Courtney Chamberlain of Minera IRL sets the gold standard for mine developers

When Courtney Chamberlain watched the first gold pour at his company's Corihuarmi mine, high in the central Andes of Peru, it marked a major milestone in his strategy to build a mid-tier mining company. By coincidence, the start of production in March 2008 came in the same week that the gold price broke through the $1,000 per ounce barrier for the first time ever.

By the usual standards of the executive chairman of London and Lima listed Minera Irl MIRL , Corihuarmi is a modest project. Yet for the past three years it has bankrolled the company through a market downturn that left a number of its peers ragged or broke. It also funded a relentless exploration and development programme that looks set to generate a second and third generation of mines in Latin America and put Minera IRL on a 200,000 ounce per year footing by 2014. From a low last June of 56p, the Minera IRL share price on AIM currently lies at around 84p, having spent the second half of 2010 gaining ground, which values the company at £101m (US$162m).

In the pipeline are major projects at Ollachea in Peru and Don Nicholas in the Patagonia region of Argentina, the latter of which was snapped up in the company's acquisition of struggling neighbour Hidefield Gold in December 2009. Beyond that, another longer-term project could potentially see production start from the company's latest discovery at its Escondido project in Patagonia, which adjoins the Calandria Sur discovery made by its AIM-listed compatriot, Mariana Resources MARL . Elsewhere in the region, and among the company's larger peers, industry giant Barrick Gold ABX runs the Pierina and Lagunas Norte gold mines in Peru and the Veladero gold mine in Argentina while Hochschild Mining HOC operates three underground epithermal vein mines in southern Peru.

In an interview with Stockopedia, Chamberlain discussed Minera IRL's strategy in South America and the reasons why investors should be taking a closer at the company.

Courtney, tell me about your background and what led to the creation of Minera IRL?

I grew up in a mining family, got a degree in metallurgy and went on to work first of all for Newmont Mining Corp NEM and then Newcrest Mining NCM for 29 years, much of the time as a senior executive and then 13 years on the board. In 1997, myself and several others formed a consultancy called Investor Resources Ltd – which is what the IRL stands for in Minera IRL. It is an advisory group and we did a lot of interesting work for different clients but by 2000 we felt that we wanted to put some of our own money into a venture and create something in our own right. By that stage I had some experience in South America having supported Newcrest there during the 1990s. I felt that the geological potential, the discovery potential, the mining culture and the mining law here was conducive to building a business unit. We put our money into it over the first two and a half years and then in 2003 we brought in private equity and then, when we had our first mine ready to develop, we went public in 2007. Now we are on two exchanges and continuing to build.

Has your focus always been on gold?

Yes, it has been. I have been in gold since 1975, I was involved in the development of the Telfer gold mine in Western Australia, which was the largest gold producer for many years. I like the gold business, I have had experience around the world of various aspects of gold mining. It is a commodity you can always sell and you don't have to be on railway lines to transport it. I am also a believer in gold, I think that with currencies being weak a lot of people think gold is an ultimate source of wealth and security. It is always going to have a future – and that's my philosophy.

What are your views on the performance of the gold price and how bullish are you about it?

Look at the fundamentals – mine production continues to drop because the development of new gold mines around the world is not keeping pace with falling production. A number of high-cost jurisdictions, particularly South Africa, have really fallen off the perch in terms of their dominance in the gold mining industry. I think that falling mine production is going to put pressure on things and I also believe that in the Far East, particularly China and India, as they become more affluent and become volume buyers of gold, there will continue to be strong demand. I also feel that the cost per ounce operating costs have increased so that going back to the $400-$500 gold price of not too many years ago would mean that a huge sector in the mining industry would be uneconomic, it would be making a loss at that level. So I think the fundamentals for the cost of production have changed as well and that is going to augur well. If the gold price drops significantly you would find that mines would close down and that would put more pressure on the supply side.

What has been the company's strategy in terms of building a production portfolio – starting with your flagship Corihuarmi mine?

Our philosophy was to start with a fairly modest deposit and roll it into operation. We felt that we had a better chance of sourcing a modest sized deposit than holding out for a large one. We felt that we had a better chance of being able to fund the exploration, the discovery, the feasibility and the capital costs of building a smaller mine. We also felt that it would be a great opportunity to get some cashflow, build up the operating and development team and use that as a springboard for moving on to the next generation of mines.

Now, that didn't appeal to everybody, some people wanted a big deposit from day one but I know how difficult that is. For us, as a strategy, it has worked extremely well. We brought Corihuarmi on stream in March 2008 at a time when it was very difficult to raise money on the market. We saw a lot of our peers who were not in production really struggle to raise money and in some cases going broke or being in a situation where they needed somebody to take them over. We had good production, good cashflow and a rising gold market. Not only did it sustain us but it allowed us to put that money back into exploration and make the discovery at Ollachea and it also allowed us to carry out the Hidefield Gold transaction in late 2009.

