Augusta Resource Corp. (AZC) must be second guessing its decision to stray from the mining-friendly confines of its native Canada to try to develop an open pit copper mine near my adopted hometown of Tucson, Ariz. The company's proposal to get this operation permitted has dragged on as it has been met with every type of resistance imaginable, so I thought I'd share my opinion on the situation, having had a front row seat to watch the drama unfold in the pages of our local newspaper.
The latest baffling development came last weekend, when Augusta Resource's new plan to cut water use was actually met with resistance from the very opponents who called for it in the first place. Augusta must have felt like they were in a bizarre Catch-22 meets Atlas Shrugged situation, as its concession to save water by not using toxic sulfuric acid to leach copper oxide out of ore was met with indignant outrage by opponents who now contend that the plan has changed significantly enough to warrant further environmental impact studies, despite the fact that several have already been conducted on the more invasive plan.
Opponents have also tried more creative methods to put the kibosh on Augusta's plans, dredging up an ally in the Center For Biological Diversity, which is pushing for the U.S. Fish and Wildlife Service to consider designating a jaguar conservation zone that, coincidentally, would include the Rosemont mine site. If you're thinking, "I didn't know jaguars lived in Arizona," that's because they don't. The few jaguar sightings in southern Arizona in the last half-century have been males, and the last recorded sighting of a female jaguar in Arizona occurred in 1910, which does not exactly constitute a current breeding population.
Just for reference, the 4,400-acre mine project was specifically flagged as the only "threat" to the critical habitat, despite making up less than 0.5%, meaning the company is likely correct in saying it couldn't possibly affect the rest of the 99% of the 1,309 square miles of the supposedly critical habitat. I'm all for protecting wildlife when appropriate, but this and other obstinate attempts by similar groups like Save The Scenic Santa Ritas to oppose progress no matter what are absurd. The Rosemont site will occupy a small corner of one side of this mountain range that is nearly identical to all the other desert in a several hundred-mile radius. It won't even be visible from Tucson, and I would wager that more than 90% of Tucsonans would not even be able to identify which direction the "Scenic Santa Ritas" are toward, with even fewer having ever ventured there to enjoy their resplendent desolate beauty -- or perhaps even catch a glimpse of the jaguars that are rumored to frolic there.
I'll climb down off my soapbox now and try to analyze the business prospects of the company in the face of this controversy. The mine is clearly promising, enough so that even back in 2010 Silver Wheaton (SLW) committed to purchasing the life of mine gold and silver production for a cash injection of $230 million, which represents 25% of total project capex for less than 4% of the projected annual revenue. The copper and molybdenum resources are where the money's at with this project, with the latest resource estimates topping 5.9 billion pounds of copper and 194 million pounds of molybdenum, worth a total of more than $23.5 billio. Rather than contrasting this with AZC's sub-half-billion-dollar market cap like some penny stock promoter, I'd like to focus on the more relevant mine payback time frame, which comes in at under two and a half years, with a life of mine of more than 20 years thereafter. Rosemont could supply 10% of all U.S. copper output once in production in 2014 if the company can actually get it up and running by then, which should generate significant cash flow and profits for investors.
With China ramping up infrastructure spending again and the Fed buying bonds that even China wouldn't touch, this inflationary environment should make everything except toilet paper more expensive. Therefore, I think mining stocks are definitely a good place to be, especially since they've underperformed the actual metals for so long and are due for a comeback. However, the tangled web of red tape described above and numerous cost overruns at various other miners like Thompson Creek (TC) and Molycorp (MCP) illustrates just how difficult and expensive it is to get a project approved, much less actually get the stuff out of the ground.
Therefore, a more conservative approach would be to avoid the operational risks by sticking with a streaming company like Silver Wheaton, which smartly doesn't have to fork over the cash until the Rosemont mine is fully permitted. I'd suggest a similar approach for potential investors in AZC, because while obtaining the go-ahead on Rosemont should result in a pop in the stock price, investors might still be better served in following SLW's lead and waiting until all the final permits are in hand before committing any money to what would still be a good long-term investment -- as long as opponents finally abandon their misplaced impediments to technological, financial, and community progress.