http://seekingalpha.com/article/1794132-copper-fox-currently-overvalued-even-if-schaft-creek-proceeds?source=email_rt_article_readmore

Copper Fox Metals (OTC:CPFXF) is a junior copper exploration company that recently formed a joint venture with Teck Resources to further explore and develop the Schaft Creek project in British Columbia, Canada. Copper Fox holds a 25% interest in that joint venture, and also has the undeveloped Sombrero Butte and Van Dyke properties.

Copper Fox currently has a market capitalization of approximately $200 million, of which the vast majority is attributable to the Schaft Creek project. We believe that Copper Fox is currently overvalued due to the uncertainty that its Schaft Creek project goes ahead and the limited NPV of the project at current metal prices. While the economics of the Schaft Creek project will improve with higher metal prices, it would take a major increase in metal prices to justify Copper Fox's current market capitalization, let alone any increase in market capitalization.

Copper Fox is only lightly traded under the linked trading symbol, and mainly trades as CUU on the TSX Venture Exchange.

Limited Chance Of Project Proceeding

Teck exercised its option on Schaft Creek in order to maintain its options, but the reality is that the project is unlikely to proceed in the near to intermediate future.

Some factors limiting the chance of Schaft Creek proceeding include:

• High capital costs
• Minimal post-tax NPV at base case metal prices
• Metal prices that have declined significantly since the feasibility study was done
• Competition with other Teck projects (especially Quebrada Blanca Phase 2) for capital

Schaft Creek's capital costs were estimated at $3.257 billion in the feasibility study. This would be a very significant outlay for Teck, which would be responsible for 75% of the project costs as well as being required to lend Copper Fox funds to cover its 25% share of the project costs.

Due to the high upfront costs associated with Schaft Creek, its base case NPV is only $513 million pre-tax and $67 million post-tax using the 8% discount rate that Teck required for the feasibility report.

The base case assumed copper prices of $3.25 per pound, gold prices of $1,445 per ounce, silver prices of $27.74 per ounce, and molybdenum prices of $14.64 per pound. Copper prices are currently slightly above that level, but gold, silver and molybdenum prices are well below the levels assumed in the base case scenario. Current metals prices would put NPV at close to zero pre-tax.

Aside from the question of whether to proceed with Schaft Creek on its own merits, it also faces competition from other Teck projects for resources. Teck's $5.6 billion Quebrada Blanca Phase 2 (QB2) copper project is also in the pipeline and that project already been delayed due to market conditions. Teck currently owns 76.5% of the Quebrada Blanca property. QB2 is now facing a construction decision after permitting in 2014, with first production starting in 2019 if it proceeds. This places QB2 in direct competition with Schaft Creek, which has a current timeline with permit completion in June 2014 and production starting in December 2019. Teck likely will make the decision of going ahead with either QB2 or Schaft Creek, or not proceeding with either of them. Proceeding with both seems unlikely due to the massive capital costs required to proceed with both simultaneously. To put things in perspective, Teck's capital expenditures for 2013 are forecast to reach $1.85 billion. Proceeding with either Schaft Creek or QB2 would tie up the majority of Teck's capital expenditure budget for multiple years.

Schaft Creek's Advantages Over Other Teck Projects

Some of the advantages that favor Teck proceeding with Schaft Creek over QB2 include:

• Canada is considered a very low risk mining jurisdiction. Chile is also a very low risk mining jurisdiction, although its risk rating is slightly higher than Canada, giving Schaft Creek a slight edge here.
• Capital costs are $2.3 billion less for Schaft Creek compared to QB2.

Schaft Creek's Disadvantages To Other Teck Projects

Some of the advantages that favor Teck proceeding with Quebrada Blanca Phase 2 ahead of Schaft Creek include:

• It is an expansion of one of Teck's long-running properties. Teck is very familiar with this site and may consider this expansion lower risk than starting a new mine at a site that they aren't as intimately familiar with.
• Teck CEO Don Lindsay mentioned that "In the long term, that is going to be one of the key assets in our portfolio". Without the QB2 project, Quebrada Blanca will face "continued declines in grades and production and increases in costs" until mine end of life in 2019. QB2 would extend mine life by 39 years.
• Quebrada Blanca has a lower estimated pay back period of 5.8 years at copper prices of $3.25 per pound and molybdenum prices of $12.50 per pound. This compares to Schaft Creek's 6.5 year pay back period. It also has a higher estimated IRR than Schaft Creek at 13.0% versus 10.1% for Schaft Creek. NPV is estimated at $2.266 billion for QB2 versus $513 million for Schaft Creek pre-tax.
• Teck has already committed $270 million towards QB2 in 2013 compared to the $20 million it paid Copper Fox for the Schaft Creek option.

