The Northern Miner, Volume 94 Number 12, May 12 - 18, 2008

Dispute threatens more delays for Petaquilla

By Vivian Danielson

VANCOUVER--The Petaquilla project in north-central Panama has long been described as one of the largest undeveloped copper deposits in the world. A dispute between proposed partners Teck Cominco (TCK-T, TCK-N) and majority owner Petaquilla Copper (PTC-T) could stall its development yet again.

Petaquilla Copper holds 52% of Minera Petaquilla, a Panamanian company formed to develop the porphyry copper project. Inmet Mining (IMN-T) holds the remaining 48% interest. Teck Cominco can acquire a 26% interest in the joint venture company by funding 52% of the costs to bring the project to commercial production, and would have the right to receive 52% of the project cash flow until it recoups its entire investment.

The project appeared to be on track in late March when Teck Cominco and Inmet jointly announced plans to proceed with the project, albeit under a modified arrange ment. Teck Cominco, which had until March 31 to make its yeah-or-nay decision, agreed that on an interim basis, Inmet would fund project expenditures of at least US$50 million and take the lead technical role in developing the project. At or before the end of the interim period on Sept. 30, 2009, Teck Cominco can elect either to continue participating in the project and resume funding or sell its interest.

President Don Lindsay stated at the time that Teck Cominco had "high regard for the enormous potentialî of the Petaquilla project, but struck the deal with Inmet in order to preserve its ability to expand and develop other projects, notably the Quebrada Blanca and Andacollo copper projects in Chile.

Petaquilla Chief Executive Richard Fifer initially described the joint announcement as "a huge endorsement of both the project and Petaquilla's perseverance from two highly respected international mining companies." But within weeks the company delivered a notice of request to arbitrate, alleging that Teck Cominco had "failed to satisfy the preconditions" for making the final commitment to proceed with development. Petaquilla Copper also declared that Teck Cominco's interest in the property "has now been terminated."

Dispute aside, Petaquilla also notified Inmet and Teck Cominco that it had elected to have its 26% interest in the property fully carried.

Inmet responded by stating that Petaquilla Copper's notice was "inconsistent" with the company's recent and past actions concerning the project and shareholder arrangements. The notice does not dispute Inmet's 48% interest in the project, however Inmet warned that the dispute would delay the project timeline envisioned by the project partners.

Inmet further described the claim as "completely without merit" and hinted that it might join the arbitration hearings or pursue "other legal means" to refute the claims made by Petaquilla Copper under the notice.

Teck Cominco, meanwhile, is holding its ground.

"We think we've done what was required under the deal," said Greg Waller, vice-president of investor relations and strategic analysis.

At press time, Tom Byrne, Petaquilla's manager of corporate communications, said the company's position continues to be that Teck Cominco did not deliver the detailed feasibility study required under the agreement, specifically a bankable study "acceptable to five major Canadian banks."

Notwithstanding, Byrne said the door is open to resolve the matter without going to arbitration. "It's in the interest of all parties to resolve this matter. We believe the intent is there to do so."

If the matter is resolved and Teck Cominco elects to go forward in 2009, it would reimburse Inmet for $50 million of expenditures and jointly participate with Inmet to fund and develop the project. If it elects not to fund further development costs, Teck Cominco would sell its interest to Inmet, subject to provisions of the Minera Petaquilla agreement that may apply.

If the dispute is not settled, it would be the latest in a series of setback for the project, which was initially discovered in 1968 by a United Nations Development Program team. The Panamanian government put the project out to tender in mid- 1969, after the UN team completed 37 short holes on the Petaquilla and Botija deposits.

A consortium of seven Japanese companies won the project in 1971, and conducted drilling programs that led toapositive feasibility study for a proposed 18,000-tonne-perdayoperation for both deposits. The consortium abandoned the project in 1980, citing political difficulties with the Panamanian government of the day.

The project was re-activated in the early 1990s when a predecessor to Inmet optioned the project from a Panamanian company and brought in junior Adrian Resources as an operating partner. Adrian discovered multiple deposits on the property, including the satellite Molejon gold deposit, but ultimately focused its efforts on defining the advanced Petaquilla and Botija deposits.

In 1994, a pre-feasibility study by Kilborn Engineering recommended that the project proceed to full feasibility based on minable reserves of 743.75 million tonnes grading 0.53% copper, 0.014% molybdenum, 0.12 gram gold and 1.31 grams silver per tonne for the Petaquilla and Botija deposits, within a much larger (1.6 billion tonnes) geological resource.