In terms of the mine itself, it is only simple, it is an open pit heap leach operation at an altitude of 5,000 metres in the Andes, so it is pretty high. We made a return on $20m capital in seven months so it paid for itself quickly. We are running at about 30,000 ounces per year now and, as I said, that is only modest but we are still generating almost $40m in sales this year. Our cash cost is $400 per ounce and we are selling at almost $1,400 at the moment so that is nearly $1,000 per ounce margin.

In terms of further exploration, are you looking further around Corihuarmi or is the attention really on the Ollachea and Don Nicolas projects?

At Corihuarmi itself I think that what you see is what you have got and we can see 2015 and maybe 2016 in terms of mine life but production will gradually drop off. So, we need to rely on developing a new generation of mines and we are working very hard on that at the moment. We have an exploration project called Bethania which is only about 10km away from Corihuarmi, which is very interesting but is more of a gold porphyry exploration project and would look somewhat different to Corihuarmi.

Looking to the future, Corihuarmi got us started and it will continue to be good for a while but Ollachea is the jewel in the crown. We acquired that from Rio Tinto RIO in 2006, started exploring in 2008 and quickly announced a discovery. It is a very big system, a gold deposit unlike anything in North or South America but more similar to some of these more central Asian gold deposits. We completed a scoping study in November 2009 that indicated a viable project and we have now moved on to a pre-feasibility study, which is now in progress. We announced a resource update of 1.2m ounces indicated and we have done a major drill-out in the last 12 months, confirming a very high quality resource and another 0.5m ounces inferred and a new discovery along side. So we have got 1.6m ounces in various categories, most of which is in a robust category, and we can see pretty clearly on the horizon 2m ounces coming out of Ollachea. It is open ended in all directions so there is a lot of exploration work to do going forward but it could be a very nice, long-life mine once it is up and going.

Would you be tempted to sell a project like that before it gets to production?

No, we are developers and operators and our strategy is to build a mining company. We won't balk at the challenge. The capital cost will be around $150m, although that will need fine tuning in the pre-feasibility study, and we will go on to develop it in our own right. The same thing goes for Don Nicholas in Patagonia.

We have no specific plan to bring in partners although we often have discussions with colleagues in other companies. If the conditions were right we would be amenable to growing a bigger company through a merger. In terms of corporate deals, I think consolidation is the way the industry will go over the next few years and I think that is a good thing – if one and one can make five.

The Patagonia opportunity through the takeover of Hidefield was a small scale example of this. We felt that the company had very good assets, not only a very large exploration package in Patagonia but a resource base that we thought we could bring into production quite quickly. That company was floundering at the time and they were amenable for a rescue bid. We acquired it and it just gets better and better. The resource has filled out and is looking robust, we have got a feasibility study in progress, we made a discovery at a project called Escondido last September and we have got a list of exploration targets to continue with. That is an idea of how we took over a smaller company but that could quite as easily in the future be a merger of equals.

Clearly your project pipeline is keeping you busy so how important is further exploration in your strategy?

We have got $10m budgeted for exploration in the next year. Of that, $4m will be used on continuing to expand Ollachea but $6m will be spent on drilling and assessing other good targets that we are hoping will become the next discoveries for our third generation of mines. We continue to keep a look out for new exploration or development properties that we can bring in to our portfolio. We feel that between four and six good exploration properties at any one time is a good mix because it is a high risk business and a lot of them can fall over. But you are never going to buy a really good deposit, you have got to discover it and that is what we are out there trying to do.

Why should a private investor take a closer look at Minera IRL?

Well, I think we have a growth profile, we have over 2m ounces in resources but we are only valued at a market cap of $80 per resource ounce. If you look across the industry, that is cheap so we feel there is a lot of unlocked value in the share price. Our challenge in the next six months is to get a positive pre-feasibility of Ollachea and a positive pre-feasibility at Don Nicholas that we can then turn into the next generation of mines. Within two or three years we will have Don Nicholas up and running and we will be developing Ollachea. At the end of that process in 2014 we should be up around the 180,000 – 200,000 ounce mark and that would give us sales well over $200m per year and have our future secured. Private investors should be looking at us as a company that has already got one mine up and going and a growing resource base, a team of 500 people that know what they are doing in Latin America and on a growth curve. We, as executives, have still got 7% of the company and so we are heavily incentivised to make this work and we are determined to make this a success.

The pre-feasibility studies at of Ollachea and Don Nicholas will both happen close to mid-year. Along the way we hope to get some more exploration success so that people can see we are finding new things. We did a C$37m fundraising last November which means we can fund our objectives over the next 12-18 months. That is good for us because we can now rely upon these work programmes going forward.

Thank you for talking to Stockopedia.

Thank you.

Stockopedia