A welcome shock

IN a shrinking world of significant near-surface copper prospects, Marengo Mining seems more undervalued every day.
A welcome shock A welcome shock A welcome shock A welcome shock A welcome shock

Published in the November 2012 PNG Report magazine

Of course, its shares might have received a boost by the time you read this, with the long-awaited feasibility study for its Yandera project in Papua New Guinea due by October 31*.

In regards to its possible findings, the verdict will be that the project is certainly profitable and the major unknown is to what generous degree.

After all, the months of delays to the feasibility study announcement were not based on funding difficulties or troublesome geotechnical revelations, they came from shockingly good results of its infill drilling campaign.

Announced assay results since August have included a series of high copper grade, triple digit intersections at Yandera with quite a few within 50m of the surface - an important consideration given that open cut mineable depths typically fall within 150m.

The first series of what was then seen as among the "best-ever" drilling results by management included a 126m intersection grading 0.92% copper and 700 parts per million molybdenum from a depth of 30m and a 159m intersection grading 0.9% copper and 303ppm moly from a depth of 42m.

This set also included a 186m intersection grading 0.8% copper plus a whopping 1449ppm moly from a 42m depth and a 165m intersection at 0.67% copper and 284ppm moly from 39m down the hole.

To place these figures in context, the average resource grade of the project was previously considered to hover around 0.5% copper.

The work to reach this outcome already lured hundreds of millions in investment and put the Yandera project into the league of being one of PNG's next generation of world-class mines.

But these results were bested the following month with the announcement of a 198m intersection grading 1.01% copper and 742ppm moly, plus a 219m intersection at 0.84% copper and 214ppm moly with both starting within 95m of the surface.

This batch of results included a 141m intersection at 0.9% copper, 154ppm moly which started just 12m down the hole.

Then in October Marengo revealed it hit a 165m intersection grading 1.08% copper and 381ppm moly from a depth of 42m, Included within that wave of drilling results were a 270m intersection at 0.8% copper and 264ppm moly from 87m down the hole, plus a separate find of 186m at 0.89% copper and 232ppm moly at a depth of 96m.

Marengo investor relations vice-president Dean Richardson said the drilling results confirmed the board's view that Yandera had high-grade, low strip-ratio starter zones to accelerate the capital payback for developing the project.

"It's an absolute positive, although we have always had a strong belief that the resource was being somewhat under-reported," Richardson told PNG Report.

"Even we were pleased with the fact we got results that double our current resource grade."

He said it was too early to say whether there would be a small pit on each of the zones, such as at the Omora, Gremi and Imbruminda finds.

The Yandera project has long targeted production of about 80,000-100,000 tonnes per annum of copper, plus 15,000t of moly in a concentrate form over a mine life of 20 years with first production in 2016.

But the ever-expanding project resources naturally leads to a discussion over whether this production rate should be lifted or instead sustained over a much longer period.

"We think 20 years is really just a starting point," Richardson said.

"But we also think the potential is there to double the train [production capacity] over years 5 and 6. It needs to be supported by ongoing drilling results.

"We have already got mineralisation going down to a kilometre but the current resource estimate is only down to about 500m. We're pretty comfortable there is plenty more there."

With three rigs still active at the project, Richardson said drilling would continue right through and into the construction phase.

One of the key challenges Marengo has faced is raising the necessary capital to explore, let alone develop, a large-scale project independently.

The tenements were once owned by BHP Billiton before its infamous exit from PNG and these assets today would even fit more comfortably with a major mining house or with any of the large Chinese government-owned resource companies.

The potential for a major stake sale to Chinese interests only seemed more likely after Marengo struck a memorandum of understanding agreement with China Nonferrous Metal Industry's Foreign Engineering and Construction Company (NFC) in October 2010.

The MOU covered possible financing, construction and off-take aspects of the project, including the possibility the Chinese company could fund 70% of the estimated $1.8-2 billion development cost.

Should this financing flow through, construction work for the Yandera project will not only be able to kick off from next year but Marengo will also minimise its risk of possible cost blowouts for this development.

"They provide us with the financing to buy their goods and services off them to build the mine," Richardson said of the NFC arrangement.

"They may participate in some project or equity stake going forward but to this stage we have maintained 100% independence, which we were very keen to do.

"It's really about them securing off-take and this is one of the largest undeveloped projects in Asia Pacific not held by a major."

Marengo's ambition to maintain control once the project transitions into operations was backed up by its efforts to recruit a series of exceptional mining veterans this year.

Most notably, this included chief operating officer Paul Korpi, who led development, construction and the start of operations at Newmont's Batu Hijau copper-gold mine in Indonesia.

Marengo, which benefits from the influence of former prime minister Sir Rabbie Namaliu, who is on its board, is also quite confident when it comes to the necessary milestones ahead.

Richardson expects a mineral resource update to accompany the feasibility study results and further tipped that government mining approvals will follow. He was even sure enough to tell PNG Report that early equipment orders for the mine were likely to be made from the first quarter of 2013.

"To develop a mine of this size as an independent junior maintaining 100% equity is quite unusual," Richardson said.

"But the reason why we can actually put forward development timelines is because we are still in control of our own destiny."

With a market cap mainly within $180 million territory for the year, compared to the billions of potential profits over decades ahead if the Yandera goals are reached, it's fair to say that Marengo's journey under investor radar screens might not last forever.

In a sign this could change, JP Morgan has already hopped on as substantial investor in the explorer.

As for risks to the Yandera project, there is the key issue of what to do with tailings in PNG given the metres of annual rainfall.

Marengo has already ruled out deep-sea tailings disposal, the avenue which cost the Ramu nickel mine years out of legal action, and it could have another interesting solution on the cards.

Richardson said it was using a New Zealand consultancy which had expertise in high seismic and high rainfall areas to develop its tailings dam designs.

How that plays out could be one of the last significant hurdles facing development and operations, considering that the Yandera project already has the resources, options for mine development finance and off-take plus enviably good relations with the government in its favour.

*Marengo did not meet this deadline with the FS still pending.

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