Metminco (ASX:MNC, LON:MNC) has announced that a remodelling of the resources at its Los Calatos project in Peru has resulted in an updated resource estimate focusing on the higher grade zones. That was a good move as a large bulk-tonnage and low-grade project would never have been financed in the current commodity climate.

The new resource estimate contains just over 350 million tonnes of ore at an average grade of 0.75% copper and 300 ppm Molybdenum in the measured, indicated and inferred resource categories. This means the project still contains in excess of 5 billion pounds of copper as well as roughly 250 million pounds of molybdenum for a total in situ value of in excess of $15B. As the average rock value is now approximately $45/t, the project had a better chance to be developed as the mining rate of 6 million tonnes per year (16,500 tonnes per day) should be cheaper to develop.

The capital expenditures have indeed been reduced by 50% to $650M, but the C1 cash operating costs have increased to $1.20/lbs and it looks like the mine will be unviable at the current spot price of copper. Metminco has used a long-term price of $3/lbs, and using those numbers, the NPV8% would be positive at $285M. That’s okay, but not impressive and as the NPV is less than half of the initial capex, the golden rule doesn’t seem to be met here. The project is doable, but it will be impossible for Metminco to find financing in the current commodity price environment.

On top of that, Metminco has been in some sort of vicious circle and is currently trading at just half a cent. If one would use a 2/3 debt 1/3 equity ratio for the initial capex, there’s just no way Metminco can raise $200M+ in equity to fund its share of the project without external help. It looks like Metminco’s best option right now is to either investigate a potential sale of the company to a competitor with more financial resources, or to put Los Calatos on care and maintenance.

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Disclosure: The author holds no position in Metminco Resources. Please see our disclaimer for current positions.

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