactus and Parks/Salyer Projects. Cactus was formerly ASARCO’s Sacaton mine that processed 38 million tonnes (“Mt”) of primary ore from 1974 to 1984.ASCC is planning to treat the oxidised and supergene enriched portions of the mineralisation overlying the primary mineralisation.Treatment will be by leaching of the material on heap leach pads followed by solvent extraction and electrowinning (“SX/EW”) to produce copper cathode..
After acquisition of the old mine and associated waste dumps in 2020, Arizona Sonoran, started technical studies and exploration. The waste dumps contain oxide material that has been reclassified as a Stockpile resource. Other resource areas initially included the old Cactus West open pit area, and underground potential at Cactus East. A 2021 Preliminary Economic Analysis (“PEA”) outlined a 17 year staged operation. The PEA development sequence starts with the Stockpile while preparing the old open-pit, then mining at the Cactus Mine West open pit and finally opening the Cactus Mine East underground. Recent exploration has been particularly successful at defining additional underground potential in the Parks / Salyer area (“P/S”). In September 2022 a revised Mineral Resource Estimate (“MRE”) expanded the overall project resource base and included maiden numbers for P/S. Resources currently stand at 2.5 Blbs of leachable copper (inferred) at Parks/Salyer and 1.1 Blbs (indicated) and 1.2 Blbs (inferred) of leachable copper at Cactus and Stockpile.
The plan in 2023 is to carry out exploration and infill drilling, metallurgy, and permitting de-risking steps. In Q4 2023 or Q1 2024, Arizona Sonoran will publish a Pre-Feasibility Study, integrating the P/S resources into the study. Management has indicated that development is likely to start at P/S and Stockpile, with work on the Open Pit coming later.
The Cactus project hard rock deposits are copper porphyries. Both the Cactus and Parks/Salyer deposits are characterised by a zonation that varies with depth. At the top there is a Leached zone devoid of copper, followed by an Oxide zone and a subsequent Enriched zone. The weathered zones overly fresh mineralisation which is not in the development plan at present.
Crux Investor feels that the PEA is a poor technical report, for a number of reasons. The amount of material to be mined – the Mineable Inventory – exceeds stated resource estimates in key areas. Metallurgical testwork is partial, incomplete, and badly explained. Forecast metallurgical recoveries are aggressive. Acid consumption forecasts are inconsistent with test work. Operating cost estimates from the PEA are too low. The resources estimate and PEA reports were prepared by Stantec Consulting Services Inc. (“Stantec”), a US-based engineering company. The PEA does not reflect well on Stantec. The report was signed off by Arizona Sonoran, and it does not reflect well on Arizona Sonoran either. Crux Investor hopes that the forthcoming PFS report will be of a much higher quality.
Crux Investor stresses that much more metallurgical work is needed. Experience from other copper heap leach projects indicates that detailed geometallurgical mapping is required. Each resource block should be mapped for mineralogy, recovery, and grade.
Despite these concerns, fundamentally the overall Cactus project is encouraging. Using a number of more conservative assumptions in addition to the basic parameters provided by the PEA, Crux Investor arrives at an NPV8 of $445 million (“M”). At a copper price of $4.09/lb, the project is robust with a cash operating margin of 55%.
At the share price of C$1.89 on 10 February 2023 the diluted Enterprise Value is $107.8 M which is 76% lower than the NPV8 figure of $445 M. Using just preliminary numbers for the Cactus deposits, the shares are attractive. The project will probably only improve with the inclusion of the Parks/Salyer deposit in the production plan. The high value of the Santa Cruz deposit of Ivanhoe Electric Incorporated (“Ivanhoe”) at a short distance to the southwest provides a good comparable valuation for Cactus.
Introduction
Arizona Sonoran Copper Company (“ASCC”) (TSX:ASCU) is a Canadian company aiming to achieve mid-tier copper production status by developing the Cactus and Parks/Salyer Projects. Cactus was formerly ASARCO’s Sacaton mine that processed 38 million tonnes (“Mt”) of primary ore from 1974 to 1984. ASCC is planning to treat the oxidised and supergene enriched portions of the mineralisation overlying the primary mineralisation.Treatment will be by leaching of the material on heap leach pads followed by solvent extraction and electrowinning (“SX/EW”) to produce copper cathode that is directly marketable.
After acquisition of the old mine and associated waste dumps in 2020, Arizona Sonoran, started technical studies and exploration. The waste dumps contain oxide material that has been reclassified as a Stockpile resource. Other resource areas initially included the old Cactus West open pit area, and underground potential at Cactus East. A 2021 Preliminary Economic Analysis (“PEA”) outlined a 17 year staged operation. The PEA development sequence starts with the Stockpile while preparing the old open-pit, then mining at the Cactus Mine West open pit and finally opening the Cactus Mine East underground.
Recent exploration has been particularly successful at defining additional underground potential in the Parks / Salyer area (“P/S”). In September 2022 a revised Mineral Resource Estimate (“MRE”) expanded the overall project resource base and included maiden numbers for P/S. Resources currently stand at 2.5 Blbs of leachable copper (inferred) at Parks/Salyer and 1.1 Blbs (indicated) and 1.2 Blbs (inferred) of leachable copper at Cactus and Stockpile.
The plan in 2023 is to carry out exploration and infill drilling, metallurgy, and permitting de-risking steps. In Q4 2023 or Q1 2024, Arizona Sonoran will publish a Pre-Feasibility Study, integrating the P/S resources into the study. Management has indicated that development is likely to start at P/S and Stockpile.
Location and Mineral Tenements
The “Cactus project” has been used as a catch-all name for the old waste dumps (now classified as “stockpiles”), the Cactus West and East deposits, the Parks/Salyer deposit and all exploration targets in the area.
The project area is located 40 road miles south southeast of the Greater Phoenix metropolitan area and approximately 3 miles northwest of the city of Casa Grande, Pinal County, Arizona (see Figure 1). Immediately to the southwest, Cactus abuts the start of Ivanhoe Electric Inc. (“Ivanhoe Electric”) Santa Cruz claims. Ivanhoe Electric is a $1.2 billion exploration and development company with a number of assets, including the flagship Santa Cruz copper deposit.
The area is well serviced by infrastructure. The total tenement area is currently approximately 4,850 acres of which the area within the PEA mine plan subject to 3.18% net smelter return (“NSR”) royalties.
Geology and Mineralisation
The Cactus project hard rock deposits are copper porphyries which have been displaced in a north-easterly direction along a shallow dipping Basement Fault. The Basement Fault has, in turn, been affected by cross cutting faults resulting in the deposits present in “horst” blocks. Horsts are raised fault blocks.
Figure 2, below, shows a plan view location of deposits along the northeast / southwest-trending mineralised corridor. The cross-section A-A’ is a good illustration of the deeper Santa Cruz deposit (owned by Ivanhoe Electric) to the southwest, followed by Parks/Salyer in the middle, and the Cactus West open pit profile visible on the right of the section. Cactus East mineralisation is the deeper portion on the very edge of the cross-section.
The geology in the area has a history of oxidation and leaching through weathering. Both the Cactus and Parks/Salyer deposits are characterised by a zonation that varies with depth. At the top there is a Leached zone devoid of copper, followed by an Oxide zone and a subsequent Enriched zone. The weathered zones overly fresh mineralisation.See Figure 3, below for a cross section through the deposits to illustrate this zonation.
