We have been following Nevada Copper (NCU.TO) for approximately one year now and during that time frame the company has made tremendous progress. Not only did the shaft for the underground phase reach its desired depth to the main haulage level of 1,900’ for which drilling can now resume to likely further enhance the already high grade profile while also testing the open extent of the deposits, Nevada Copper also continued to de-risk the open pit phase of the Pumpkin Hollow project and will be completing and updated Integrated feasibility study and completed the land transfer bill which was approved by Congress and signed by President Obama in December 2014.
[margin20]
The Land Transfer Bill
As we reported before, the House of Representatives and the US Senate have approved the land transfer bill and that’s a major step forward for Nevada Copper as it will now be able to avoid a lengthy federal approval process for the large open pit mine at Pumpkin Hollow.
President Obama signed the bill in the second half of December and that’s when the clock started to tick as the in excess of 10,000 acres of Federal land have to be transferred within 180 days after signing. Nevada Copper has entered into a binding agreement with the city of Yerington to formalize the details of this transfer, so we aren’t expecting any problems on this front.
It gets even better as Nevada Copper now expects to receive all key state permits before this summer as it thinks it will be able to obtain these permits through a simple revision of the current Air Pollution Control and Reclamation permits. Needless to say the approval of the land change bill is a major milestone and game changer for the company
Shaft-sinking has been completed to main haul level (only 200 feet for remainder)
Another major milestone has been reached earlier this quarter when Nevada Copper announced its production-sized shaft had reached a depth of 1,900 feet. The company has now started lateral development at this level and approximately 700 feet of development will be completed. This will allow Nevada Copper to establish locations for delineation and development drilling. (see next image).
We are quite eager to see Nevada Copper starting its underground drill program as we think this will increase the reliability of the underground tonnage/grades. On top of that, it’s definitely possible NCU will be able to find some higher grade zones which could be prioritized towards early production. A 7,900 meter underground drill program will start in May and we hope Nevada Copper finds some higher grade zones.
Why a higher grade mineralized zone could be very beneficial
Let’s now hypothetically assume Nevada Copper is able to delineate some higher grade underground zones which could be fast-tracked towards production – and keep in mind this is just our hypothesis and absolutely not official company guidance.
According to the feasibility study for the underground part of Pumpkin Hollow which was completed in 2012, the expected average grade in the first three years of the underground operations is 1.9%, 1.825% and 1.65%. If we would now assume Nevada Copper is able to increase the grade by just 0.2%, the total cumulative copper production during those first three years could increase by 24 million pounds for a revenue increase of in excess of $60M (excluding the by-product revenues). We’re not saying this will happen, but we think there’s quite a realistic possibility Nevada Copper will be able to prioritize higher-grade mill feed. Again, we would like to emphasize these are our own assumptions and aren’t Nevada Copper’s official expectations.
The Red Kite refinancing deal
The market was also a bit nervous in 2014 as Nevada Copper started to run low on cash. This was very effectively nipped in the bud by the company’s management team as it signed a new $200M financing deal with Red Kite maturing at the end of 2020.
An initial $90M was immediately made available to Nevada Copper and resulted in net proceeds of $26M (net of arrangement fees and the repayment of just over $57M of the previous loan). This puts the company in a relatively comfortable position to continue its development activities at the underground part of the Pumpkin Hollow project.
An additional $110M will be made available when additional project milestones will have been met, so there’s no pressure on Nevada Copper to get back to the market anytime soon.
The new loan facility carries an interest rate of LIBOR +10% during the pre-completion phase and LIBOR +7.5% during the production phase. This is quite high but as Nevada Copper is allowed to repay the loan without any penalties, we wouldn’t be surprised to see the company refinance the loan before the maturity date in December 2020.
Another positive element of the refinancing is the fact Nevada Copper doesn’t have to repay principal until September 2017 which means there’s plenty of margin of error to get to the cash flow positive stage before it needs to repay its debt. From September 2017 on, Nevada Copper will have to repay approximately $6.35M of the current $90M principal amount (+ interest) per quarter which is also quite a good deal as it will have until December 2020 before it will have to cough up the final balloon payment.
Yes, the renewed financing agreement is quite an expensive deal but it also provided Nevada Copper with a lot of financial flexibility. The repayments only start in 2017 which is roughly one year after the expected date of the start of commercial production at the underground mine.
Conclusion
Nevada Copper is ticking all the right boxes and in the past 12 months, the company has been substantially de-risked. Stage I isn’t only fully permitted, the shaft is ready and lateral development should kick things in a higher gear as we’re expecting a decent news flow regarding further achievements (receipt of open pit permits, closing land acquisition and drill results) and a substantial underground drill program.
The pieces of the Stage II open pit puzzle are also falling into place and Nevada Copper now expects to have the land deal closed and the open pit fully permitted by this summer where after it undoubtedly will attract a strategic partner to build the mine. All stars are aligning for Nevada Copper and it’s now the only large-scale copper mine in the USA which is under construction with an anticipated completion date of Q3 2016 for the underground phase and the end of 2017 for the open pit stage. There really aren’t a lot of copper companies out there that get us as excited as Nevada Copper.
Disclosure: Nevada Copper Corp. is a sponsoring company. Please see our disclaimer for current positions.
