Straits to pay $120m to exit processing deal

STRAITS RESOURCES is writing a $US120 million cheque to extricate itself from a costly supply deal for copper concentrate from its Tritton mine near Nyngan in NSW with the metals trading arm of J.P. Morgan.

By InvestSMART · 21 Sep 2011

By InvestSMART ·
21 Sep 2011

Comments

The supply terms were entered into by the previous owners before Tritton's float on the ASX in 2002 and have become horribly "out of the money". Straits is handing over about one-third of the copper price in treatment and refining charges compared with the industry average of about 5 per cent.

While copper has eased in recent weeks, the current price of $US3.80 a pound is well above historic highs and above Tritton's cash cost of production of $US2.13. That makes the terms of the offtake agreement particularly painful.

To rid itself of the cash drain, Straits will pay J.P. Morgan the $US120 million in return for the agreement being replaced by one more in line with prevailing industry charges. Straits said Tritton finally would become a "clean" asset. Annual production is about 25,000 tonnes of contained copper.

Because of the unfavourable offtake agreement, the mine has struggled to make a profit despite bumper copper prices. In the five months to June 30 (Straits' most recent reporting period), Tritton lost a net $4.8 million.

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Frequently Asked Questions about this Article…

What deal is Straits Resources exiting with J.P. Morgan and how much will it cost?

Straits Resources is paying US$120 million to exit a costly supply/offtake deal with the metals trading arm of J.P. Morgan. The payment will replace the old agreement with one that reflects prevailing industry charges.

Why did Straits Resources decide to pay US$120 million to end the Tritton mine offtake agreement?

Straits said the existing offtake terms, entered by the previous owners, left Tritton paying about one‑third of the copper price in treatment and refining charges versus the industry average of about 5 per cent. That made the mine a cash drain despite healthy copper prices, so Straits chose to buy out the deal.

How will exiting the J.P. Morgan deal make the Tritton mine a “clean” asset for Straits?

By paying US$120 million, Straits will replace the unfavourable contract with terms aligned to prevailing industry treatment and refining charges. That should remove the disproportionate processing cost burden and leave Tritton as a ‘clean’ asset on Straits’ books.

How much copper does the Tritton mine produce and where is it located?

Tritton produces about 25,000 tonnes of contained copper a year. The mine is located near Nyngan in New South Wales (NSW), Australia.

How did the unfavourable offtake agreement affect Tritton’s recent profitability?

Because of the unfavourable agreement, Tritton struggled to make a profit despite high copper prices; in the five months to June 30 (Straits’ most recent reporting period) the mine recorded a net loss of $4.8 million.

What were copper prices and Tritton’s cash cost of production at the time of the announcement?

The article notes a copper price of about US$3.80 a pound and Tritton’s cash cost of production at US$2.13 a pound. Even with prices above cash cost, the high treatment and refining charges made the prior deal particularly painful.

Who originally agreed the supply terms that hurt Tritton’s margins, and when were they set?

The supply terms were entered into by Tritton’s previous owners before the mine floated on the ASX in 2002, according to the article.

What change can investors expect in processing charges after the new agreement replaces the J.P. Morgan deal?

Straits said the old one‑third‑of‑price treatment and refining charges will be replaced by terms in line with prevailing industry charges, which the article cites as about 5 per cent—reducing the processing cost burden on Tritton’s copper sales.