In the Oxide zone, copper is predominantly present as chrysocolla, brochantite and malachite. Chrysocolla is a hydrated copper silicate, brochantite is a copper sulphate and malachite is a copper carbonate. All three minerals are acid soluble and can be leached to produce high purity copper cathode with conventional hydrometallurgical processing such as solvent-extraction / electro-winning (“SX/EW”).
In the Enriched zone, copper is largely present as chalcocite and in the primary zone as chalcopyrite. Both are sulphides. Chalcocite is especially copper-rich and it is cyanide soluble and can be partially leached by sulphuric acid to produce high purity copper purity cathode in an SX/EW plant.
Chalcopyrite readily upgrades to copper-sulphide concentrates, but cannot be leached by sulphuric acid under atmospheric conditions. To recover copper from the sulphides, a separate flotation plant would need to be built, to generate a sulphide concentrate. A flotation plant is not envisaged. Accordingly, the most important grade across all resources is not the total copper grade (“CuT”) but the soluble copper grades (“Cu Sol”), and within that acid soluble (“CuAS”) and cyanide soluble (“CuCN”).
Mineral Resources
An understandable evolution
The mineral resources at Cactus were calculated at two separate dates and using two different copper prices. The Cactus resource estimation, which includes the stockpiles, dates from 31 August 2021 and uses a copper price of $3.15/lb. The Parks/Salyer estimate dates from 26 September 2022 and uses a price of $3.75/lb.Crux Investor has cross-checked that the cut-off grades applied reflect the different input assumptions.
Both resource estimates and the PEA were prepared by Stantec Consulting Services Inc. (“Stantec”), a US-based engineering company.
Table 1, below, shows a complete resource statement for the Stockpiles and the Cactus deposits, compiled by Crux Investor analysts.The tons are short tons, not metric tonnes.
Note that the bulk of the resource lies within the open pit (2,860 Mlbs of copper), of which 1,590 Mlbs Cu is classified as leachable, with a grade of 0.48% Cu Sol. The underground portion of the resource is relatively small, at 515 Mlbs Cu.
Table 2 shows the Inferred resources estimated for Parks/Salyer, effective 26 September 2022. Note the grade and the size of the resources amenable to SX/EW leaching. The Parks/Salyer deposit is potentially at least as important a contributor to leachable copper resources as the Cactus West open pit, but at much higher grade.
Mineable Inventory
Unexplained discrepancies with Resource Estimates
No reserves have yet been defined at Cactus. The project is at the PEA level of de-risking, and can use Inferred Resources in projections of Mineable Inventory. Remember that inferred resources cannot be used in studies at the Pre-Feasibility level of de-risking or higher. Pre-Feasibility Studies must use Measured and Indicated Resource categories to define Reserves.
The Mineable Inventory included in the PEA schedule only includes the leachable portion of the mineral resources at Cactus and Stockpile: Oxide and Enriched mineralisation.
Note that the Parks/Salyer resource estimate had an effective date of September 2022, but the PEA was published over a year earlier in August 2021. Accordingly, Parks/Salyer does not contribute to the mineable inventory in the PEA.
Conversion rates are inconsistent
Crux Investor has compared the material that is included in the PEA mineable inventory category (Table 3, below) against the material in the resource estimate (Table 1, above) to determine the ratios for tonnage, grade and contained metal: the conversion rates. It is a measure of how much of the resource estimate is going to be mined and at what grade. The conversion rates are shown in Table 3, below.
For reasons not explained there are several serious discrepancies between the Resource Estimate (Table 1) and the Mineable Inventory (Table 3).Note that the Mineable Inventory tables in the PEA do not distinguish between Indicated and Inferred resources for underground mining. Therefore, Crux Investor can only calculate the conversion rates for the aggregated resource totals.
More stockpile mined in the PEA than is in the Resource Estimate
The first discrepancy evident from the Table 3 is that mineable inventory of Stockpile (taken from table 17-1 of the PEA) is 81.2 Mt, which is larger than the available resource figure of 77.4 Mt (taken from Table 14-9 of the PEA). How can the amount of material and the amount of contained copper that is mined exceed the resource base? The conversion rates are 106 (6%) and 104 (4%) for Tons and Contained Soluble Copper respectively.
Moving on to the Open Pit, another discrepancy arises. The conversion factors for the Open Pit resources show that both the amount of material and the grade in mineable inventory are much lower than for the figures shown in the resources statement.Table 1 shows Leachable open pit resources of 166 Mt at a grade of 0.48 % Cu Sol, for 1,590 Mlbs of soluble copper. Table 3 shows the PEA plans to mine 70 Mt at a grade of 0.26 % Cu Sol, for 370 Mlbs of soluble copper. In other words, the PEA is only going to target 20% of the accessible copper from the resource estimate. More information please.
An unexplained drop in open pit grade
And why is the grade so much lower? The cut-off grades used for mineable inventory are only slightly lower than those for mineral resources and dilution from bulk-tonnage open-pit mining is usually relatively low, probably below 5%. The grade difference in the mine-plan is approximately 29% lower than the grade in the mineral resource estimate. More information please.
>2x Enriched underground ore in the mine plan as there is in the resource estimate
The numbers for the underground portion of the schedule proposed in the PEA are perhaps the most problematic. For Cactus East, Table 1 shows a resource of 25.6 Mt at a grade of 0.9 % Cu Sol, for 462 Mlbs of contained soluble copper. Stantec, in the PEA, proposes processing greater quantities of higher-grade ore, as shown in Table 3 below: 27.5 Mt at a grade of 1.24 % Cu Sol, for 684 Mlbs of contained soluble copper. Going into even greater detail on the comparison between Table 1 and Table 3 it is evident that the amount of underground oxide material accessed is much less than is contained in the resource estimate, just 45% of the total. And that the mine plan includes accessing more than twice the amount of enriched mineralisation than is in the resource estimate. How does that work? This is a major discrepancy that needs to be explained.
Garbage in, Garbage out?
With inadequate explanation of the relationship between the resource statement and the mineable inventory, the input into the PEA is highly questionable. Garbage in, garbage out? The discrepancies between resources and mineable inventory place a question mark behind the economic assessment of the PEA. More information please.
Mining Operations
Conventional and standard
The mining methods proposed in the PEA are conventional. Crux Investor accepts the mining operation at face value.
The Stockpile is planned to be mined in the early years by a contractor with its own dedicated mine fleet.The average haul distance to the leach pads is 2,440 m, which is substantial for the grade of the material. Material will be removed from the Stockpile Project from a series of sequenced production faces.
Open Pit mining is planned as a conventional drill-blast-haul open pit operation. The overburden does not require drilling and blasting.Mining will be by contractor.Oxide and Enriched mineralised material will be send to the leach pad, Primary mineralised material will be send to a stockpile for possible later treatment and the waste is sent to the waste dumps.
The Underground mine is accessed by twin declines, developed from the wall of the open pit.Due to the high daily production rate required, the declines will use one way traffic to minimise traffic congestion. Pre-production development will excavate the twin declines down to the centre of the deposit and split to opposite ends of the deposit (see Figure 4, which indicates the Oxide material in green and Enriched in purple).
Once the top sublevel is established, the main ventilation raise can be driven to surface. Dual internal ramps will be driven down to the midpoint of the deposit at 15 Level.
