Copper Fox falls on Schaft Creek feasibility

VANCOUVER – After four years of drilling, designing, consulting, and number crunching, Copper Fox Metals (CUU-T) has produced a feasibility study for its planned Schaft Creek mine in British Columbia that increases throughput by 30% compared to earlier plans while only boosting capital costs by 20%.

Investors, however, were not impressed, perhaps because the expected cost to develop the copper-gold-silver-molybdenum mine now sits at a sizeable $3.26 billion. The feasibility study news sparked a four-day selloff that left CUU shares down 24% at 81¢. Before that fall, Copper Fox shares had dropped below $1 only a handful of times since early 2011, and were worth as much as $1.35 a few months earlier.

Schaft Creek is home to a substantial mineral reserve: 940.8 million proven and probable tonnes grading 0.27% copper, 0.0176% molybdenum, 0.19 gram gold per tonne, and 1.72 grams silver per tonne. Plans for the project envision an open pit mine and conventional mill churning through 130,000 tonnes per day.

The reserve established to date would feed such a mine for 21 years. If Copper Fox can upgrade the additional 171.2 million tonnes of inferred resource within the deposit, which are currently classed as waste, the mine might last even longer.

But first the mine has to exist, which requires road access and connection to the power grid. The problem is that Schaft Creek lies 80 km south of the town of Telegraph Creek in northwest BC. It is rugged and wet alpine terrain, with neither a road nor a power line passing within 80 km.

The closest road is Highway 37. There is another road that covers part of the distance from the highway towards the project, but it is incomplete because the project it was supposed to serve – another massive but remote copper-gold porphyry – was shelved after capital costs ballooned to more than $5 billion.

It is the road to Galore Creek. Joint partners NovaGold Resources (NG-T) andTeck Resources (TCK.B-T) started building a mine at Galore Creek several years ago but suspended the project when capital costs more than doubled. Now Copper Fox hopes to negotiate a deal to use what already exists of the Galore Creek road. Copper Fox would extend the road by 25 km, a stretch that includes one major bridge, so that it extended 65 km west from the highway. From there the road would split, with one branch envisioned for Galore Creek and a second 40-km extension reaching the rest of the way to Schaft Creek.

Power is also a challenge in developing Schaft Creek. BC Hydro is currently building the Northwest Transmission Line, a 344-km line that follows Hwy 37 north from Terrace to Bob Quinn Lake. To power a mine at Schaft Creek Copper Fox would have to construct an 81-km power line from the Bob Quinn substation north along the highway and then west along the Galore-Schaft Creeks road.

Electrical power is one thing, but mines also burn through a lot of fuel. To that, the Schaft Creek plans also includes a 105-km fuel pipeline from a depot at Hwy 37 to the mine. And even with a road the project is too remote to sensibly drive personnel to and from site, so the mine plan also incorporates an airport capable of receiving aircraft of up to 78 passengers.

Once a mine is built, the deposit itself is fairly straightforward. The strip ratio of waste to ore averages two to one for the life of the operation. The porphyry ore enables recoveries of 86.6% for copper, 73% for gold, 48.3% for silver, and 58.8% for moly.

A conventional ore grinding and flotation circuit would produce a copper concentrate with gold and silver credits and a separate molybdenum concentrate. Concentrates would be transported by truck, with the copper concentrate going to the port in the town of Stewart while the moly concentrate headed to Prince Rupert. Copper Fox has already inked a deal with Stewart Bulk Terminals for the storage and shipment of up to 600,000 tonnes of concentrate a year.

Schaft Creek would produce 4.9 billion lbs. of copper, 4.21 million oz. gold, 215 million lbs. of molybdenum, and 25.1 million oz. of silver over its lifespan. The mine should be able to produce a pound of copper for $2.09, or $1.15 including by-product credits.

Based on a copper price of US$3.25 per lb., gold at US$1,445 per oz., silver at US$27.74 per oz., and a moly price of US$14.64 per lb., the Schaft Creek operation would generate a 10.13% internal rate of return. At that rate, it would take 6.5 years to pay back that initial outlay of $3.2 billion. The project holds a net present value of $513 million, using an 8% discount rate.

Looking ahead, the feasibility plan includes a generous timeline to development that does not see mine construction get underway until 2016. The first 65,000-tonne-per-day mill would start commercial production in late 2019; a second would follow within a year.

Copper Fox's president and CEO Elmer Stewart says the timeline could be shortened, but there are a few good reasons to stretch it out for now. The first is that project economics will improve if Copper Fox can upgrade the deposit's inferred resources to reserves status. Second, there remains considerable exploration potential at Schaft Creek, including extension of the main deposit to the east as well as additional zones to the north. Third, the study recommended additional metallurgical testwork to improve metal recoveries, if possible.

But the fourth, and most important, reason that Copper Fox is not rushing to develop the project is that development is not their goal – the company has always aimed to prep the deposit for development and then sell it.

"Since 2000 every activity that we have done at Schaft Creek has been directed towards setting this project up for a sale," said Stewart in a conference call. Later he explained that the design allows for an expansion to 180,000 tonnes per day, primarily because "…it is financially advantageous to do that today rather than down the road, and as I mentioned we wanted to do everything we could to attract the attention of a buyer."

Stewart and his team will soon find out whether their efforts attracted the most likely buyer: Teck Resources, which has an earn-back option on Schaft Creek. Now that Copper Fox has delivered a feasibility study, Teck has 120 days to decide what it wants to do. The major can elect to acquire a 20% stake by spending an amount equal to Copper Fox's expenditures to date, a 40% stake by spending three times CUU's investment, or a 75% stake by spending four times Copper Fox's output. As of mid-2012, Copper Fox had spent $84.9 million on the project.

There is another twist to the Schaft Creek ownership tale. Copper Fox holds a 100% working interest in the site, but Liard Copper Mines holds a 30% carried net proceeds interest. Completing the feasibility study means that Copper Fox now owns Teck's 78% stake in Liard. Adding in the 2% of Liard that Copper Fox bought on the open market, the company now owns 80% Liard, which means it indirectly owns 80% of the junior's 30% net proceeds interest.

In addition, Royal Gold holds a 3.5% net profits interest in Schaft Creek.

For now, Stewart and his team will push ahead with permitting because with every permit they acquire for Schaft Creek "the risk profile for the project drops considerably" – yet another way to make the megaproject attractive to potential buyers. Copper Fox hopes to submit its BC environmental assessment application and its federal environmental impact statement within the next nine months. The company is also seeking permission to construct the access road.