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AXG Mining enters world class Peruvian copper belt

AXG Mining (ASX: AXC) has entered into option agreements with TSX listed Lara Exploration on copper+/-gold+/-molybdenum porphyry projects in the prospective Andahualyas-Yauri mineral field of southern Peru.

This field hosts world class mines such as Tintaya, Las Bambas, and Antapaccay (Xstrata), Constancia (Hudbay Minerals), Haquria (First Quantum Minerals) and Quechua Project (Pan Pacific Copper Company). 

The belt currently hosts over 4 billion tonnes of Inferred and Indicated Resources.

The option agreements allow AXG to earn up to 75% of the Condoroma and Coporaque Projects via a two stage farm in which will see the expenditure of up to A$10.50 million and cash/share payments of A$1.80 million.

Recent reconnaissance exploration at Condoroma and Coporaque has defined multiple drill ready targets which will be the focus of the maiden drill campaign commencing April/May 2012. Condoroma is situated around 45 kilometres from a sealed road and Coporaque close to the town of Espinar.

Both projects are also proximal to existing mining operations which could provide a treatment option in the event of future project developments.

Peru is fast becoming one of the hot spots of exploration and mining with copper production scheduled to increase to over 2.0 million tonnes per annum by 2015. Peru is now the second ranked copper producer of the world behind Chile and fourth in terms of molybdenum production.

The Peruvian Government has taken a tough stance on minority groups opposed to mining. For example, recent tensions between local farmers surrounding the proposed US$4.8b Minas Conga copper development which saw the imposition of a state of emergency by President Ollanata Humala.

The AXG technical team has also been strengthened recently led by geologist Jeremy Niemi (15 years experience including stints at Noront Resources, Kinross and INCO Exploration) and Peruvian Engineer Carlos Lzaro, Proactive Investors believe the Company now has the necessary manpower to execute the exploration program.

Funds from the current A$1.50 million capital raising will be applied to initial cash payments to Lara Exploration (A$100K) and for the Company’s maiden drill program scheduled to commence in April/May 2012 on several drill ready targets.

RM Research is maintaining a speculative buy on the Company ahead of the commencement of exploration in mid 2012.

INVESTMENT CASE

Previously defined targets: Previous reconnaissance exploration on Condoroma and Coporaque has defined multiple drill ready targets which will be the focus of the maiden drill campaign commencing April/May 2012.

World Class Mineral Endowment: Proactive Investors believes both Condoroma and Coporaque are strategically located along the Andahualyas-Yauri mineral field, a host of world class mines such as Tintaya, Las Bambas, and Antapaccay (Xstrata), Constancia (Hudbay Minerals), Haquria (First Quantum Minerals) and Quechua Project (Pan Pacific Copper Company).  The belt is prospective for porphyry hosted Cu+/-Au+/-Mo deposits and hosts over 4Bt of Inferred and Indicated Resources.

Experienced Technical Team: Led by geologist Jeremy Niemi (15 years experience including stints at Noront Resources, Kinross and INCO Exploration) and Peruvian Engineer Carlos Lzaro, Proactive Investors believe the Company has the necessary manpower to execute the exploration program.

Infrastructure Advantages: Condoroma is situated around 45 kilometres from a sealed road and Coporaque close to the town of Espinar. Both projects are also proximal to existing mining operations which could provide a treatment option in the event of future project developments.

Peruvian Mining Industry from Strength to Strength: Peru is now ranked 2nd in world copper production (behind Chile), 4th in Molybdenum and has the 6th highest exploration expenditure in the world. The country remains stable with a strong mining culture.

COMPANY OVERVIEW

AXG Mining is a mineral exploration company that listed on the Australian Securities Exchange in 2006 raising A$4.0 million to initially focus on mineral exploration in Western Australia.

The Company has recently switched its focus to South America where it has entered into option agreements to earn up to 75% in two Cu+/-Au+/-Mo porphyry projects in Southern Peru, namely the Condoroma and Coporaque, Projects. Significantly the projects are situated along the highly prospective Andahuaylas-Yauri belt, a known host of several world class Cu+/-Au+/-Mo deposits.