The 15 Level will define the first horizon.Ventilation from the initial vent raise will be carried down through the sublevels from the top level to the first horizon.Production of the initial stopes will begin once the ventilation circuit is established.All the mined-out stopes on the 15 Level will be filled with cemented rock fill (“CRF”) to establish a sill pillar and separate the two mining horizons within the mine. While production mining on the 15 Level begins, development of the two internal ramps will continue to the lowest level where the second mining horizon can begin.
Metallurgical Test Work
Incomplete, inconsistent, unconvincing
Crux Investor is troubled by the metallurgical section of the PEA. Primarily there is a lack of clarity on the test work carried out on the Enriched (sulphide) material and the final recovery assumptions. Nomenclature is incomplete and inconsistent. Detail on the work carried out is lacking. Results are either poor or very poor, and yet the conclusions are deemed to be positive. Discussion about the test work and gaps in understanding is completely absent. Stantec does provides a caveat in stating that “the metallurgical testing program for the Cactus mine resources is ongoing, with preliminary testing completed in some areas”. But Stantec does not go on to explain the problems. Instead, it falls to Crux Investor to highlight the situation. Here goes.
Acid consumption figure discrepancies
The Stockpile test work all seems in order, with the work carried out on three samples of varying mineralogy, and both by Bottle Roll and by Column tests. The low-grade stockpile material responded well to leaching, giving recoveries in the range of 72%. Gross acid consumption was found to be 25-30 lb/t of material treated with net acid consumption (after recovery of acid returned from the SX/EW plant) suggested at 18-21 lb/t.
So far so good, but Crux Investor notes that the Stantec cash flow model uses acid consumption of 14.5 lb/t for the Oxide portion of the stockpile in years 1-5 and 13.4 lb/t for Enriched. Why was the lower acid consumption figure used? More information please.
Sulphide or Enriched?
The data on the Open Pit Materials is even more problematic. Remember the three basic types of mineralisation classifications? One is “Oxide” which is a mix of minerals that are not just oxides, but sulphates and silicates. One is “Enriched”, which is a mix of sulphides, primarily chalcocite with lesser digenite. [Chalcocite and digenite are sulphides, albeit secondary sulphides]. One category is “Primary”, which is also sulphides, mostly chalcopyrite.The PEA in not clear in its distinction between “Oxides and Enriched”, and “Oxides and Sulphides”.
Arizona Sonoran states that for Enriched Material recoveries are expected to be 72%. These are the recovery figures presented in the summary of the PEA, in the Mineral Processing Section of the PEA, and in the Cash Flow model used in the PEA.
Variable metallurgical testwork with low copper recoveries from sulphides
The 72% recovery assumption is not evident from metallurgical testwork to date. Bottle Roll test copper recoveries of 8.8% and 11.3% on enriched material. Two column tests on the same enriched material show copper recoveries after 200 days of one in the high 60s and the other in the low 50s. Crux Investor realises that the column testwork on the chalcocite ore was still in progress at the time of the PEA study. Figure 5, below, shows that the red and the green curves are still rising, which indicates that the leaching process was still active after 200 days.
For the PEA a projection forward to 720 days is made, and it is assumed the copper recovery is 72%. Crux Investors feels this is an aggressive suite of assumptions given the following reasons:
i) the end recovery date 720 days for 72% recovery is 3.6 times longer than the initial leach test – it is a very far-dated prediction
ii) 3 m column tests are not representative of the 6 m leach kinetics of the planned heap lifts
iii) Two samples are not representative of the mineralogy of the overall deposit
Much more metallurgical testwork needed
From the PEA it was evident that much, much more testwork is needed to establish the viability of leaching, whether bio- or not, for the sulphide material. This fact is especially critical given the make-up of the Parks/Salyer resource. Remember that the Parks/Salyer resource is predominantly enriched sulphide material. See Table 2, above. Of the 2.5 billion pounds of leachable copper at P/S, 2.2 billion pounds are in the Enriched material category.
Geometallurgical mapping is crucial
For any future economic study of the Cactus Project it is imperative that more metallurgical testwork is carried out on the leaching of chalcocite, Enriched resources. The testwork to date does not inspire confidence. In fairness, Arizona Sonoran seems to be addressing the problem with its work plan.
On 10 January 2023, Arizona Sonoran announced its plan for 2023. With regard to metallurgical testwork it includes testing twelve 20 ft (6 m) columns on site. The materials from the Stockpile, Cactus and P/S deposits have been separated into different rock types, copper grades and mineralogy for assessment. Additional materials from P/S are being prepared off-site for the ongoing testing program. Based on the Cactus met testing, Arizona Sonoran expects P/S to follow a similar timeline of 90-day oxide leach cycle, and ~200-day enriched material leach cycle. Using Figure 5 as a reference point, Crux Investor notes that the leach cycle may need to be longer still.
In addition to the twelve 20 ft columns, a further five 30 ft (9 m) columns will test both oxide and enriched materials from P/S and Cactus. Rio Tinto, a shareholder, will operate columns related to its proprietary Nuton leaching technologies.
Crux Investor takes little comfort from the test work carried out in the PEA on the enriched material. The results are contradictory and lack detailed discussion and analysis. For the sake of this Analysts’ Note, Crux Investor is taking a leap of faith that the enriched material will leach, because it is known that chalcocite and digenite are leachable in other operations worldwide. Crux Investor repeats that much more work is required. Experience from other copper heap leach projects indicates that detailed geometallurgical mapping is required. Each resource block needs to be mapped for mineralogy, recovery, and grade. Extensive testing for heap-leach processing is required.
Mineral Processing Options
Standard copper oxide heap-leach process flowsheet
The technical report indicates that two different leach pads are planned, one for Oxide material and another for Enriched material.The Oxide resources will be processed on a lined leach pad suitable for H2SO4 leaching. The Enriched materials will be processed on a second leach pad, employing bioleaching and H2SO4 technology. Note there is no discussion on how bioleaching will be performed.There is no information on things such as bacteria addition, curing time, nutrient addition, or the effectiveness of sulphide oxidation over time.
At this PEA level of analysis, no crushing is planned as test work shows that recovery is only affected at very coarse particle sizes.Placement of materials on the leach pads will be by truck dump-and-push methods.Surfaces will be ripped, and cross-ripped to a depth of 6 ft (~2 m) to minimise surface compaction and surface permeability degradation.Fresh materials will be placed over previously leached materials, in 20 ft (~6 m) lifts.The height of the leach material on the pad will eventually reach 200 ft (61 m) in overall height.
The pregnant leach solution (“PLS”) is collected in ponds and pumped from there to the SX/EW plant.First the solution in mixed with an organic solvent into which the copper is preferentially absorbed.Thereafter the enriched copper solution is rinsed by a concentrated acid solution to extract the copper, which solution is pumped to cells for electrowinning of copper onto cathodes.
Crux Investor has no especial faith in the process flowsheet proposed by Stantec in the PEA because of the lack of discussion around the metallurgical test work. Crux Investor accepts the flowsheet on the basis that it is a relatively standard process flowsheet for oxide copper.
Financial Modelling of The Cactus Project
Underground mining kicks in at Year 6
This study has considered two price cases.One case uses the metal prices in the PEA, allowing a comparison between the taxes as the study cash flow model and the PEA model. The second case using the spot prices on 10 February 2023 as Base Case for the study cash flow model.
Figure 6 shows the overall mine production of ore, waste and the copper grade mined over the LOM.
