LAF lafayette mining limited

lafayette on verge of

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    PERTH – Lafayette Mining [ASX:LAF] is on the verge of achieving what few resources companies have – launching a foreign-owned mine in the Philippines.
    The Melbourne-based junior has finally obtained all the necessary government licences and is about 80 percent through acquiring the necessary land position to enable it to proceed with construction, which is targeted to kick off in April next year. In addition, this week it confirmed that Macquarie Bank and Standard Bank London have been mandated to arrange a syndicated debt and hedging facility for the partial funding of the proposed US$45 million Rapu Rapu polymetallic project on Rapu Rapu Island. Lafayette hopes to finalise the financing package by the end of January 2003.

    The banks will no doubt factor in a sovereign risk premium for the Philippines. “The political situation is expected to maintain its post-Marcos improvement (offset by the regression under Estrada),” said ABN AMRO Morgans analyst, Chris Brown. “We don’t believe the political situation in the Philippines is an issue, but Rapu Rapu Island is located south and east of Luzon in an area that hasn’t experienced any unrest.”

    Should development run to schedule, then production is slated to commence in mid-2004, with metal output for the initial six-to-seven-year mine life expected to average around 10,000 tonnes per annum of copper, 14,000tpa zinc and 50,000 ounces a year of gold, which would make Rapu Rapu one of the biggest mines in the country. Lafayette said ore from the proposed open pit (there is underground potential) would be treated via conventional flotation and CIL processing applications, to produce both copper and zinc concentrates, and gold dore.

    Macquarie and Standard Banks will provide about 70-80 percent of the funding, while the balance is planned to come from a combination of smelter equity (as some smelters in the Australasian region are lacking feedstock sources) and capital equipment supplier finance. Jiangixi Copper Company (JCC), which operates the largest copper smelter in China, has signed a letter of intent (LOI) with Lafayette to buy copper concentrate on commercial terms as well as take up a direct 21.7 percent stake in the project for US$5 million. Lafayette also has LOIs to purchase copper concentrates from PASAR, a Glencore International (40 percent Xstrata shareholder – see below) affiliate in the Philippines, and from Dowa Mining in Japan, plus LOIs to purchase zinc concentrates from Padaeng in Thailand and Korea Zinc. “This interest confirms the quality of the concentrate to be produced,” said Brisbane-based Brown.

    Lafayette completed a bankable feasibility study (BFS) two years ago, which says something about the slow mandatory approvals process in the Philippines. However, the BFS parameters were reworked in May this year after the company decided it favoured the owner-miner and inhouse power generation options with a view to lowering operating costs.

    Based on current metal prices, the NPV for Rapu Rapu is around A$100 million (or A$0.32 per share) at a 10 percent discount rate, according to Brown’s figures. The capital payback period for the project has been estimated at two years, while (pre-revised BFS) the operating margin was projected at 35 percent and internal rate of return 33 percent. Brown is forecasting net profits for Lafayette of A$14-15 million a year from annual cashflows of about A$27-28 million, from 2004/05 onwards.

    Former WMC Resources group manager - commercial services, Andrew McIlwain, took over as Lafayette’s managing director in June this year and, along with other key appointments, has certainly made good progress. “We have now received all the regulatory approvals required to commence construction – a first for a foreign company in the Philippines for many years,” he said.

    The company has wisely followed the lead of two other Aussie juniors who have their keystone projects in South East Asia. It has appointed Brisbane-based engineering firm Ausenco to go over the Rapu Rapu BFS numbers prior to construction contracts being awarded. Ausenco also worked on the Chatree gold project in Thailand for Kingsgate Consolidated [ASX:KCN] and the soon-to-be-commissioned Sepon gold project in Laos for Oxiana Resources [ASX:OXR].

    Pooled development fund Lion Selection [ASX:LSG] is Lafayette’s largest shareholder with a 32.6 percent stake and is also the major shareholder in another Aussie junior trying to crack it in the Philippines, Indophil Resources, which acquired the Tampakan project from WMC (see related article). Interestingly, MIM Holdings [ASX:MIM] holds an option to buy into Indophil’s substantial Tampakan copper-gold project, which may well be of some interest – from a growth pipeline perspective – to Xstrata plc [LSE:XTA], who is currently in merger talks with MIM.

    Significantly, from a risk point of view, Philippines stalwart, the Aussie junior Climax Mining [ASX:CMX], has been trying to get the large Dinkidi copper-gold project off the ground for several years, but was scared off in 2001 by political uncertainty. It was currently evaluating smaller-scale alternatives, according to its website.

    Meantime, diversified mining giant Anglo American [LSE:AAL] is also looking to establish an operation in the Philippines via the exciting multi-million-ounce Boyongan porphyry copper-gold deposit, which was discovered in late 2000. Further exploration aimed at delineating a resource was continuing prior to any development decision being made.

    Lafayette has 303 million shares on issue and its stock closed slightly up today (Tuesday) at A$0.05.

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