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Argonaut Resources signs copper major Antofagasta to fund Lumwana West in Zambia

Published: 09:13 29 Apr 2014 AEST

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Argonaut Resources (ASX: ARE) has attracted Chilean copper major Antofagasta plc (LON: ANTO) to fund the Lumwana West project in Zambia to production.

In addition, Antofagasta - which is one of the world's biggest copper producers will also become a cornerstone investor in Argonaut via a placement of shares at $0.2156 per share.

Significantly, the deal will allow for Argonaut to be either carried into production or bought-out prior to construction.

Argonaut has executed the option agreement with a wholly owned subsidiary of Antofagasta for the exploration and development of Lumwana West.

The deal highlights that junior mining companies with high-quality projects can attract funding even in the current environment and is a coup for the company.

The £7.8 billion market capped Antofagasta, part of the FTSE-100 Index. can earn 70% of the project by spending US$18.9 million on exploration plus the amount required to complete a feasibility study to international standards.

If the project is feasible, Argonaut is either carried into production or bought-out prior to construction.

Antofagasta will become a cornerstone shareholder in Argonaut via a US$1.1 million placement, with funds to be used to increase Argonaut’s interest in the Lumwana West project to 90%.

Argonaut will be operator until an election by Antofagasta during Phase II.

The Lumwana West licence area covers numerous prospects, as defined by regional soil geochemistry, and has a global exploration target of between 1,090 million and 1,560 million tonnes at 0.45% to 0.65% copper.

Zambia continues to position itself as a significant global copper producer, and in 2013 produced 830,000 tonnes - which places the country within the top ten


Lindsay Owler, Argonaut director

Lindsay Owler, Argonaut director, commented: “The implications of this Agreement are considerable. The Lumwana West project is now fully funded with a timetable for development.

"Project funding provided via the Agreement together with recently announced capital raising programs sees Argonaut’s capital requirements met. Investors can expect strong news-flow.”


Exploration next steps

Major exploration work will commence at Lumwana West in May 2014, and will include diamondcore drilling targeting extensions and repetitions of the Nyungu deposit plus discovery phase drilling at the West Mwombezhi and Kavipopo prospects.

Drilling will cover over 8500 metres.

The tenor of these targets, the scarcity of emerging copper mines and the global decrease in exploration activity makes this work internationally significant.


Principal Commercial Terms

The option agreement between Antofagasta, Argonaut Resources NL and Argonaut’s related subsidiaries is in five phases. The principal commercial terms are described below.

Phase I involves the input by Antofagasta of US$5M within one year in exchange for a 25% interest in the Project. The funding is in two parts: US$3.9M for exploration works commencing May 2014 and a US$1.1M placement in Argonaut at $0.2156 per share.

Placement funds will be used by Argonaut to acquire an additional 39% interest in the Project, for a total of 90%, via the underlying Lumwana West Joint Venture.

Phase II involves exploration and development expenditure of US$15M by Antofagasta within four years of the completion of Phase I at a minimum expenditure rate of US $2.5M per year. Antofagasta can earn an effective 51% interest in the Project by completing Phase II.

Phase III involves the completion of a feasibility study to international standards. Antofagasta may conduct additional work necessary to commence the feasibility study, such as a preliminary feasibility study, prior to electing to commence the definitive study. Antofagasta will have up to two years to complete additional work and four years to complete the feasibility study. Antofagasta can earn an effective 70% interest in the Project by completing the feasibility study.

Phase IV is the period following the delivery of the feasibility study, but prior to the development decision. Argonaut may elect not to contribute or dilute during this period, subject to certain reimbursement conditions to be paid out of future dividends.

Phase V is the period after a development decision when, if Argonaut decides not to fund its pro-rata share of the project, Antofagasta may elect to either carry Argonaut into production, with Argonaut’s development costs being funded by 60% of future dividends, or buy-out Argonaut’s interest for its pro-rata share of the Project’s net present value.

Antofagasta may elect to stop contributing at certain stages in which case various provisions including standard dilution and drag-along/tag-along rights will apply.

Argonaut will be the operator under the Agreement during Phase I and part of Phase II. Antofagasta may elect to become operator at any stage during Phase II.


Placement

The Placement will involve the issue of the following securities to Antofagasta: 54,899,991 ordinary shares at 2.156 cents per share. The shares are intended to be issued to Antofagasta on 5 May 2014.

20,540,433 ordinary shares will be issued in accordance with ASX Listing Rule 7.1 and 34,359,558 ordinary shares will be issued in accordance with ASX Listing Rule 7.1A.


Rights issue


Announced last month, Argonaut will undertake a rights issue with shares and options to be offered on the basis of one new share for every five ordinary shares held at the record date, priced at $0.022.

There is one free option for every three new shares issued.


Analysis


Argonaut's shares are set to be re-rated on the agreement with Antofagasta.  It de-risks the development of Lumwana West and provides a means to be either carried into production or bought-out prior to construction.

Antofagasta is more generally known for its production profile in Chile and this agreement is a significant vindication of the prospectivity and profit potential it sees in Lumwana West and likely low operating costs.  We would surmise that for Antofagasta to get involved the upside potential must be very significant indeed.

Besides Lumwana West, Argonaut has other key projects which are not reflected in the share price including the Torrens projects in South Australia, located 75 kilometres from BHP Billiton’s (ASX: BHP) Olympic Dam mine.

Further adding to the case for re-rating, are Argonaut's listed investments, valued at close to $1.8 million, while Argonaut carries a market cap of just $5.7 million.

However, the Antofagusta agreement is the cream and provides a path that is now paved for potential development of Lumwana West from a major as well as receiving an equity funding injection.

Fuelling potential is a major 8,500 metre drill campaign set to commence in May.

 

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