The advantage of the Cactus project is that no pre-stripping in the pre-production period is required. Waste stripping at the open pit occurs in Year 1 concurrently with treatment of stockpile material.Against that is the requirement of very high stripping in the early years to access open pit mineralisation.In Year 1 a total of 13.9 Mt waste releases only 0.4 Mt mineralised material.In Year 2 waste removal ramps up to 17.5 Mt releasing 1.29 Mt mineralised material.Peak waste removal is reached in Year 3 with 18.6 Mt releasing 3.1 Mt mineralized material.After Year 4 waste removal rapidly drops.
The mine plan for underground operations is expected to ramp up to an initial production rate of 3,500 tpd starting in Year 6 and reach a daily production of 7,000 tpd (2.5 Mtpa) in Year 8 until the end of LOM. To achieve this production rate, the deposit will be split into two mining horizons. Given the size of the deposit, both laterally and vertically, each mining horizon will be capable of 3,500 tpd.
Figure 7 gives the recoverable copper mine production from all sources over the LOM together with copper produced as cathode.
The graph shows that the copper production in the early years is around 25,000 short tons per year, increasing to 45,000-50,000 short tons between Year 8 and Year 12, dropping back to 30,000 short tons thereafter. A short ton is 2,000 lbs.
Operating Cost
Operating costs rise after Year 5 as underground mining kicks in
Table 4 shows the cost structure suggested in the PEA study and used for this valuation.
The PEA distinguishes cost rates in terms of two production phases: the first 6 years and the period thereafter. Crux Investor brings the change in costs one year earlier since the stockpile is forecast to be depleted halfway through Year 5.
Regular readers of Analysts Notes that Crux Investor focuses on operating costs used in economic study assumptions. Table 4 shows costs of $0.78/t and $0.50/t for ore and waste material respectively from the stockpile. Crux Investor agrees that the cost rate should be low compared to mining as no drilling and blasting is involved, but notes that there will be costs for grade control and some haulage and handling. Furthermore, when the work is outsourced, the contractor needs to recoup the investment in equipment and take a profit margin. Crux Investor uses an amended figure of $1.25/t and $0.75/t for ore and waste respectively.
Contract mining means lower upfront Capex but brings higher ongoing Opex
Similarly the open pit cost rates of $1.89/t initially and $2.57/t after five years are also low considering mining will be the responsibility of a contractor. Contractors effectively spread the financing cost of the equipment across the operating cost for the life of the equipment; with a profit margin. Crux Investor has amended the figures by adding approximately 10% to the PEA numbers, to arrive at open pit costs of ore and waste of $2.08/t initially and $2.83/t after five years.
The underground mining cost rates of $28.93/t of ore are low, but potentially achievable. Factors include the massive nature of the deposit which requires little in terms of development, the relatively short haulage distances, and low fuel costs in the United States.
Crux Investor takes a conservative approach to acid consumption and costs
Crux Investor is more concerned in the estimation of leaching costs.Estimated net acid consumption for both stockpile and open pit material (Oxide and Enriched combined) is indicated at 18 lb/t (Section 13.6.1 of the technical report). Yet for the cash flow model the PEA uses rates of 14.5 lb/t for the Oxide portion of the stockpile in years 1-5 and 13.4 lb/t for Enriched, dropping thereafter to 6.0 lb/t for Oxide and 1.0 lb/t for Enriched material. Even accounting for the possible of acid-generating sulphides as the heaps advance these feel like aggressive assumptions.
In addition, a cost discrepancy is evident. Back calculating from total cost and unit cost it seems the cost implications for acid in the PEA cash flow model assumes an average treatment rate of 17.8 Mtpa for the first 6 years. Elsewhere in the PEA cash flow model, the throughput is 18.5 Mtpa.Crux Investor has therefore increased the leaching cost for acid consumption only which adds $0.35/t processed in the first 5 years and $0.98/t thereafter.
Crux Investor does not have sufficient information to comment on the SX/EW cost rate and has adopted the PEA figure at face value.
The PEA study has modelled G&A expenditure as a function of milled throughput. This resulted in annual cost varying between $2.4 M and $3.8 M during the first 5 years.Considering that the expenses are almost all fixed, Crux Investor has modelled G&A expenses on an annual basis.Even for a very small and simple operation it is highly unlikely such cost can be below $4.0 M.Whereas the PEA considerably increases the cost rate after Year 5, the annual amount varies from $2.1 M to $10.7 M, which is not credible.Crux Investor has increased this to $10.0 M annually.
Corporate office cash expenditure was almost $6.4 M in 2021.Crux Investor has adopted this rate for its cash flow model as this valuation is of Arizona Sonoran and not the Cactus project alone.
Nothing of the capital provision stand out as not credible given the available information.
Crux Investor has provided for working capital peaking at $17.5 M and calculated taxes for the PEA case that are 17% lower than suggested by the PEA which uses an assumed tax rate of 24%.
Financial Model
Table 5 summarises the LOM results for both mining scenarios for base case metal prices and the input parameters set out above.
Using the PEA parameters the project has a very good operating margin of 52%.The higher operating cost rates of Crux Investor and inclusion of corporate expenses are more than compensated by a higher copper price of $4.09/lb in the model, raising the cash margin to more than 55%.Despite a tax model that results in higher overall taxes and the slightly higher capital expenditure numbers the net cash flow increases by almost 38%.The project looks very robust.
However, there is much uncertainty surrounding the cost inputs.A sensitivity analysis demonstrates that sensitivity to changes in operating cost is low (the NPV8 changes by 1.2% for a 1%-point change) and capital expenditure (the NPV8 changes by 0.8% for a 1%-point change). Should the operating cost be 15% higher and capital expenditure 25% higher, the NPV8 is still an attractive $278 M.
At the share price of C$1.89 on 10 February 2023 the diluted Enterprise Value is $107.8 M which is 76% lower than the NPV8 figure of $445.4 M. Whereas the share seems to be attractive based just on preliminary numbers for the Cactus deposits, there are a number of upsides such as inclusion of the Parks/Salyer deposit in the production plan and the prospects of two other identified exploration targets.Moreover, there may be a possibility for synergies with the Santa Cruz deposit of Ivanhoe Electric Incorporated (“Ivanhoe”) at short distance to the southwest.
Conclusion
Arizona Sonoran offers a mixed bag to the investor. On one level the historic work does not flatter the Company. Crux Investor feels that the PEA is a poor technical report, for a number of reasons. The amount of material to be mined – the Mineable Inventory – exceeds stated resource estimates in key areas. Metallurgical testwork is partial, incomplete, and badly explained. Forecast metallurgical recoveries are aggressive. Acid consumption forecasts are inconsistent with test work. Operating cost estimates from the PEA are too low. Crux Investor hopes that the forthcoming PFS report will be of a much higher quality.
Crux Investor stresses that much more metallurgical work is needed. Experience from other copper heap leach projects indicates that detailed geometallurgical mapping is required. Each resource block should be mapped for mineralogy, recovery, and grade.
Despite these concerns, fundamentally the overall Cactus project is encouraging. Crux Investor arrives at an NPV8 of $445 million (“M”) which is about four times the current Enterprise Value. At a copper price of $4.09/lb, the project is robust with a cash operating margin of 55%.
In addition, the Parks/Salyer deposit is large, relatively high grade, and it should be amenable to low-cost mineral processing. When P/S is included in the production plan it should enhance the economics of the overall project. The trajectory of the Company should be onwards and upwards.
