The Economics of Processing Copper Concentrates The value of research in hydrometallurgy Frank Crundwell CM Solutions (Pty) Ltd 15 September 2005

Introduction A large number of new processes have been announced in the last 5 years. BHP Billiton and Codelco have teamed up under the banner of Alliance Copper to develop BioCOP. Phelps Dodge and Placer have teamed up to develop a pressure leaching facility at Bagdad, Arizona. Outokumpu, the developer of the industry’s leading technology, flash smelting, has announced the piloting the HydroCopper. In addition, there are at least 15 other processes, each with slightly different conditions and chemistry. Can these processes compete with smelting? Why invest money in research in hydrometallurgy?

Processing routes for copper concentrates Miners (concentrators) compete with each other on basis of ore quality and quantity. Since independent smelters that currently destroy value, processing cannot be basis for competition between miners.

Trade in copper concentrates Concentrate sold on basis of toll contract called TC/RC contract (treatment and refining charges) TC/RC is the earnings to the smelters Negotiated between copper miners and independent smelters Not correlated with copper prices TC/RC prices are generally low Smelters seeing an increasing price volatility Difficult environment to invest in smelting, particularly in the West

How do you make an investment decision? Invest if the asset generates more cash than the cost of the investment. Need to account for the time value of money by using net present value (NPV)

Capital costs Smelters are generally more capital intensive

Operating costs Smelters are generally more energy efficient

Net Present Value Neither smelters nor the competing hydromet processes are economically viable

Competition Non competitive between miners, hence co-operation and collaboration Highly competitive between miners and smelters Why would a miner develop a concentrate process? Competition between miners on basis of ore quality and tonnage

Real options valuation Strategic net present value – or real options Attempts to account for uncertainty (or volatility) in market projections, and values the options that management has to determine strategy. Options are to change your mind, defer decision, mothball operation, re-open operations etc

Strategic value Due to uncertainty in prices, option approach says there is value in doing research. However, it also says that investment is highly unlikely – prices should go to 60 c/lb before investing 300 300 Exercise price Exercise price 250 250 200 200 Value (US c/lb pa) 150 150 100 100 Option, or Option, or strategic strategic 50 50 value value Project value Project value 10 10 20 20 30 30 40 40 50 50 60 60 70 70 TC/RC (US c/lb) TC/RC (US c/lb)

Lots of strategic value in research The value in research is due to high volatility and low prices – which favour miners and not smelters. The research is not meant to be implemented – it is meant as a competitve weapon in the negotiation of TC/RC prices 300 300 250 250 200 200 Project value Project value Value (US c/lb pa) 150 150 100 100 Research value Research value 50 50 10 10 20 20 30 30 40 40 50 50 60 60 70 70 TC/RC (US c/lb)

Implications for hydrometallurgical research Unlikely that hydrometallurgy will compete with smelting on clean concentrates. Developers of hydrometallurgical processes should focus on processes that do not require the production of concentrates, which are saleable intermediates. Hydrometallurgical processes should focus on whole ore processing – such as bio-heap leaching.