AXG Maps

MAP of Projects


Farm-in agreement on Condoroma and Coporaque

In early September 2011, AXC signed Letters of Intent with TSX Listed Lara Exploration Ltd (“Lara Exploration”) (TSX: LRA) to earn up to 75% in both the Condoroma and Coporaque Projects, situated in the Cusco region of southern Peru. The projects comprise 24 mineral concessions covering 17,764 hectares. Previous reconnaissance exploration has been successful in outlining a number of drill targets which will be the target of follow up drilling by the Company in April/May 2012.

Regional Exploration and Mining Activity

Both Condoroma and Coporaque are strategically located along the Andahualyas-Yauri mineral field, a host of world class mines such as Tintaya (105Mt @ 1.16% Cu, 120-Ktpa Cu production), Las Bambas (1.50Bt @ 0.61% Cu, 160Ktpa Cu) and Antapaccay (105Mt @ 1.16% Cu, 160Ktpa Cu production) (Xstrata), Constancia (372Mt @ 0.39%, 100Ktpa Cu forecast) (Hudbay Minerals), Haquria (688Mt @ 0.63% Cu, 230Ktpa forecast Cu production) (First Quantum Minerals) and Quechua Project (680Mt @ 0.38% Cu, 75Ktpa forecast Cu production) (Pan Pacific Copper Company). The belt is prospective for porphyry hosted Cu+/-Au+/-Mo deposits and hosts over 4Bt of Inferred and Indicated Cu+/-Au+/-Mo Resources.

Peru is ranked 2nd globally in copper production, 4th in the world in molybdenum production and is South America’s largest gold producer. Peru is also ranked 6th globally and 2nd in Latin America in terms of attracting exploration investment.

Condoroma Project (AXG earning 55-75%)

The project comprises 12 mining claims covering 9,816 hectares and lies adjacent to historical Au, Cu, Ag, Pb, Zn mines. Previous geochemical sampling together with Induced Polarisation (“IP”) and Magnetic surveys has outlined a total of six drill targets (Figure 3) covering a total area of 1.7km x 0.80km. Diamond drilling is scheduled to commence in April/May 2012.

Skarn and porphyry copper mineralisation is the target, both common mineralisation styles known to host major mineral deposits in the region. Significant surface mineralization and structural features transect the property and trend towards the Tintaya-Antapaccay deposits to the northwest. An IP survey has revealed conductive targets along this trend which will be the target of the upcoming drill campaign.
 
Terms of Option Agreement

The Company may earn 55% by:

- On exercise of the option agreement a payment of US$100K together with further cash payments of US$700K (mixture of AXG shares + cash), and
- AXG can earn an addition 20% by:
a. Cash payment to Lara Exploration of US$1.0 million within 60 days of earning a 55% interest in the Condoroma, and
b. Spending a further US$7.0 million over the subsequent 3 year period, and
c. Completing a Pre-Feasibility Study within 4 years of executing the option for an additional 20% interest.

Coporaque Project

Previous reconnaissance exploration by Lara Exploration has identified outcropping porphyry Cu-Au-Mo mineralization and six areas worthy of follow up exploration. Follow up exploration will consist of more detailed mapping and geochemical sampling ahead of a maiden drill campaign later in the 2012 season.

Terms of Option Agreement
Pursuant to a Letter of Intent, the Company may earn 55% in the project by:

- On exercise of the option agreement a payment of US$100K together with further cash payments of US$650K (mixture of AXG shares + cash), and
- AXC can earn an addition 20% by:
a. Cash payment to Lara Exploration of US$1.0 million within 60 days of earning a 55% interest in Coporaque, and
b. Spending a further US$7.0 million over the subsequent 3 year period, and
c. Completing a Pre-Feasibility Study within 4 years of executing the option for an additional 20% interest.

MILESTONES

AXG Milestones



The 2012 program (Table 3) at Condoroma will provide the most interest to the market as drill targets are further defined and a 1,500m drill program is launched. Coporaque remains more grass roots with activity in 2012 likely to be limited to reconnaissance exploration ahead of a maiden drill program in 2013.
 
CORPORATE

The Company is currently issuing up to 170 million Shares at 0.9 cents each to raise up to A$1.5 million (before expenses of the Offer).