If you are a Family Office investor, or an Institutional investor, and you would like the full report behind this article, please contact matthew@cruxinvestor.com
Executive Summary
Arizona Sonoran Copper Company (“ASCC”) (TSX:ASCU) is a Canadian company aiming to achieve mid-tier copper production status by developing the Cactus and Parks/Salyer Projects. Cactus was formerly ASARCO’s Sacaton mine that processed 38 million tonnes (“Mt”) of primary ore from 1974 to 1984.ASCC is planning to treat the oxidised and supergene enriched portions of the mineralisation overlying the primary mineralisation.Treatment will be by leaching of the material on heap leach pads followed by solvent extraction and electrowinning (“SX/EW”) to produce copper cathode..
After acquisition of the old mine and associated waste dumps in 2020, Arizona Sonoran, started technical studies and exploration. The waste dumps contain oxide material that has been reclassified as a Stockpile resource. Other resource areas initially included the old Cactus West open pit area, and underground potential at Cactus East. A 2021 Preliminary Economic Analysis (“PEA”) outlined a 17 year staged operation. The PEA development sequence starts with the Stockpile while preparing the old open-pit, then mining at the Cactus Mine West open pit and finally opening the Cactus Mine East underground. Recent exploration has been particularly successful at defining additional underground potential in the Parks / Salyer area (“P/S”). In September 2022 a revised Mineral Resource Estimate (“MRE”) expanded the overall project resource base and included maiden numbers for P/S. Resources currently stand at 2.5 Blbs of leachable copper (inferred) at Parks/Salyer and 1.1 Blbs (indicated) and 1.2 Blbs (inferred) of leachable copper at Cactus and Stockpile.
The plan in 2023 is to carry out exploration and infill drilling, metallurgy, and permitting de-risking steps. In Q4 2023 or Q1 2024, Arizona Sonoran will publish a Pre-Feasibility Study, integrating the P/S resources into the study. Management has indicated that development is likely to start at P/S and Stockpile, with work on the Open Pit coming later.
The Cactus project hard rock deposits are copper porphyries. Both the Cactus and Parks/Salyer deposits are characterised by a zonation that varies with depth. At the top there is a Leached zone devoid of copper, followed by an Oxide zone and a subsequent Enriched zone. The weathered zones overly fresh mineralisation which is not in the development plan at present.
Crux Investor feels that the PEA is a poor technical report, for a number of reasons. The amount of material to be mined – the Mineable Inventory – exceeds stated resource estimates in key areas. Metallurgical testwork is partial, incomplete, and badly explained. Forecast metallurgical recoveries are aggressive. Acid consumption forecasts are inconsistent with test work. Operating cost estimates from the PEA are too low. The resources estimate and PEA reports were prepared by Stantec Consulting Services Inc. (“Stantec”), a US-based engineering company. The PEA does not reflect well on Stantec. The report was signed off by Arizona Sonoran, and it does not reflect well on Arizona Sonoran either. Crux Investor hopes that the forthcoming PFS report will be of a much higher quality.
Crux Investor stresses that much more metallurgical work is needed. Experience from other copper heap leach projects indicates that detailed geometallurgical mapping is required. Each resource block should be mapped for mineralogy, recovery, and grade.
Despite these concerns, fundamentally the overall Cactus project is encouraging. Using a number of more conservative assumptions in addition to the basic parameters provided by the PEA, Crux Investor arrives at an NPV8 of $445 million (“M”). At a copper price of $4.09/lb, the project is robust with a cash operating margin of 55%.
At the share price of C$1.89 on 10 February 2023 the diluted Enterprise Value is $107.8 M which is 76% lower than the NPV8 figure of $445 M. Using just preliminary numbers for the Cactus deposits, the shares are attractive. The project will probably only improve with the inclusion of the Parks/Salyer deposit in the production plan. The high value of the Santa Cruz deposit of Ivanhoe Electric Incorporated (“Ivanhoe”) at a short distance to the southwest provides a good comparable valuation for Cactus.
Introduction
Arizona Sonoran Copper Company (“ASCC”) (TSX:ASCU) is a Canadian company aiming to achieve mid-tier copper production status by developing the Cactus and Parks/Salyer Projects. Cactus was formerly ASARCO’s Sacaton mine that processed 38 million tonnes (“Mt”) of primary ore from 1974 to 1984. ASCC is planning to treat the oxidised and supergene enriched portions of the mineralisation overlying the primary mineralisation.Treatment will be by leaching of the material on heap leach pads followed by solvent extraction and electrowinning (“SX/EW”) to produce copper cathode that is directly marketable.
After acquisition of the old mine and associated waste dumps in 2020, Arizona Sonoran, started technical studies and exploration. The waste dumps contain oxide material that has been reclassified as a Stockpile resource. Other resource areas initially included the old Cactus West open pit area, and underground potential at Cactus East. A 2021 Preliminary Economic Analysis (“PEA”) outlined a 17 year staged operation. The PEA development sequence starts with the Stockpile while preparing the old open-pit, then mining at the Cactus Mine West open pit and finally opening the Cactus Mine East underground.
Recent exploration has been particularly successful at defining additional underground potential in the Parks / Salyer area (“P/S”). In September 2022 a revised Mineral Resource Estimate (“MRE”) expanded the overall project resource base and included maiden numbers for P/S. Resources currently stand at 2.5 Blbs of leachable copper (inferred) at Parks/Salyer and 1.1 Blbs (indicated) and 1.2 Blbs (inferred) of leachable copper at Cactus and Stockpile.
The plan in 2023 is to carry out exploration and infill drilling, metallurgy, and permitting de-risking steps. In Q4 2023 or Q1 2024, Arizona Sonoran will publish a Pre-Feasibility Study, integrating the P/S resources into the study. Management has indicated that development is likely to start at P/S and Stockpile.
Location and Mineral Tenements
The “Cactus project” has been used as a catch-all name for the old waste dumps (now classified as “stockpiles”), the Cactus West and East deposits, the Parks/Salyer deposit and all exploration targets in the area.
The project area is located 40 road miles south southeast of the Greater Phoenix metropolitan area and approximately 3 miles northwest of the city of Casa Grande, Pinal County, Arizona (see Figure 1). Immediately to the southwest, Cactus abuts the start of Ivanhoe Electric Inc. (“Ivanhoe Electric”) Santa Cruz claims. Ivanhoe Electric is a $1.2 billion exploration and development company with a number of assets, including the flagship Santa Cruz copper deposit.
The area is well serviced by infrastructure. The total tenement area is currently approximately 4,850 acres of which the area within the PEA mine plan subject to 3.18% net smelter return (“NSR”) royalties.
Geology and Mineralisation
The Cactus project hard rock deposits are copper porphyries which have been displaced in a north-easterly direction along a shallow dipping Basement Fault. The Basement Fault has, in turn, been affected by cross cutting faults resulting in the deposits present in “horst” blocks. Horsts are raised fault blocks.
Figure 2, below, shows a plan view location of deposits along the northeast / southwest-trending mineralised corridor. The cross-section A-A’ is a good illustration of the deeper Santa Cruz deposit (owned by Ivanhoe Electric) to the southwest, followed by Parks/Salyer in the middle, and the Cactus West open pit profile visible on the right of the section. Cactus East mineralisation is the deeper portion on the very edge of the cross-section.
The geology in the area has a history of oxidation and leaching through weathering. Both the Cactus and Parks/Salyer deposits are characterised by a zonation that varies with depth. At the top there is a Leached zone devoid of copper, followed by an Oxide zone and a subsequent Enriched zone. The weathered zones overly fresh mineralisation.See Figure 3, below for a cross section through the deposits to illustrate this zonation.
