April 21, 2014

Copper Fox Metals – Feasibility Study

Schaft Creek

Just before christmas, Copper Fox Metals released their long awaited Feasibility Study for the Schaft Creek deposit. This “ground breaking” deposit puts the company on the forefront of defining viability in the so called “Golden Triangle” in northern Canada. No doubt many eyes are watching the next steps.

The golden triangle is in the northwest corner of British Columbia. It has two big hindrances: Low grade deposits and very rugged, mountainous terrain. In fact, nobody would want to explore there if it wasn’t for one big advantage: The deposits are massive. Just to give you an idea, Seabridge Gold’s (SEA-X) KSM deposit contains 42 million ounces and counting, and there’s just as much copper as gold too.

There are two juniors in the golden triangle who are well advanced, Seabridge Gold and Pretium Resource (PVG-T). Both are located south of Schaft Creek. Also, Novagold and Teck have a 50/50 joint venture for the Galore Creek deposit to the west of Schaft Creek. They attempted to begin mine construction in 2007 as prices were heating up and decided to pull out mid-way, due to escalating costs. Schaft Creek is planning to use their partially built access road.

So let’s get down to business.  The feasibility study looks like this:

  • Capex:  $3.256 billion
  • IRR: 10.13%
  • NPV @ 8%:  $513 million
  • Payback Period:  6.48 years

Metal price assumptions:

  • Copper:  $3.25/lb
  • Gold:  $1,445/ounce

The resource:

  • Proven and Probable: 941 million tonnes grading 0.27% copper and 0.19 g/t gold
  • Measured and Indicated:  1,229 million tonnes grading 0.26% copper and 0.19 g/t gold.
  • Silver and Molybdenum will add another 5%-10% more metal

Annual Production:

  • 274 million pounds of copper
  • 237,000 ounces of gold
  • 1,229,000 ounces of silver
  • 8,420 tonnes of molybdenum

What’s next?

Copper Fox has an agreement with Teck Resources whereby Teck can “back-in” to the project with a 75% stake, leaving Copper Fox with 25%.  Clearly Teck has a right of first refusal.

If they back in, they will begin the process of constructing the mine and Copper Fox is left as a semi-passive partner.  In this scenario, starting in 2020 Copper Fox will be a mining company with 69 million pounds of copper production and 59,000 ounces of gold production, or 205,000 gold-equivalent ounces.  With 420 million shares outstanding, this positions the company very favourably.  It would produce 1/2,000 ounce per share, a level similar to Eldorado Gold which trades at about $13.

If Teck does not back in, Copper Fox would be free to search for other partners.  Everything is, of course, wide open in this scenario.

My analysis

So what do I think?  Here are a few thoughts for a Copper Fox investor, or potential investor, to consider.

  1. The market is terrible right now.  Not just bad, but terrible.  It is unlikely that Teck will back in and commit to a $3.2 billion expenditure for only 75% of the production under these market conditions.  That being said, if market conditions improve Copper Fox could be a good “threshold play” with potential massive upside.
  2. Teck’s Highland Valley mine near Kamloops, BC (500 km south) is producing copper at a similar grade to Schaft Creek.
  3. Teck is still counting reserves from its Galore Creek property.  Thus, the implication is that they believe the project is economic, at the right time, and under the right circumstances.  If Galore Creek is economic, Schaft Creek probably is as well.  Investor’s have talked at length about a possible combination.  Besides the shared access road, I don’t see alot of synergies because they are 50 km apart, across several mountains, and will require their own processing.  Synergies will be minor at best.
  4. If metal prices increase Teck is in a position to become the major producer in the region (Galore Creek plus Schaft Creek).  This is an advantage I would not want to give up if I was them, and based on long term metal prices this is probably an important possibility.
  5. Big, company making deposits for majors are becoming very, very scarce.  Barrick’s CEO highlighted the lack of new “super-majors,” defined as 20 million ounces plus, at the LBMA conference a few months ago.  The golden triangle has at least three super majors, Schaft Creek being one of them (well, it’s very close on a gold-equivalent basis).  The only question is how to mine it economically.
  6. If Teck does not back in, Copper Fox will search for options, and eventually find a partner when the copper price moves beyond $4.00, possibly on more favourable terms.

My final analysis is this:  Schaft Creek will be a mine.  There could be some jostling because Teck might not actually back in.  They could take an equity stake, or the agreement could be renegotiated.  Maybe they will indeed walk away, but with long term worldwide trends the way they are (depletion of resources, increase of metal prices) big deposits like this are almost a necessity for a junior gold investor.  One would, of course, hope they back in and this is a very decent possibility.

Good luck.

Comments

  1. Rick McCosh says:

    Bernie

    I find it strange that mining companies wait for the price of the commodity they will mine to go up so the deposit is economic. Considering that there it takes a minimum of 3 or 3 years to get a property into production after it is sanctioned and that mineral commodity prices being cyclical can fluctuate considerably in that time, wouldn’t it be more practical to base the sanctioning of a project on the projected commodity price rather than the current price.

    This is the principle that contributed to making Wayne Gretsky the most sucessful hockey player of all time. Wayne always skated to where the puck was going to be rather than directly at the puck when he first saw it. May the mining industry could learn something from this.

  2. Great idea, Rick. Maybe the industry needs to change its thinking. Even drawing a straight line out three years with the current gold price would make deposits like Schaft Creek look different (i.e. much, much better). Investors would probably see greater returns too!

    Just as a further note, Ernesto Echavarria has bankrolled every private placement since 2007, and owns something like 60% of CUU shares. I wonder how much more he’s got and if he’s willing or interested in financing Schaft Creek’s construction. Making a good return on a billion dollars is difficult…

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