If you’ve viewed the classic film “The Treasure of the Sierra Madre” (1948), then you must remember the character of “Howard,” a grizzled prospector with the Gabby Hayes whiskers who knew a thing or two about mining. No doubt, you were enlightened by some of the gray-bearded miner’s nuggets of wisdom. For instance, who could question his estimation of the true, intrinsic value of gold: “Gold is only worth what it is because of the human labor that went into the findin’ and the gittin’ of it.”
Fast-forward the VCR to today, when mining has developed into a high-tech industry. Gregory Hahn could utter a similar judgment about copper. But he might say that the “findin'” and “gittin'” of this “red gold” entails a price not measured in terms of physical toll. Rather, the price includes the administrative challenges involved with bringing the project through its development stages, environmental permitting, technical reports through to bankable feasibility study, construction, mining, and finally, commercial production. The finished product ¬ 99.99 percent pure copper cathode.
Hahn is president and chief executive officer of the Lakewood, Colo.-based Constellation Copper Corporation (TSE:CCU), and for the past 14 years, his company sought to mine copper from the Lisbon Valley, a remote area in southeast Utah. At times, the project must have felt to Hahn like his own private “El Dorado,” with an elusive goal that seemed to distance itself farther away whenever he drew closer.
Ultimately, things worked out. At last, in late 2005, Constellation Copper’s first mine was about to complete construction, with first production anticipated in January 2006. But the road was fraught with roadblocks involving environmentalists’ objections, federal government rulings and financial troubles.
The Lisbon Project Saga
As far back as 1991, the company (which was then known as Summo Minerals) investigated copper mining opportunities in Lisbon Valley, located in Utah’s San Juan County. “The company was established with the expressed intent of developing a copper mine there, and we’ve spent the last 10 years advancing that project through permitting and financing,” recalls Hahn.
As Hahn indicates the maddening part of the drama really began in 1995, when Summo submitted a plan of operations to the Bureau of Land Management (BLM). Two years later, the BLM issued a positive Environmental Impact Statement and Record of Decision.
So far, so good.
However, environmentalist groups such as the Mineral Policy Center and the National Wildlife Federation objected to the ruling. These groups turned to the Interior Board of Land Appeals (IBLA) with their concerns. They won the first round when the IBLA issued a stay on the BLM decision, which effectively placed the LisbonValley project in limbo. The stay would cost Summo its multi-million dollar construction financing, mining contract, and several million dollars defending the permits against the appeal.
In the ensuing and inevitable back-and-forth, the Northwest Mining Association sued the Department of Interior over the illegal implementation of new bonding regulations. In March, 1999 a U.S. administrative law judge ruled against the appeal and lifted the stay. A year later, everything seemed to be in place. Summo had all of the state and federal permits required to move ahead. But the fates weren’t finished with the company just yet. Like an old, haunted western mine bedeviled by indigenous spirits, the Lisbon Valley site confronted more hard luck.
“It had taken two years to permit the project and another two years to defend the project and then, about the same time that the federal judge made his ruling, the price of copper hit an all-time low,” says Hahn. “So, we had to wait out the recovery of the copper price market, which took about another five years.”
During the period, the company nearly went under, as it was unable to find new funding. However, a South African bank eventually offered to finance the Lisbon Valley project, which breathed new life into the mine. “We’re now 95 percent finished with the construction of what will be the first new copper mine built in the United States in the last decade,” says Hahn.
There’s an interesting sidelight to the main story: In May 2002, Summo decided to change its name to Constellation Copper, to avoid confusion with another copper company beset with whopping financial losses, market scandal and legal problems. No use inviting more hassles into an already perplexing situation.
Rechristened, refinanced and regenerated, Constellation is now moving forward with its plans to build a portfolio of mining properties in the United States and Mexico. According to Hahn, the company is molding itself into a profitable, low-cost, mid-tier producer of copper and zinc (100 million-plus pounds each year) by developing mineral deposits with open pit mining methods and recovery by heap leach and solvent extraction-electrowinning (SX-EW) processing.
“We plan to do this organically, through the development of company assets, but we’ll look at growing the company through external sources as well,” he says.
To be sure, one of Constellation’s stated goals is to identify potential acquisition opportunities that would strengthen its status as a cost-effective, mid-tier producer.
In the meantime, Constellation is focusing on its $55 million Lisbon Valley mining operation. By November 2005, with construction nearly complete, the company began the mining, crushing and placement of ore onto the leach pad at full production capacity of 24,000 tons per day. By the end of2005, construction was completed and Constellation anticipated producing its first copper cathodes in January. It expects to ramp up to the full production capacity of 54 million-plus pounds of copper by the end of March 2006.
Copper cathodes, Hahn explains, are a desirable form of copper metal that comes in sheets of about three-feet squared and a quarter-inch thick. “Our process technology and deposits allow us to produce copper sheet metal directly from our plant, so our copper goes directly to end users,” he reveals.
Conversely, other industry players, he continues, produce what is called concentrate, an unrefined collection of copper-bearing minerals that need to go through a smelting and refining process before that copper mineral is turned into copper metal that can be used directly by manufacturers. “Because we bypass the smelting and refining, our copper is more readily available to end users,” says Hahn. “We can produce at a lower cost, which is a significant advantage.”