In the Oxide zone, copper is predominantly present as chrysocolla, brochantite and malachite. Chrysocolla is a hydrated copper silicate, brochantite is a copper sulphate and malachite is a copper carbonate. All three minerals are acid soluble and can be leached to produce high purity copper cathode with conventional hydrometallurgical processing such as solvent-extraction / electro-winning (“SX/EW”).
In the Enriched zone, copper is largely present as chalcocite and in the primary zone as chalcopyrite. Both are sulphides. Chalcocite is especially copper-rich and it is cyanide soluble and can be partially leached by sulphuric acid to produce high purity copper purity cathode in an SX/EW plant.
Chalcopyrite readily upgrades to copper-sulphide concentrates, but cannot be leached by sulphuric acid under atmospheric conditions. To recover copper from the sulphides, a separate flotation plant would need to be built, to generate a sulphide concentrate. A flotation plant is not envisaged. Accordingly, the most important grade across all resources is not the total copper grade (“CuT”) but the soluble copper grades (“Cu Sol”), and within that acid soluble (“CuAS”) and cyanide soluble (“CuCN”).
Mineral Resources
An understandable evolution
The mineral resources at Cactus were calculated at two separate dates and using two different copper prices. The Cactus resource estimation, which includes the stockpiles, dates from 31 August 2021 and uses a copper price of $3.15/lb. The Parks/Salyer estimate dates from 26 September 2022 and uses a price of $3.75/lb.Crux Investor has cross-checked that the cut-off grades applied reflect the different input assumptions.
Both resource estimates and the PEA were prepared by Stantec Consulting Services Inc. (“Stantec”), a US-based engineering company.
Table 1, below, shows a complete resource statement for the Stockpiles and the Cactus deposits, compiled by Crux Investor analysts.The tons are short tons, not metric tonnes.
Note that the bulk of the resource lies within the open pit (2,860 Mlbs of copper), of which 1,590 Mlbs Cu is classified as leachable, with a grade of 0.48% Cu Sol. The underground portion of the resource is relatively small, at 515 Mlbs Cu.
Table 2 shows the Inferred resources estimated for Parks/Salyer, effective 26 September 2022. Note the grade and the size of the resources amenable to SX/EW leaching. The Parks/Salyer deposit is potentially at least as important a contributor to leachable copper resources as the Cactus West open pit, but at much higher grade.
Mineable Inventory
Unexplained discrepancies with Resource Estimates
No reserves have yet been defined at Cactus. The project is at the PEA level of de-risking, and can use Inferred Resources in projections of Mineable Inventory. Remember that inferred resources cannot be used in studies at the Pre-Feasibility level of de-risking or higher. Pre-Feasibility Studies must use Measured and Indicated Resource categories to define Reserves.
The Mineable Inventory included in the PEA schedule only includes the leachable portion of the mineral resources at Cactus and Stockpile: Oxide and Enriched mineralisation.
Note that the Parks/Salyer resource estimate had an effective date of September 2022, but the PEA was published over a year earlier in August 2021. Accordingly, Parks/Salyer does not contribute to the mineable inventory in the PEA.
Conversion rates are inconsistent
Crux Investor has compared the material that is included in the PEA mineable inventory category (Table 3, below) against the material in the resource estimate (Table 1, above) to determine the ratios for tonnage, grade and contained metal: the conversion rates. It is a measure of how much of the resource estimate is going to be mined and at what grade. The conversion rates are shown in Table 3, below.
For reasons not explained there are several serious discrepancies between the Resource Estimate (Table 1) and the Mineable Inventory (Table 3).Note that the Mineable Inventory tables in the PEA do not distinguish between Indicated and Inferred resources for underground mining. Therefore, Crux Investor can only calculate the conversion rates for the aggregated resource totals.
More stockpile mined in the PEA than is in the Resource Estimate
The first discrepancy evident from the Table 3 is that mineable inventory of Stockpile (taken from table 17-1 of the PEA) is 81.2 Mt, which is larger than the available resource figure of 77.4 Mt (taken from Table 14-9 of the PEA). How can the amount of material and the amount of contained copper that is mined exceed the resource base? The conversion rates are 106 (6%) and 104 (4%) for Tons and Contained Soluble Copper respectively.
Moving on to the Open Pit, another discrepancy arises. The conversion factors for the Open Pit resources show that both the amount of material and the grade in mineable inventory are much lower than for the figures shown in the resources statement.Table 1 shows Leachable open pit resources of 166 Mt at a grade of 0.48 % Cu Sol, for 1,590 Mlbs of soluble copper. Table 3 shows the PEA plans to mine 70 Mt at a grade of 0.26 % Cu Sol, for 370 Mlbs of soluble copper. In other words, the PEA is only going to target 20% of the accessible copper from the resource estimate. More information please.
An unexplained drop in open pit grade
And why is the grade so much lower? The cut-off grades used for mineable inventory are only slightly lower than those for mineral resources and dilution from bulk-tonnage open-pit mining is usually relatively low, probably below 5%. The grade difference in the mine-plan is approximately 29% lower than the grade in the mineral resource estimate. More information please.
>2x Enriched underground ore in the mine plan as there is in the resource estimate
The numbers for the underground portion of the schedule proposed in the PEA are perhaps the most problematic. For Cactus East, Table 1 shows a resource of 25.6 Mt at a grade of 0.9 % Cu Sol, for 462 Mlbs of contained soluble copper. Stantec, in the PEA, proposes processing greater quantities of higher-grade ore, as shown in Table 3 below: 27.5 Mt at a grade of 1.24 % Cu Sol, for 684 Mlbs of contained soluble copper. Going into even greater detail on the comparison between Table 1 and Table 3 it is evident that the amount of underground oxide material accessed is much less than is contained in the resource estimate, just 45% of the total. And that the mine plan includes accessing more than twice the amount of enriched mineralisation than is in the resource estimate. How does that work? This is a major discrepancy that needs to be explained.
Garbage in, Garbage out?
With inadequate explanation of the relationship between the resource statement and the mineable inventory, the input into the PEA is highly questionable. Garbage in, garbage out? The discrepancies between resources and mineable inventory place a question mark behind the economic assessment of the PEA. More information please.
Mining Operations
Conventional and standard
The mining methods proposed in the PEA are conventional. Crux Investor accepts the mining operation at face value.
The Stockpile is planned to be mined in the early years by a contractor with its own dedicated mine fleet.The average haul distance to the leach pads is 2,440 m, which is substantial for the grade of the material. Material will be removed from the Stockpile Project from a series of sequenced production faces.
Open Pit mining is planned as a conventional drill-blast-haul open pit operation. The overburden does not require drilling and blasting.Mining will be by contractor.Oxide and Enriched mineralised material will be send to the leach pad, Primary mineralised material will be send to a stockpile for possible later treatment and the waste is sent to the waste dumps.
The Underground mine is accessed by twin declines, developed from the wall of the open pit.Due to the high daily production rate required, the declines will use one way traffic to minimise traffic congestion. Pre-production development will excavate the twin declines down to the centre of the deposit and split to opposite ends of the deposit (see Figure 4, which indicates the Oxide material in green and Enriched in purple).
Once the top sublevel is established, the main ventilation raise can be driven to surface. Dual internal ramps will be driven down to the midpoint of the deposit at 15 Level.