Capital costs for a 60,000-tonne-per- day operation were estimated at US$452 million, including a contingency of US$59 million. The on-site operating cost was projected at US$0.34 per pound of copper produced, based on a copper price of US$1 per pound and a gold price of US$375 per oz.

In 1994, Adrian negotiated a deal allowing Teck (a predecessor of Teck Cominco) to earn half (26%) of its 52% interest by funding a bankable feasibility study and arranging its portion of project financing.

Two years later, in 1996, Fluor Daniel Wright delivered a production scoping study for the Botija, Petaquilla, Valle Grande and Molejon deposits, which concluded that 120,000 tonnes per day would be the optimal throughput rate for the open-pit deposits, providing for a mine life of 33.4 years.

Teck funded and delivered a bankable feasibility study (by H. A. Simons) to the partners in early 1998, with a capital-cost price-tag of US$1.1 billion and total reserves of 1.1 billion tonnes grading 0.5% copper with minor moly and gold. The company had the right to defer development at copper prices below US$1.15 per pound, and took it, particularly after seeing the costs associated with constructing an owner-operator diesel-fired power plant.

"Petaquilla was competing with projects that were much higher grade at that time," Waller says, noting that copper was barely above US$0.70 per pound.

Copper prices remained low until the early 2000s, so it wasn't until early 2007 that Teck Cominco released an updated feasibility study byAMEC Americas, the first to comply with new NI 43-101 standards. By this point, Adrian had been acquired by Petaquilla Minerals (PTQ-T, PTQMF-O), which subsequently spun-out Petaquilla Copper to hold the copper deposits. Petaquilla Minerals retained and focused on the Molejon gold deposit.

The 2007 updated feasibility study for Petaquilla (based on similar parameters as the 1998 study) projected capital costs of US$1.7 billion and cash operating costs of $0.76 per pound copper or an average total cost of US$1.06 per pound for the first ten years of the 23-year mine life.

A year later, in February of 2008, Inmet and Teck released an interim report on the Petaquilla Front Engineering and Design (FEED) study, based on the mine plan developed in 1998. Cash costs net of by-product credits were estimated at US$0.85 per pound of copper produced for the first ten years of the 23-year mine life, but capital costs were estimated at a whopping US$3.5 billion, including a contingency of US$515 million.

The increased costs were attributed to "scope changes, including enhancements in erosion control, water management and other environmental protection measures, as well as increases in equipment and construction costs that have been affecting projects worldwide."

This study (and all previous studies) included cost estimates for proposed construction of port and power facilities to support the project. In the FEED study, capital costs for the oil-fired power plant alone were estimated at US$500 million, plus another US$280 million for the port facilities.

Throughout all this, Petaquilla Minerals made no secret that it was engaging in discussions with other parties to potentially buy out its current partners. In late 2005 and early 2006, Chinese companies were reported to be involved in these discussions.

In 2007 and 2008, Petaquilla Copper signed confidentiality agreements with five major mining companies based in China, Japan, Korea and Europe. In early 2008, the company reported that these companies had completed due diligence studies and were evaluating financing strategies, including equity, debt and off-take agreements, to finance either 26% or 52% of the copper project.

"They're still very interested in the asset and in being part of the project," Byrne says.

Waller says Teck Cominco is aware of these discussions with third parties. "They were held in the event that we might elect not to participate."

In early 2008, Petaquilla Copper and Petaquilla Minerals incorporated an infrastructure company that they will own 51% and 49%, respectively. The new company will focus on managing and expediting development of the port, power plant and related facilities to support development of the Molejon epithermal gold project.

The infrastructure company is presently in advanced negotiations with a "global power producer" for the construction of a 360 Mw thermal power plant on the Caribbean coast. The proposed plant would have excess capacity that could be sold regionally to local communities, while also providing "over the fence" power to the Petaquilla copper project.

"By offloading these two items -- the port and power--the numbers become totally different and lower capital costs by US$800 million," Byrne says.

The Molejon and Petaquilla deposits are situated in north-central Panama, near tidewater on the Caribbean Sea, and 75 km west of Panama City.

-- The author is a Vancouverbased freelance writer specializing in mining issues, and a former editor of The Northern Miner.