Nevada Copper (NCU.TO) had an excellent second quarter of the year, as the company’s share price has almost doubled since our initial report in March. Back then, we were emphasizing the robust economics of the Pumpkin Hollow project which led us to believe the company’s market capitalization was way too low based on the quality of its assets in Nevada.

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When Lupaka Gold (LPK.TO) acquired Andean American Gold in the fall of 2012, it announced its Crucero exploration project would still be the company’s flagship exploration project. Even though increasing the value of the Crucero project through additional exploration remains the long term objective, the company has another project that could have the potential to provide near-term cash flow to support exploration expenses at Crucero.

After trying to sell the Invicta project or finding a suitable joint venture partner last year, Lupaka is now pulling the Invicta-card and is focused on putting the project into production in the first half of next year at a minimal capital expenditure. This report will be fully focused on the Invicta project and its road to production.

The background of the Invicta project

Invicta was Andean American’s flagship (and only) project as it aimed to develop this poly-metallic deposit. Andean American’s original plan was to construct a 5,000 tonnes per day underground mine and process plant, but its consultants ran into some problems whilst updating the feasibility study as they doubted the mine would ever be able to produce 5,000 tonnes of ore per day and on top of that the underground mining costs would have been considerably higher than the expected $28/t. Needless to say the further development of the Invicta project came to a screeching halt as it became clear the economics of a 4-5,000 tonnes per day operation wouldn’t look too exciting.

This was also one of the reasons why Lupaka Gold tried to find a solution for the project last year, as it engaged Haywood Securities to line up potential partners to develop the Invicta Project. There was some interest, but during the process Lupaka Gold started to realize that it might actually make a lot of sense to keep the project and investigate a scenario whereby Invicta would be developed as a small-scale mine with a throughput of approximately 300 tonnes per day utilizing a contract mining strategy. This should be much cheaper and easier to implement than a full-scale 5,000 tpd mine.
We have visited the Invicta project last year and were impressed with the current status of the project’s adits. The production-sized adit will allow the company to commence production quite fast (see later).

The Invicta Resource estimate

The Invicta project is a poly-metallic project with gold as its main metal but also sizeable silver, copper, lead and zinc credits. The average grade of the measured and indicated resources published by Andean American was 3.48g/t AuEq whilst the inferred resources came in at an average grade of 2.9g/t AuEq applying a cutoff grade of 1.3 g/t AuEq That being said, the company’s approach to small-scale high-grade has identified zones with a higher average grade, as the Atenea main zone for instance has 131,000 tonnes in the measured category at an average gold-equivalent grade of 6.65g/t.

Additionally, a recent sampling program which was meant to confirm the continuity of the mineralization as well as the grade has exceeded our and the company’s expectations. The sampling of the footwall zone has revealed assay values grading in excess of 6g/t gold, 2 ounces per tonne of silver as well as high-grade copper (1.68%) and a decent lead-zinc kicker of 1.54% ZnPb over a length of 105 meters and a width of 6.4 meters. This leads to a gold-equivalent grade of in excess of 10g/t and once again re-confirms the potential to quickly restart operations at Invicta. The assay results of the hanging wall were a bit less impressive, but according to our calculations, even the hanging wall should have an average grade of close to 7g/t AuEq over a length of 125 meters and a width of 6.16 meters this time.

The plan to bring Invicta into production

As said before, there were serious issues with the feasibility study prepared by Invicta’s previous owner, and this was the main reason why Lupaka has put Invicta on the backburner and has focused on its 2Moz Crucero gold project instead. However, the company investigated the potential to construct a small scale mine with a throughput of just 300 tonnes per day (as opposed to the proposed 5,000 tpd throughput in the feasibility study).

As the output will be relatively limited, Lupaka Gold doesn’t plan to build its own processing facility but will very likely use excess capacity at an already existing mill. This will increase the operating costs compared to processing the ore through a fully owned mill but more importantly, this will allow Lupaka to bring Invicta back into production quite cheap and with minimal CAPEX financial risk as the estimated initial capital expenditures are estimated at just $3M. Based on our talks with the management team, we have the impression Lupaka will sell the Invicta ore to a third party processor during the first year of the operation, but after the first year, the company might switch to an owner-operated processing model.

The entire low-capex and quick production story is depending on nearby mills with excess capacity which will be able to treat Lupaka’s ore. In a radius of just a hundred kilometers (keep in mind trucking isn’t expensive in Peru, and trucking the ore over a distance of 100 km would not have a serious impact on the economics of Invicta). As said before, the ore is readily accessible through an already existing production-sized adit, and we have no doubt this project won’t have to overcome major hurdles. The main issue will be to get the small scale production at Intvicta permitted (and all necessary certificates and licenses are expected to be received within the next few months) and to find a suitable mill to process the Invicta ore.

Lupaka’s financial situation

At the end of the first quarter of this year, Lupaka Gold had a working capital position of approximately C$1.8M, and we expect this to have decreased to C$1.4M in the second quarter and the company will obviously have to raise money to continue working on the re-development of the Invicta project. We talked to Lupaka’s CFO and he prefers to finance Invicta expenses through issuing new equity in the near term, but the company would be open for debt and convertible debt later on.