The 15 Level will define the first horizon.Ventilation from the initial vent raise will be carried down through the sublevels from the top level to the first horizon.Production of the initial stopes will begin once the ventilation circuit is established.All the mined-out stopes on the 15 Level will be filled with cemented rock fill (“CRF”) to establish a sill pillar and separate the two mining horizons within the mine. While production mining on the 15 Level begins, development of the two internal ramps will continue to the lowest level where the second mining horizon can begin.
Metallurgical Test Work
Incomplete, inconsistent, unconvincing
Crux Investor is troubled by the metallurgical section of the PEA. Primarily there is a lack of clarity on the test work carried out on the Enriched (sulphide) material and the final recovery assumptions. Nomenclature is incomplete and inconsistent. Detail on the work carried out is lacking. Results are either poor or very poor, and yet the conclusions are deemed to be positive. Discussion about the test work and gaps in understanding is completely absent. Stantec does provides a caveat in stating that “the metallurgical testing program for the Cactus mine resources is ongoing, with preliminary testing completed in some areas”. But Stantec does not go on to explain the problems. Instead, it falls to Crux Investor to highlight the situation. Here goes.
Acid consumption figure discrepancies
The Stockpile test work all seems in order, with the work carried out on three samples of varying mineralogy, and both by Bottle Roll and by Column tests. The low-grade stockpile material responded well to leaching, giving recoveries in the range of 72%. Gross acid consumption was found to be 25-30 lb/t of material treated with net acid consumption (after recovery of acid returned from the SX/EW plant) suggested at 18-21 lb/t.
So far so good, but Crux Investor notes that the Stantec cash flow model uses acid consumption of 14.5 lb/t for the Oxide portion of the stockpile in years 1-5 and 13.4 lb/t for Enriched. Why was the lower acid consumption figure used? More information please.
Sulphide or Enriched?
The data on the Open Pit Materials is even more problematic. Remember the three basic types of mineralisation classifications? One is “Oxide” which is a mix of minerals that are not just oxides, but sulphates and silicates. One is “Enriched”, which is a mix of sulphides, primarily chalcocite with lesser digenite. [Chalcocite and digenite are sulphides, albeit secondary sulphides]. One category is “Primary”, which is also sulphides, mostly chalcopyrite.The PEA in not clear in its distinction between “Oxides and Enriched”, and “Oxides and Sulphides”.
Arizona Sonoran states that for Enriched Material recoveries are expected to be 72%. These are the recovery figures presented in the summary of the PEA, in the Mineral Processing Section of the PEA, and in the Cash Flow model used in the PEA.
Variable metallurgical testwork with low copper recoveries from sulphides
The 72% recovery assumption is not evident from metallurgical testwork to date. Bottle Roll test copper recoveries of 8.8% and 11.3% on enriched material. Two column tests on the same enriched material show copper recoveries after 200 days of one in the high 60s and the other in the low 50s. Crux Investor realises that the column testwork on the chalcocite ore was still in progress at the time of the PEA study. Figure 5, below, shows that the red and the green curves are still rising, which indicates that the leaching process was still active after 200 days.
For the PEA a projection forward to 720 days is made, and it is assumed the copper recovery is 72%. Crux Investors feels this is an aggressive suite of assumptions given the following reasons:
i) the end recovery date 720 days for 72% recovery is 3.6 times longer than the initial leach test – it is a very far-dated prediction
ii) 3 m column tests are not representative of the 6 m leach kinetics of the planned heap lifts
iii) Two samples are not representative of the mineralogy of the overall deposit
Much more metallurgical testwork needed
From the PEA it was evident that much, much more testwork is needed to establish the viability of leaching, whether bio- or not, for the sulphide material. This fact is especially critical given the make-up of the Parks/Salyer resource. Remember that the Parks/Salyer resource is predominantly enriched sulphide material. See Table 2, above. Of the 2.5 billion pounds of leachable copper at P/S, 2.2 billion pounds are in the Enriched material category.
Geometallurgical mapping is crucial
For any future economic study of the Cactus Project it is imperative that more metallurgical testwork is carried out on the leaching of chalcocite, Enriched resources. The testwork to date does not inspire confidence. In fairness, Arizona Sonoran seems to be addressing the problem with its work plan.
On 10 January 2023, Arizona Sonoran announced its plan for 2023. With regard to metallurgical testwork it includes testing twelve 20 ft (6 m) columns on site. The materials from the Stockpile, Cactus and P/S deposits have been separated into different rock types, copper grades and mineralogy for assessment. Additional materials from P/S are being prepared off-site for the ongoing testing program. Based on the Cactus met testing, Arizona Sonoran expects P/S to follow a similar timeline of 90-day oxide leach cycle, and ~200-day enriched material leach cycle. Using Figure 5 as a reference point, Crux Investor notes that the leach cycle may need to be longer still.
In addition to the twelve 20 ft columns, a further five 30 ft (9 m) columns will test both oxide and enriched materials from P/S and Cactus. Rio Tinto, a shareholder, will operate columns related to its proprietary Nuton leaching technologies.
Crux Investor takes little comfort from the test work carried out in the PEA on the enriched material. The results are contradictory and lack detailed discussion and analysis. For the sake of this Analysts’ Note, Crux Investor is taking a leap of faith that the enriched material will leach, because it is known that chalcocite and digenite are leachable in other operations worldwide. Crux Investor repeats that much more work is required. Experience from other copper heap leach projects indicates that detailed geometallurgical mapping is required. Each resource block needs to be mapped for mineralogy, recovery, and grade. Extensive testing for heap-leach processing is required.
Mineral Processing Options
Standard copper oxide heap-leach process flowsheet
The technical report indicates that two different leach pads are planned, one for Oxide material and another for Enriched material.The Oxide resources will be processed on a lined leach pad suitable for H2SO4 leaching. The Enriched materials will be processed on a second leach pad, employing bioleaching and H2SO4 technology. Note there is no discussion on how bioleaching will be performed.There is no information on things such as bacteria addition, curing time, nutrient addition, or the effectiveness of sulphide oxidation over time.
At this PEA level of analysis, no crushing is planned as test work shows that recovery is only affected at very coarse particle sizes.Placement of materials on the leach pads will be by truck dump-and-push methods.Surfaces will be ripped, and cross-ripped to a depth of 6 ft (~2 m) to minimise surface compaction and surface permeability degradation.Fresh materials will be placed over previously leached materials, in 20 ft (~6 m) lifts.The height of the leach material on the pad will eventually reach 200 ft (61 m) in overall height.
The pregnant leach solution (“PLS”) is collected in ponds and pumped from there to the SX/EW plant.First the solution in mixed with an organic solvent into which the copper is preferentially absorbed.Thereafter the enriched copper solution is rinsed by a concentrated acid solution to extract the copper, which solution is pumped to cells for electrowinning of copper onto cathodes.
Crux Investor has no especial faith in the process flowsheet proposed by Stantec in the PEA because of the lack of discussion around the metallurgical test work. Crux Investor accepts the flowsheet on the basis that it is a relatively standard process flowsheet for oxide copper.
Financial Modelling of The Cactus Project
Underground mining kicks in at Year 6
This study has considered two price cases.One case uses the metal prices in the PEA, allowing a comparison between the taxes as the study cash flow model and the PEA model. The second case using the spot prices on 10 February 2023 as Base Case for the study cash flow model.
Figure 6 shows the overall mine production of ore, waste and the copper grade mined over the LOM.