Aside from QB2, Teck also has its $3.9 billion Relincho project which is possibly ahead of Schaft Creek in the queue if the power situation at Relincho gets resolved. It is probably a sign of Schaft Creek's lower priority status that Teck hasn't mentioned it much on conference calls or in presentations

Valuation if Schaft Creek Proceeds

Due to the high upfront costs associated with Schaft Creek, its base case NPV is only $513 million pre-tax and $67 million post-tax with an 8% discount rate. As Copper Fox has a 25% share of the project, that makes the NPV of its share $128 million pre-tax and $17 million post-tax. Copper Fox would also get an additional $20 million upon a production decision and $20 million upon the completion of the mine facility. If we were to value Schaft Creek at 0.6x pre-tax NPV and add Copper Fox's current net cash plus the $20 million it will get upon a production value and the NPV of the $20 million it will get upon completion of the mine facility in 2019, Copper Fox would be worth around $130 million. This is a very generous valuation as we will show below.

As a comparison, Taseko has a producing copper mine also located in British Columbia. The total value of its reserves at current metals prices is $10.652 billion. Copper Fox's share of the Schaft Creek reserves would be valued at $7.72 billion at current metals prices. However, to develop Schaft Creek would require Copper Fox to contribute $814 million, putting its enterprise value at its current share price at $975 million after factoring in Teck's remaining payments to Copper Fox. Taseko's current enterprise value is only $660 million despite having a producing mine that has a higher reserve value than Copper Fox's share of Schaft Creek.

Another comparison would be to Thompson Creek, which recently finished developing the Mount Milligan copper and gold mine in British Columbia. The total value of Thompson Creek's reserves at Mount Milligan is $12.278 billion (47.75% gold share at full price and 52.25% at $435 per ounce). Thompson Creek's enterprise value is approximately $1.22 billion, which equates to a 9.9% enterprise value to reserve value ratio. Using the same ratio for Copper Fox would value it at $767 million, less than the net debt it will have upon completing Schaft Creek.

Therefore it appears that Copper Fox is overvalued even if Schaft Creek does proceed.

Valuation if Schaft Creek Doesn't Proceed

If Schaft Creek doesn't proceed then Copper Fox needs to find another partner or someone to sell its stake in Schaft Creek to. Teck passing on the project would likely make Copper Fox worth fairly little given the relatively marginal economics of Schaft Creek, and resulting difficulty in finding another partner. If we were generous, we'd value Copper Fox at $80 million, reflecting the amount spent on exploring Schaft Creek and its other properties to date. On the positive side, Teck's recent $20 million payment to Copper Fox means that it can continue operating for a very long time with administration and professional expenses of approximately $2 to $3 million per year.

Evaluating Potential Upside Catalysts For Copper Fox

Copper Fox has been mentioned as a potential buyout candidate before. However, Copper Fox's market capitalization was only $40 million at that time, versus $200 million now. As well, there are other British Columbia mining exploration companies with more attractive valuations. Seabridge Gold has an enterprise value of $435 million - less than 10% of its 100% owned Kerr-Sulphurets-Mitchell mine's $4.5 billion NPV at a 5% discount. Schaft Creek's NPV at a 5% discount is only $1.694 billion, making Copper Fox's share of that only $424 million.

Copper Fox is likely to receive a temporary boost in share price if Schaft Creek does proceed. That boost is unlikely to be justified by fundamentals though. Copper Fox will need to take on substantial debt to fund its portion of Schaft Creek, leaving it with an estimated $775 million in debt at the time of mine completion if the project finishes on budget. With the resulting enterprise value of $975 million (at current market capitalization), that means that Copper Fox is already trading at over 3.2x times 2020/2021 revenues (at current metals prices). That is roughly in line with what major companies (see Goldcorp and Yamana Gold) are trading at versus 2014 revenues without the risk of negative production decisions, cost overruns, and not having a producing mine for another 6+ years.

As Copper Fox is relatively lightly traded (146,000 share daily volume on its main exchange), news events like the formation of the joint venture with Teck may cause substantial volatility. With that event, Copper Fox's share price went up 36% in one day on 12x normal volume before settling back down to its pre-announcement price one week later.

Conclusion

With an estimated valuation of $80 million if Schaft Creek doesn't proceed and $130 million if it does proceed, there appears to be substantial downside to Copper Fox at current prices. For Copper Fox to be worth its current price, Schaft Creek would need to be valued at over 1.0x pre-tax NPV and also double the enterprise value to reserve value of the producing British Columbia copper miner Taseko.

As well, it is likely that Teck's Quebrada Blanca Phase 2 project and perhaps its Relincho project gain priority over Schaft Creek in its project queue even if Teck decides to proceed with Schaft Creek. In that case, first production could be pushed back substantially from 2019. Teck's nearby (to Schaft Creek) Galore Creek project has been on hold indefinitely and Teck's partner NovaGold has been attempting to sell its stake for over a year.

We would value Copper Fox at approximately $100 million given the relatively low likelihood that Schaft Creek proceeds anytime soon, and the limited upside even if it does proceed. This represents a 50% downside to current prices.

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