Further, producing copper cathode is the best way to go, as no concentrate treatment facilities exist within the United States. “The concentrate produced goes offshore and gets smelted and refined usually in Asia, Canada, or Europe,” reports Hahn. “So, the copper has to be shipped back across an ocean to get back into the U.S. market. Our copper stays put in the states.”
Poised for rapid growth of copper production, Constellation )www.constellationcopper.com.) expects a nine-year mine life for the Lisbon Valley project, based on probable reserves of 372,209,000 contained pounds of copper. Copper futures as of December 2005 were trading at $2.048 per pound; cathode in the U.S. fetches an average 07¢ premium over COMEX,
Turning back to gold-prospecting “Howard” (a vivid portrayal courtesy of actor Walter Huston): Of his sought-after treasure he says, “Gold itself ain’t good for nuthin’ ‘cept makin’ jewelry and gold teeth.”
The same can’t be said about copper, which has a much more practical value based on its many applications, which have been realized in diverse areas such as architecture, automotive manufacture, electrical, plumbing, fuel gas, industry, marine, machined products and telecommunications.
In fact, copper is an integral component that has wired the nation. “Copper is primarily used to make copper wiring, mostly household and industrial wiring,” says Hahn.
It also helps drive the national economy, so to speak, as it is an essential element in the automotive industry. “There’s something like 50 electric motors in the average automobile, and they’re all copper wired,” says Hahn.
To mention only a few of the automotive uses, copper wiring helps energize windshield wipers, power windows and locks, power seats and mirrors, as well the car radio and CD player.
Another important end use is copper tubing for indoor plumbing and natural gas lines. “If you’ve done any plumbing around your house, then you know about this,” comments Hahn.
For the discerning homeowner who understands all elements involved in the construction of their domicile, copper must appear ubiquitous. According to Constellation, the average new home contains approximately 500 pounds of copper in the form of electrical wiring, plumbing pipes, and brass fixtures. “Copper is a 50-percent component in brass fixtures,” says Hahn.
Copper is also used as pigments and in fertilizers, pesticides and electronic circuit boards. It goes into the strings that provide various musical instruments their distinctive voice, and it is an ingredient in the production of brass instruments. Further, it is used to make medical products and devices, and it appears in health supplements such as multivitamin and mineral tablets.
According to Constellation, as of 2002, copper and copper alloy consumption in the U.S. exceeded 7 billion pounds a year for functional use. Worldwide consumption exceeded 18 billion pounds annually.
Constellation will also mine zinc, another widely used metal, at its Terrazas project in Chihuahua, Mexico. Zinc is primarily used as a galvanizing coating on steel, which goes into the manufacture of most automobiles. A galvanized coating protects steel from oxidation that results in rusting.
Now that the Lisbon Valley issues have been addressed, Constellation can turn its attention to other projects included in the company’s five-year plan.
Currently, Constellation is doing exploratory drilling at the Flying Diamond deposit site, located four miles south of the Lisbon facility, where abundant copper minerals are present.
Also, Constellation is involved in two projects in Mexico, just across the border. The first is a feasibility study for the Terrazas zinc and copper project in Chihuahua, Mexico. According to Constellation, the area possesses the third-largest known undeveloped copper oxide deposit in Mexico. The project could eventually turn into a $250 million mining operation, with a measured and indicated resource estimated at more than 85 million tons. The estimated annual production rate is set at 39.7 million pounds of cathode copper and 150 million pounds of zinc. “It’s a substantially larger project than the Lisbon Valley mine,” says Hahn.
The second potential mining project in Mexico resides in San Javier del Cobre, a site with existing infrastructure. Constellation envisions building three copper mines that could produce as much as 300 million pounds of SX-EW copper and zinc annually.
The future looks as bright as gold dust gleaming in the afternoon sun. In late 2005, Constellation was looking at a $33 million debt, but it expected to generate sufficient cash flow at current metal prices to be able to repay that figure after only one year of mining operation.
Further, Constellation anticipates assuming a leading role in a fresh market. “There are very few mid-tier producers in the North American sector, and we look to become a member of this small niche,” says Hahn.
Membership, Constellation anticipates, opens the door to untapped opportunities. “Larger producers require substantial assets to justify development,” explains Hahn. “That leaves a lot of smaller but profitable opportunities available for smaller companies to develop. As larger companies choose not to develop such projects, smaller companies can move in and take advantage.”
Moreover, the company intends to become one of the lowest cost producers of copper in North America, says Hahn. “This will give us a more attractive operating margin than anyone could imagine,” he says.
Finally, Constellation wishes it known that it intends to address concerns of the environmentally conscious. “Times have changed,” Hahn points out. “It is no longer acceptable for a mining company to create disturbances across the life of a mine. Now, companies must consider reclamation and remediation of those disturbances at the end of the life of the mine. Currently regulations require and operators perform reclamations concurrent with their operations. So, we will reclaim some of our disturbances as we proceed.”
This represents a new ethic in mining, Hahn says. Companies like Constellation aren’t out to “rape and pillage” the land, as he puts it. “That’s the way it was done in the early 1900s,” says Hahn.
But that was then and this is now, old Howard might think, as he burdens his burros with sacks of ore. Indeed, mining for base metals has come a long way, supplies are low, demand is high, and pricing is hitting record highs. Constellation Copper is on the cusp of production, and as the elements fall into place, it’s this mining company’s time to shine.