The advantage of the Cactus project is that no pre-stripping in the pre-production period is required. Waste stripping at the open pit occurs in Year 1 concurrently with treatment of stockpile material.Against that is the requirement of very high stripping in the early years to access open pit mineralisation.In Year 1 a total of 13.9 Mt waste releases only 0.4 Mt mineralised material.In Year 2 waste removal ramps up to 17.5 Mt releasing 1.29 Mt mineralised material.Peak waste removal is reached in Year 3 with 18.6 Mt releasing 3.1 Mt mineralized material.After Year 4 waste removal rapidly drops.
The mine plan for underground operations is expected to ramp up to an initial production rate of 3,500 tpd starting in Year 6 and reach a daily production of 7,000 tpd (2.5 Mtpa) in Year 8 until the end of LOM. To achieve this production rate, the deposit will be split into two mining horizons. Given the size of the deposit, both laterally and vertically, each mining horizon will be capable of 3,500 tpd.
Figure 7 gives the recoverable copper mine production from all sources over the LOM together with copper produced as cathode.
The graph shows that the copper production in the early years is around 25,000 short tons per year, increasing to 45,000-50,000 short tons between Year 8 and Year 12, dropping back to 30,000 short tons thereafter. A short ton is 2,000 lbs.
Operating Cost
Operating costs rise after Year 5 as underground mining kicks in
Table 4 shows the cost structure suggested in the PEA study and used for this valuation.
The PEA distinguishes cost rates in terms of two production phases: the first 6 years and the period thereafter. Crux Investor brings the change in costs one year earlier since the stockpile is forecast to be depleted halfway through Year 5.
Regular readers of Analysts Notes that Crux Investor focuses on operating costs used in economic study assumptions. Table 4 shows costs of $0.78/t and $0.50/t for ore and waste material respectively from the stockpile. Crux Investor agrees that the cost rate should be low compared to mining as no drilling and blasting is involved, but notes that there will be costs for grade control and some haulage and handling. Furthermore, when the work is outsourced, the contractor needs to recoup the investment in equipment and take a profit margin. Crux Investor uses an amended figure of $1.25/t and $0.75/t for ore and waste respectively.
Contract mining means lower upfront Capex but brings higher ongoing Opex
Similarly the open pit cost rates of $1.89/t initially and $2.57/t after five years are also low considering mining will be the responsibility of a contractor. Contractors effectively spread the financing cost of the equipment across the operating cost for the life of the equipment; with a profit margin. Crux Investor has amended the figures by adding approximately 10% to the PEA numbers, to arrive at open pit costs of ore and waste of $2.08/t initially and $2.83/t after five years.
The underground mining cost rates of $28.93/t of ore are low, but potentially achievable. Factors include the massive nature of the deposit which requires little in terms of development, the relatively short haulage distances, and low fuel costs in the United States.
Crux Investor takes a conservative approach to acid consumption and costs
Crux Investor is more concerned in the estimation of leaching costs.Estimated net acid consumption for both stockpile and open pit material (Oxide and Enriched combined) is indicated at 18 lb/t (Section 13.6.1 of the technical report). Yet for the cash flow model the PEA uses rates of 14.5 lb/t for the Oxide portion of the stockpile in years 1-5 and 13.4 lb/t for Enriched, dropping thereafter to 6.0 lb/t for Oxide and 1.0 lb/t for Enriched material. Even accounting for the possible of acid-generating sulphides as the heaps advance these feel like aggressive assumptions.
In addition, a cost discrepancy is evident. Back calculating from total cost and unit cost it seems the cost implications for acid in the PEA cash flow model assumes an average treatment rate of 17.8 Mtpa for the first 6 years. Elsewhere in the PEA cash flow model, the throughput is 18.5 Mtpa.Crux Investor has therefore increased the leaching cost for acid consumption only which adds $0.35/t processed in the first 5 years and $0.98/t thereafter.
Crux Investor does not have sufficient information to comment on the SX/EW cost rate and has adopted the PEA figure at face value.
The PEA study has modelled G&A expenditure as a function of milled throughput. This resulted in annual cost varying between $2.4 M and $3.8 M during the first 5 years.Considering that the expenses are almost all fixed, Crux Investor has modelled G&A expenses on an annual basis.Even for a very small and simple operation it is highly unlikely such cost can be below $4.0 M.Whereas the PEA considerably increases the cost rate after Year 5, the annual amount varies from $2.1 M to $10.7 M, which is not credible.Crux Investor has increased this to $10.0 M annually.
Corporate office cash expenditure was almost $6.4 M in 2021.Crux Investor has adopted this rate for its cash flow model as this valuation is of Arizona Sonoran and not the Cactus project alone.
Nothing of the capital provision stand out as not credible given the available information.
Crux Investor has provided for working capital peaking at $17.5 M and calculated taxes for the PEA case that are 17% lower than suggested by the PEA which uses an assumed tax rate of 24%.
Financial Model
Table 5 summarises the LOM results for both mining scenarios for base case metal prices and the input parameters set out above.
Using the PEA parameters the project has a very good operating margin of 52%.The higher operating cost rates of Crux Investor and inclusion of corporate expenses are more than compensated by a higher copper price of $4.09/lb in the model, raising the cash margin to more than 55%.Despite a tax model that results in higher overall taxes and the slightly higher capital expenditure numbers the net cash flow increases by almost 38%.The project looks very robust.
However, there is much uncertainty surrounding the cost inputs.A sensitivity analysis demonstrates that sensitivity to changes in operating cost is low (the NPV8 changes by 1.2% for a 1%-point change) and capital expenditure (the NPV8 changes by 0.8% for a 1%-point change). Should the operating cost be 15% higher and capital expenditure 25% higher, the NPV8 is still an attractive $278 M.
At the share price of C$1.89 on 10 February 2023 the diluted Enterprise Value is $107.8 M which is 76% lower than the NPV8 figure of $445.4 M. Whereas the share seems to be attractive based just on preliminary numbers for the Cactus deposits, there are a number of upsides such as inclusion of the Parks/Salyer deposit in the production plan and the prospects of two other identified exploration targets.Moreover, there may be a possibility for synergies with the Santa Cruz deposit of Ivanhoe Electric Incorporated (“Ivanhoe”) at short distance to the southwest.
Conclusion
Arizona Sonoran offers a mixed bag to the investor. On one level the historic work does not flatter the Company. Crux Investor feels that the PEA is a poor technical report, for a number of reasons. The amount of material to be mined – the Mineable Inventory – exceeds stated resource estimates in key areas. Metallurgical testwork is partial, incomplete, and badly explained. Forecast metallurgical recoveries are aggressive. Acid consumption forecasts are inconsistent with test work. Operating cost estimates from the PEA are too low. Crux Investor hopes that the forthcoming PFS report will be of a much higher quality.
Crux Investor stresses that much more metallurgical work is needed. Experience from other copper heap leach projects indicates that detailed geometallurgical mapping is required. Each resource block should be mapped for mineralogy, recovery, and grade.
Despite these concerns, fundamentally the overall Cactus project is encouraging. Crux Investor arrives at an NPV8 of $445 million (“M”) which is about four times the current Enterprise Value. At a copper price of $4.09/lb, the project is robust with a cash operating margin of 55%.
In addition, the Parks/Salyer deposit is large, relatively high grade, and it should be amenable to low-cost mineral processing. When P/S is included in the production plan it should enhance the economics of the overall project. The trajectory of the Company should be onwards and upwards.
If you are a Family Office investor, or an Institutional investor, and you would like the full report behind this article, please contact matthew@cruxinvestor.com
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