Soaring costs threaten Teck's Panama venture

Friday, February 08 2008 @ 08:41 pm EST

Contributed by: Don Winner

By ANDY HOFFMAN From Saturday's Globe and Mail - Still reeling from its decision to shelve the Galore Creek project in British Columbia after construction costs more than doubled, Teck Cominco Ltd. is now facing massive inflation at another planned copper mine in Panama where costs have also doubled, throwing the viability of the entire project in doubt. Teck of Vancouver and its partners Inmet Mining Corp. of Toronto and Vancouver-based Petaquilla Copper Ltd. said an interim engineering report estimates capital costs to build the Petaquilla copper project have surged to $3.5-billion (U.S.) from an original estimate of $1.7-billion published last year. (more)

Teck now has until March 31 to decide whether to acquire a 26-per-cent interest in the Panamanian project. It could also decide to walk away from the endeavour or try to renegotiate the joint venture agreement with Petaquilla and Inmet, said Greg Waller, Teck's head of investor relations.

"It's a great resource. We'd love to find a way of making it work, but clearly these numbers are challenging," Mr. Waller said in an interview.

In development for more than a decade, Petaquilla has been touted as one of the largest untapped copper deposits in the world, with the potential to produce an average 411 million pounds of copper, 95,000 ounces of gold, and 8.6 million pounds of molybdenum a year over a 23-year mine life.

However, if Teck were to decide to exercise its option to acquire the stake in the project from Petaquilla Copper, it would be obligated to fund 52 per cent of the development costs of the project or roughly $1.8-billion.

Following the Galore Creek debacle that saw Teck order construction of the much-heralded copper project halted after cost estimates skyrocketed to $5-billion from $2.2-billion, the company may not be willing to take on the Petaquilla risk, said Canaccord Adams analyst Orest Wowkodaw.

"I think the project is in serious limbo. It's very unclear to me whether this thing can be developed," Mr. Wowkodaw said in an interview.

The analyst said the project's best hope is for Petaquilla Copper, the junior firm that currently owns 52 per cent of the venture, to consider relinquishing more of its interest in the potential mine.

"This is going to come down to Petaquilla Copper and what they are willing to give up. They've got to change the ownership structure or this thing is dead," Mr. Wowkodaw said.

Although Teck has laid out relatively little capital for the project to date, Petaquilla is second in the company's pipeline of copper development projects behind its Andacollo hypogene mine in Chile. A diversified metals producer and Canada's largest base metals miner, Teck is trying to reshuffle its production profile, reducing its exposure to zinc and increasing its copper production.

The loss of Galore Creek and the potential loss of Petaquilla could put the ability to execute that strategy in doubt.

Most analysts ascribed little value to Petaquilla in their valuations for Teck. However, UBS Securities analyst Tony Lesiak reduced his share target price for Inmet yesterday to $86 (Canadian) from $105 because the viability of Petaquilla is now at risk.

TD Newcrest analyst Greg Barnes said if Petaquilla does not proceed, Inmet management will face strategic challenges over how to expand the company following the startup of the Las Cruces project in Spain and what to do with a growing cash balance that could reach $1-billion by the year end.

"A delay or cancellation of the Petaquilla project raises the potential for a significant share buyback," by Inmet, Mr. Barnes said in a note to clients.

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