Lupaka also has a sizeable stake in Southern Legacy Minerals Inc. (LCY.V), with a current market value of $1.0 million that could be monetized. Lupaka is also awaiting the repayment of C$1.6M in recoverable VAT, but as you can imagine this can be quite a lengthy process in Peru and we are not counting on this repayment before Invicta will be up and running. This is also the main reason why Lupaka doesn’t consider this VAT recovery to be a current asset, but instead has booked it as a non-current asset on the balance sheet as part of their mineral properties.

Further down the road, we think the company might have an excellent chance to fund the acquisition or construction of its own mill without any further dilution, as instead of selling ore to a mill, Lupaka would be producing the metals as the end product. This means that it would be possible to sign offtake or streaming agreements which include a pre-payment which would allow Lupaka to fund the acquisition of a mill without diluting its shareholders.

The next steps at Invicta

Lupaka Gold has engaged Aminpro and provided them with approximately 150 kilo of fresh ore from samples to conduct further metallurgical test work. Keep in mind the currently known recovery rates are based on a much higher throughput, and the recovery rates could change a bit given the currently planned lower throughput with higher grade ore. Additionally, reliable metallurgical test work will put Lupaka in a much stronger negotiation position with potential mills.
The metallurgical test results will then be used by Aminpro to prepare a conceptual design and a flow sheet for the mill and thereafter the search for a mill whose technical specifications meet the matching design can begin. This will obviously take a couple of months, but this bottom-up approach (investigate the best flow sheet and then find a mill based on the flow sheet) could prove to be very important to keep the project on a fast lane.
The company has already identified some mills in the immediate vicinity which are in a position to accept and treat Lupaka’s ore, so it looks like the company will be able to choose the mill which fits the profile of the Invicta ore the best. Additionally, the company is negotiating with contractors to conduct the necessary repairs and upgrades at the dirt road from the Invicta project to the valley.

We understand from management that the company has also very recently engaged an international engineering and project management team to provide sound technical direction in development, mining and overall project control. The announcement of that team should be forthcoming soon.

The management team

Eric Edwards is the President and Chief Executive Officer and has over 25 years of experience in the gold mining and exploration industry. Mr. Edwards is a geologist with an MBA degree, which is quite rare. He has held a number of positions in operations, business development and corporate finance, of which his position at Andean Resources was the most important one, as Goldcorp acquired the company for $3.7B.

Over the past 15 years, Edwards has been Chief Financial Officer for a number of publicly-traded resource companies, including Viceroy Resource Corporation and Ivanhoe Mines and was CFO of Ivanhoe when the company completed its $275M IPO.

Darryl Jones (Chartered Accountant) is the CFO of Lupaka Gold. Mr. Jones has been involved with a number of private and public company start-up situations in Canada and the USA, of which his CFO position at Corriente Resources was the most important achievement, as Corriente was sold to the Chinese for almost $700M.

Mr. Julio Castañeda is a geologist with more than 29 years of experience in exploration and management throughout Latin American. He is the former Regional Manager for Golden Minerals in Peru and Mexico. He has also held senior positions with Barrick Gold and Hochschild Mining including 3 years of teaching at the “Universidad Nacional de Ingeniería” in Lima Peru.

Julio Castañeda was part of the team responsible for the discovery of several high-sulphidation and low sulphidation epithermal deposits with combined resources of several million ounces of gold.


Lupaka Gold is presently fully focused on the Invicta project in Peru, aiming to put it into production by the end of the first quarter of 2015. After discussions with Lupaka’s management team, the project is still on schedule and within budget, but Lupaka will obviously have to raise more money within the next quarter as we aren’t counting on a fast repayment of the recoverable VAT by the Peruvian government.

The next few months will be very important as Aminpro will finalize the metallurgical test work on the sample batches of the Invicta ore and based on those results a flow sheet will be finalized which should allow Aminpro to start looking for a plant with excess capacity which is matching the description. This entire process should take a few months, but it will be worth the wait as it will greatly reduce the risks at Invicta.
Based on indications from the management team at Lupaka aims to sell the raw ore during the first year of the operation to an existing mill with excess milling capacity, but in the longer run the company aims to acquire its own mill which would reduce the processing costs and thus enhance the economics of Invicta. It’s difficult to guesstimate the production cost at this time, but based on historical recovery rates and acceptable milling costs, we hope the company can keep its costs below $1000 per ounce of gold.

A solid mining engineering and technical team will also add considerable value and de-risking toward Invicta start-up in the short-term.

The company also completed some “boots on the ground” field examination at the Crucero Gold Project. Some interesting assay and mapping results at Crucero would add further credibility to managements long-term vision for the company. Those results should be available soon.

The next few months will be very important for Lupaka Gold as it’s ticking the boxes quite fast, and we’ll continue to update you on the company’s progress at Invicta.

Disclosure: Lupaka Gold Corp. is a sponsoring company. We own shares. Please see our disclaimer for current positions.

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