The Ajax Players: International partnership born of needs on two sides

The Ajax File: All That Glitters - Part 1 of 5

Cam Fortems / Kamloops Daily News
July 26, 2011 01:00 AM

Abacus president and CEO Jim Excell

When KGHM began talks with Vancouver firm Abacus Mining Exploration late in 2009, talks that would eventually lead to a half-billion-dollar deal, it did so with a relic of the Soviet Union peering over its shoulder.

KGHM Polska Miedz S.A., whose mining and refining interests have been restricted to Poland, has roots back to Soviet-era government from the 1950s.

"It's a state enterprise," said Andrzej Knigawka, an analyst with ING Group, based in Warsaw. "The state is gradually selling down its stake."

The state treasury remains in control through its 32 per cent ownership, a controlling interest that allows it to oversee company strategy through appointment of directors.

"Every time we had a general election, it changed the management team," Knigawka said. "It's been improving of late. Changes in the management team in the last four years have been less frequent."

KGHM operates three underground mines in Poland, as well as two associated smelter and refining operations along with other mining developments. The company also owns shares of other unrelated enterprises in Poland, including in telecommunications.

Ajax is the first international development for the company listed on the Warsaw Stock Exchange in 1997 following what a mining expert based in Vancouver called a disastrous foray in the Democratic Republic of Congo in the 1990s.

"They wanted to diversify," said Patrick Donnelly, a former analyst with Salman Partners who followed the Ajax project on behalf of the firm.

"They tried to diversify into Africa, in the DRC, and got burned."

More than a decade later "they're very bullish on copper," said Donnelly, now an executive with Hana Mining.

"They have a lot of cash and they wanted to diversify into a jurisdiction they're comfortable with."

At the same time as KGHM was looking for a safe and profitable way to deploy several hundred-million dollars in profits from its enterprises at home, executives with Abacus were looking to raise millions to develop the Ajax deposit, which despite rising copper and gold prices, failed to attract much market attention.

The small exploration company listed on the TSX Venture exchange purchased the mining rights to the claims starting in 2004 and drilled thousands of metres to prove the resource.

"It wasn't a large deposit," said Donnelly.

"(But) it has a fantastic location - that's what I liked. It was also next to New Gold, which was going ahead."

While a preliminary economic assessment identified that an annual 106 million pounds of copper along with 100,000 ounces of gold could be processed "they (Abacus) couldn't seem to get any traction in the markets," Donnelly said.

Abacus president and CEO Jim Excell said despite the numbers and location, in order to develop Ajax the company was looking at a massive dilution of its stock through issuing millions of shares or difficult loans with banking groups.

Instead, it created the joint venture agreement with KGHM, which provided all the capital required.

Excell joined Abacus soon after the deal with KGHM was cemented.

The Polish mining firm, with a market capitalization of about $37 billion, is slightly larger than Canada's Teck. It is about half as large as Honda and Disney Corp.

"They have the record, skills and interest to come and get involved in a project outside Poland," said Excell, a metallurgical engineer who is a former president of BHP Billiton Diamonds.

KGHM has a 51 per cent stake in the joint venture. Under its terms, Abacus pays back its share of more than $500 million in development costs using revenue from the mine.

Knigawka said the foray into Canada has been well received by investors, particularly because unit costs of production here are forecast to be about half costs from its copper mines at home. Gold prices have also "gone through the roof," since the deal was announced a year ago.

"People like the fact the company is involved in a politically stable country with a longstanding mining tradition that has infrastructure, labour and is not far from the Vancouver port."

Donnelly said the same factors that have heightened concern about impacts on neighbourhoods add to the economic appeal: Ajax is beside a city of 80,000 with an experienced labour pool, mining services, easy access to the B.C. Hydro grid and within 10 kilometres of two national rail lines.

Knigawka said investors don't see any downside in Ajax's proximity to Kamloops.

The analyst who has covered KGHM for decade said open pit copper mining is considered relatively simple, sharing few of the liabilities of mining coal, for example, and the firm has no environmental disasters on its record.

"What should comfort the community is it's potentially the first of a number of investments in North America. They'd be shooting themselves in the knee if they screw up on the environment or other issues," he said.

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