Bill Cara's Blog for Aug 24, 2012

I just had a two-on-one with Mike Smith, EVP of Copper Fox. I entered the meeting with 3 questions:

- does investment in a copper project make sense now?
- do any of these large northern porphyry deposits ever really get developed?
- What are Copper Fox (CUU) prospects?

The answers were positive.

Copper makes sense if you accept BMO’s assumptions of 4% annual incremental demand growth, and of supply depletion from mines nearing end of life. Presumably the driver of demand is the largest urbanization in human history, now taking place in China and India. This could slow, but surely won’t stop.

Expanded supply depends upon new projects moving towards production. BMO ranks 16 projects, and CCU’s is in the middle of resources, and expected annual production during life of mine. CUU was ranked 100% for freedom from geopolitical risk. Only 1 project with this risk rating was projected to have higher annual production. (see presentation on Copper Fox’es website for details.)

As to likelihood of development, I had in mind the cases of Seabridge Gold, NovaGold, Northern Dynasty, and Tower Hill, all massive multi-metallic porphyries, none of which ever seem to advance beyond feasibility studies. Metallurgy has proven complicated, and infrastructure requirements huge.

Mr. Smith argued persuasively that Copper Fox is in a better position. Being on the eastern side of BC’s coastal range and in a broad, U-shaped valley, melting snows do not threaten planned tailings ponds (necessitating huge dams). Being that much farther south, paved roads, cheap BC hydro power, and the deep-water Port of Stewart are all that much closer, and likely to be available soon.

Given cash credits for by-product metals, CCU’s cash costs for copper are negative – along with only 3 others of the 16 major copper projects ranked and covered by BMO.

Annual precipitation is low; only 5% of the rock is acid-generating; there is no fish habitat in the vicinity of the Schaft Creek mine site. Unlike other nearby projects, the site is NOT on First Nations’ hallowed ground, all of which has meant excellent relations with locals -- who have derailed other Northern projects.

Development requires major deals. And it is here that CUU becomes unique. 53% owner of CUU is a mega-wealthy Mexican who invested in CUU during the depths of ’08. Combined with insiders’ holdings, this group can approve or block any deal.

CUU optioned its flagship Schaft Creek Project from Teck in 2002. CUU has earned Teck’s 70% direct holding in Schaft by spending $15M. CUU is earning Teck’s 23.4% indirect interest by completing a positive feasibility study (expected in Q4).

For 120 days after presentation of the feasibility study, Teck has a back-in option allowing it 20% interest by matching prior CUU expenditures, 40% by matching 3 times CUU expenditures, or 75% interest by matching 4 times CUU expenditures.

Based on a past deal, Mr. Smith suggests that Teck may aim to acquire 20% of the project become the operator, and be amenable to equity partners, which could be Asian. Mr. Smith cites the Antamina mine, where BHP and Xtrata each have 33.75% interests alongside operator Teck’s 22.5%. He states that all serious potential equity partners are informed of the project’s status.

Based (soley) upon this meeting, I think CUU would come out well if any of the above happen: from being left with 80% of the project to sell off, OR if Teck went for 75% - leaving CUU with plenty of cash and a 25% interest in Schaft Creek (and Teck’s obligation to arrange for full project funding).

Mr. Smith also told of how CUU has involved Teck at every step in project development, including choice of the feasibility study contractor. He mentioned that Teck has equipment and personnel in BC working a mine whose mine life may be approaching. Teck’s Highland Valley mine in BC will likely terminate in 5-10 years. Equipment and personnel could be moved to Schaft Creek. CUU sees an easy path for Teck, and also notes that Galore Creek is just 80kms to the West, allowing Teck a multi-decade district play.

Should Teck NOT exercise its back-in option at all, the project’s future would likely be more subject to the vagaries of the capital markets.

Looking forward to possible post-Schaft activity, Mr. Smith told of 2 new properties optioned in Arizona for possible post-Schaft development. CUU’s CEO, Elmer Stewart, is said to have put several mines into production, and to well know how to develop and package a project to suit an acquirer’s needs.

As a rule, I prefer among juniors what I term, “deal savvy prospect generators” who offer multiple “lottery tickets” per share. However, CUU seems a particularly meticulously run, and studiously de-risked one-property play.

There’s a near-in price trigger in the form of CUU’s delivery to Teck of the feasibility study, expected in Q4. Should Teck exercise its back-in option, I’d expect CUU’s shares to move.

Full disclosure: No equity position, nor other financial ties to the company. The above is based only upon one meeting and study of Copper Fox’es website. I am not an investment advisor. My purpose is purely informational and educational.

Above all, DYODD -- Do your own due diligence, and don’t ever bet the rent money on any junior miner!

• Login or register to post comments