In addition to the cash and share payments to Lara Exploration as set out above, the Company (pursuant to a Term Sheet dated 16 September 2011) will also acquire (subject to due diligence) 100% of the issued capital of Halston Exploration Inc. (“Halston”) which in turn has the right to earn up to 75% interest in Condoroma and Coporaque:

(i) 126 million fully paid ordinary shares of AXG, and

(i) reimbursement of up to US$150,000 in business development expenditures. Post the acquisition of Halston,

The above payments are subject to, inter alia, due diligence and the execution of the Option and Farm In Agreement on both Condoroma and Coporaque.

COPPER & BASE METAL OUTLOOK

Overall the GFMS Base Metal Index (Figure 4) is off 30% since March 2011 on the back of the European debt crises and weak growth among developed economies. In addition to the Europe debt crisis, the preliminary reading of HSBC's China showed the level of activity of Chinese factories stood at 49 reflecting contraction in December 2011, though the decline was slower than in November. Growth in China’s export values eased to it’s softest pace in almost two years in October with partial indicators of domestic demand remaining relatively robust.

While weaker investor demand implies that the price of copper may further weaken, supportive fundamentals should sustain prices around current levels. Stocks of all major metals in LME warehouses remain above long-run average levels.

Investor appetite for base metals has improved over the past month or so, with most industrial metals prices recovering somewhat from heavy falls recorded in September.
 
RM Research is forecasting further market volatility to drive base metal price movements over the coming months. While tight supply side factors are persisting in some of the base metals markets (e.g. copper) – supply is projected to pick up over the next few years.

Apprehension over slowing growth in the emerging economies, most notably China, has generated some concern over whether demand from these economies will be sufficient to maintain current prices. We also maintain our view that demand from emerging economies will offset weaker developed economy growth and expected increases in metal supply.

PERUVIAN MINING SECTOR

Mining accounts for around 61% of Peru’s exports and 5% of GDP. Current extraction covers gold, copper, silver, lead, zinc, molybdenum, tin and iron with the majority of mines (Copper/Gold) situated in the Andes region.

Peru ranks highest in Latin America in terms of its climate for investment in mining. The estimated portfolio of mining investment is composed of 41 major projects, including both exploration and expansion projects, which together amount to US$42.5 billion for the period 2010-2016. Over US$6.8 billion of the announced investment will come from mining companies such as Xstrata Copper and Antamina (BHP Billiton, Xstrata Copper).

Despite the huge investment in Peru by multinational mining companies, the recent confrontation over US$4.8 billion Minas Conga development between President Humala and local protesters – which also included the declaration of a state of emergency, demonstrates that clashes between local farming communities and multinational mining companies are set to continue for the foreseeable future.

Investment in mineral exploration in Peru has grown rapidly in the last three years and now accounts for 5% of the global exploration budget (>US$534 million). According to the Metals Economics Group, Peru ranked 6th in the world and 2nd in Latin America for investment in exploration.

RISK ANALYSIS

- The Company is primarily exposed to copper and recent declines in base metals on the back of the European debt crisis together with poor economic indicators in the developed economies could put further pressure on base metals in the medium term.

- Further declines in equity markets may continue to put pressure on junior resource companies as investors switch out of “risk” into perceived safe haven investments. Our medium term view is that the risk premium has been eroded for many junior resource companies and we see near term upside.

- Political unrest in Peru, which had a traditionally strong union base, could see an increase in risk rating for the country and a decline in exploration and mining activity. Proactive Investors does not perceive this to be a significant risk at this stage however the recent confrontation over US$4.8b Minas Conga development between President Humala and local protesters – which also included the declaration of a state of emergency, demonstrates that clashes between local farming communities and multinational mining companies are set to continue for the foreseeable future.

- There is a risk that AXG will not be able to raise sufficient funds to either exercise the option or meet the expenditure obligations as set out above due to the prevailing difficult conditions for riskier asset classes.

CONCLUSION

Condoroma and Coporaque represent two high-impact base metal projects situated close to infrastructure, operating mines and in a world class mineral province with over 4Bt of resources that remains in its infancy.

With drill-ready targets at both projects, the market will be taking significant interest in exploration activity as it gears up for its maiden drill program in April/May 2012.

Led by seasoned geologist, Jeremy Niemi, RM Research remain cautiously optimistic of a fruitful field season. The primary risk in our view is the ability of the Company to raise sufficient funds to fulfil its commitment over the next 12 months in a fairly difficult market for junior explorers.  Speculative Buy.