Sumitomo to sell stake in Sierra Gorda copper mine

8.10.2020, 13:53 - eeppo

Japanese miner and smelter Sumitomo Metal Mining (TYO: 5713) said on Thursday it was reviewing its strategic options regarding its minority stake in Sierra Gorda copper mine in northern Chile, majority owned by Polish miner KGHM (WSE: KGH).

The Asian giant said that selling its 45% holding in the mine was one of the routes to be explored with its financial and legal advisors, RBC Capital Markets and Sullivan & Cromwell LLP.

KGHM, Europe’s second-largest producer of the red metal, said instead that Sumitomo had already begun the process of leaving the venture. The miner, which is also one the world’s largest silver producers, added it was not interested in increasing its stake in the money losing operation.

KGHM noted, however, that it would continue “all optimization efforts” aimed at increasing the value of the asset.

The state-controlled company has been criticized for the steep investment allocated to developing the Chilean mine ($5.2 billion and counting). Sierra Gorda, which began production in 2014, has constantly failed to meet expectations due to challenging metallurgy and difficulties in using seawater for processing.

BMO Capital Markets analyst Edward Sterck estimates the present value of Sumitomo stake is around $513 million, assuming he mine achieves design cost and production rates.

“It is worth noting that the JV shareholders have been forced to provide external funding every year since inception due to disappointing performance and this may drive a discount,” he said in a note to investors.

Rough path

KGHM grabbed the copper and molybdenum project in 2012, after completing the acquisition of Canadian rival Quadra FNX, in what was the largest-ever foreign acquisition by a Polish company.

The miner had planned to expand Sierra Gorda earlier, but the 2015-2016 rout in commodity prices forced the company to place the project in the backburner.

Two years later, KGHM secured environmental approval for a $2 billion expansion and upgrade of the mine in order to extend its productive life by 21 years.

There also are options to expand production by building an oxide circuit and doubling the throughput of the sulphide plant. Current planned output at Sierra Gorda sits at about 140,000 tonnes of ore per day, but the asset has only delivered 112,000 tonnes in its best year of operation to date.

The oxide expansion would add 40,000 tonnes of ore per day for eight years, and the sulphide expansion another 116,000, BMO estimates.

While Sierra Gorda a low grade deposit, one of its main attractions is having an “extremely flat grade profile”, which are expected to remain around 0.34% for the foreseeable future. This, Sterck noted, would potentially movie the mine from a tier four to a tier two asset with time.

KGHM posted in August a 150% leap in second-quarter core profit for the mine, despite risks related to the coronavirus pandemic.

Pawel Gruza, deputy head in charge of foreign assets, said at the time that from 2021 onwards, Sierra Gorda would no longer need financial support from its owners.

More to come…