Southern Copper to splash $2.5 billion on Peru project

Southern Copper Corp was declared the winner on Tuesday of the Peruvian government's first auction of the  Michiquillay copper project, the first tender in nearly a decade.

According to a statement by Southern Copper, controlled by conglomerate Grupo Mexico won the tender with a proposal to transfer $400 million to the government and pay 3% royalties.

Southern Copper affirmed Peruvian investment agency Proinversión's mineral resource estimate for Michiquillay adding that the project located in the country’s northern Cajamarca region is "indisputably a world-class mining project".

With mineral resources of 1.15 billion tonnes (at a 0.4% cut-off) and an average copper grade of 0.63%, Southern Copper said the mine will produce 225,000 tonnes  of copper per year (along with such by-products as molybdenum, gold and silver) for an initial mine life of more than 25 years, "at a very competitive cash-cost."

The estimated capital investment hovers around $2.5 billion and Michiquillay will start production in 2025 to become one of the largest copper mines in Peru, the company said. A 225kt annual production rate would place the mine in the top 20 largest copper mines in the world.

Southern's chief executive told Reuters in September that Michiquillay has arsenic impurities, requiring a "slightly higher" investment to clean up the area.

Southern Copper, the world's fifth largest mining company with a $38.8 billion market value, is up 32% on the NYSE over the past year in line with a stronger copper price.  Copper futures were trading higher on Wednesday at $3.20 a pound ($7,060 per tonne). Copper is flat this year after a near 30% jump in value in 2017 coming close to a four-year high in December.

Only two bidders

According to Proinversión, the other companies that pre-registered for the tender included Peru's Buenaventura, local units of Rio Tinto, Teck Resources and Hudbay Minerals, as well as Compania Minera Milpo, a company controlled by Brazil's Votorontim. Milpo had offered $250 million in transfers and 1.875% royalties. Eight of the interested companies did not end up bidding.

The Michiquillay copper project was originally scheduled to be auctioned off in November, but Proinversión pushed the date back twice amid political turmoil in the South American nation. Peru is the world's second biggest copper producer behind Chile with annual output of 2.4m tonnes of the orange metal.

Anglo American (LON:AAL) acquired the rights to Michiquillay in 2007 for $400 million, but the mining giant pulled out of the project in December 2014. In its 2011 annual report, Anglo envisaged a 187,000 tonnes per year operation at Michiquillay with expansion potential to 300,000 tonnes copper per year.

Anglo announced last year that it's bringing forward construction plans for its Quellaveco copper project in Peru, which is set to produce an average of 220,000 tonnes per year (300,000-plus in the first few years) starting as early as 2020.