Nevada Copper (NCU.TO) is an extremely enticing story, as not only has the company received all permits to start production at the underground phase of the Pumpkin Hollow project but has already started constructing a shaft for the underground development phase.
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Introduction
A lot of investors these days are focusing on near-term production and on grade, and we think Nevada Copper (NCU.TO) combines both strategies as the company is currently developing the first phase of its Pumpkin Hollow project in Nevada, USA. The project was discovered by US Steel (NYSE:X) in the Sixties. Since then more than 330,000 meters have been drilled, of which in excess of 160,000 meters have been drilled by Nevada Copper. NCU has done a great job to advance the project and is currently fully permitted for its underground operation that should be in commercial production by Q1 2016.
The Pumpkin Hollow project is a very large copper-gold-silver project with two separate development phases. In the first phase, Nevada Copper expects to produce approximately 70 million pounds of copper per year in the first ten years of the mine life, combined with over 15,000 ounces of gold and almost 250,000 ounces of silver from an underground mine. As construction on Phase 1 has already started, we anticipate seeing initial cash flow by late 2015 with commercial production scheduled to commence in Q1-2016..
Subsequently, the second phase of the project envisages a large open pit that should produce in excess of 220 million pounds of copper per year in the first five years of the mine life. This would expand the company’s overall production profile to close to 300 million pounds of copper per year in the first few years of the combined operations.
In this report we’ll first analyze the underground operation before we discuss the open pit scenario in Phase 2.
PHASE 1: Pumpkin Hollow Underground
1. An overview
Nevada Copper is currently fully permitted to start production on the eastern side of its project. The company is currently sinking a production-sized shaft that should be ready by Q4 of this year when it reaches a depth of 1906 feet (and will later be extended to just over 2100 feet). At that specific depth, Nevada Copper will be able to start lateral development to reach the ore at the East deposit and commence a detailed development-drilling program and test the still open extent of the East deposit.
From Q2 2015 on, Nevada Copper will continue its development work underground and is expected to start stockpiling ore in Q4 2015 to feed the mill, which is expected to start up in Q1 2016. We are expecting the start of commercial production in Q2 2016.
2. The economics of the Underground Phase
The Eastern deposit currently has a measured and indicated resource of just over 50 million tonnes at an average grade of approximately 1.45% copper, 0.3g/t gold and 6.6g/t silver. The feasibility study was based on proven and probable reserves of 823 million pounds of copper for an initial mine life of 12 years. However, based on a production rate of 2.1 million tonnes per year, we are quite confident to state that the mine life will be extended substantially as we expect Nevada Copper to upgrade a large part of the resources to the reserves that will eventually be mined.
Nevada Copper is targeting the high-grade first, as the expected head grade is 1.77% copper in the first five years of the mine life, dropping to 1.39% in the subsequent five years which results in an average grade of 1.58% in the first 10 years of the mine life. This means the output will be higher in the first five years of the operation, which will obviously enhance the economics of the project as the average cash cost in the first five years is just $1.21/lbs (net of by-product credits).
3. The capex and the financing needs
The initial capital expenditures for the underground phase were estimated at $329M. Of the $329M, approximately $30M was already invested as a sunk cost. And an additional $224M has been sourced by closing a $200M debt agreement with Red Kite and a $24M equipment finance facility provided by Caterpillar (NYSE:CAT).
This means there’s currently a financing shortfall of approximately $75M. As we can imagine there will be some overrun because of inflation, we estimate Nevada Copper’s capital needs to be approximately $100M. As the company had in excess of $50M in cash as of at the end of December 2013, Nevada Copper is in a comfortable position to carefully consider all options to fund the shortfall.
We have the impression that the market is actually betting against Nevada Copper’s ability to fund the shortfall, and we think that’s a very short-sighted strategy as it’s our belief the company has several options to fund the shortfall.
First of all, because of the substantial gold and silver revenues ($37M per year in the first five years of its operation), we think the possibility to sell a silver and/or a gold stream is very realistic. Considering the underground operation is fully permitted and will produce 167,000 ounces of gold and 2.7 million ounces of silver during the first 12 years of the mine life, Nevada Copper could easily raise $90M by selling 65% of its gold output to a streaming company such as Franco Nevada (FNV.TO, NYSE:FNV) using the same terms as Franco Nevada offered Rubicon Minerals (RMX.TO, NYSE:RBY).
Selling a gold and/or silver stream would obviously have an impact on the cash cost and thus the profitability of the mine, but this impact would be rather minimal and reduce the operating cash flow by just over 10%. We think this is a better solution than raising the necessary $75-90M in an equity offering, because the dilution in the share count would be too high. Raising $90M at $1.50 would increase the share count by approximately 75%, and we are convinced CEO Giulio Bonifacio who owns 9.5% of the fully diluted shares would only use a straight equity raise as a last resort.
Nevada Copper has several possibilities to fund the shortfall, and we aren’t worried about this situation at all, as there’s no real time pressure on Nevada Copper to raise the cash anytime soon.
4. The Red Kite Loan
Back in March 2013, Nevada Copper signed a $200M loan facility with Red Kite & Orion, whereby Red Kite & Orion agreed to advance Nevada Copper $200M depending on certain milestones to fund the construction work at Pumpkin Hollow. $51M of the $200M has been received, and an additional $149M will be wired when certain construction milestones will have been met.
There’s one thing that will require attention from the company. The debt facility has a six-year term (with an interest rate of LIBOR +6%) and matures in 2019. However, in the original agreement, the first quarterly instalment was scheduled for April 2015, which is approximately 9 months before our estimated start date for the Pumpkin Hollow underground phase. As such, we expect the company will be able to re-negotiate the debt agreement with Red Kite, whereby Red Kite agrees to push back the date of the first repayment by 12-18 months to allow Nevada Copper to maintain its flexibility. As Nevada Copper has an excellent working relationship with Red Kite we don’t expect any problems, but it’s an issue we’d like to see addressed sooner rather than later.
PHASE 2: The open pit
1. Background and economics
For the deposits located on the Western side of the Pumpkin Hollow project, Nevada Copper is envisaging a large open pit operation with an average daily throughput of 64,000 tonnes per day. This should result in an annual output of 221 million pounds of copper, 24,000 ounces of gold and almost 850,000 ounces of silver (see summary in table).
The initial capital expenditures for the open pit are very reasonable as the needed total upfront capital will be approximately $950M, which isn’t overly expensive for a 70,000 tpd operation. The sustaining capex is also very reasonable at just $758M during the 22-year mine life which is approximately $35M per year.
The open pit could be in production just a few quarters after starting up the underground operation at Pumpkin Hollow, if the land transfer bill gets approved by both the Senate and the House of Representatives (see later paragraph about the importance of the land transfer).
2. How will this project be financed?
A total initial capital expenditure of $950M sounds like a lot for a company with a market capitalization of just $135M, but we are confident Nevada Copper has several options on the table to fund the construction work. As the rule of thumb in financing a mine in a decent region is 1/3rd of equity and 2/3rds debt, Nevada Copper needs to find approximately $325M in equity to build the mine.
As the Pumpkin Hollow open pit will produce a substantial amount of precious metals (in excess of 230,000 ounces of gold and 8 million ounces of silver in just the first 10 years of the mine life), selling a gold and/or silver stream definitely is a possibility. Any royalty or streaming company would love to get its hands on a streaming deal which would allow them to purchase in excess of 480,000 ounces of gold over a 22 year mine life at a fixed price of $300 or $400/oz. As we think this deal might be too large for Sandstorm Gold (SSL.TO, NYSEMKT:SAND), we think Franco Nevada (FNV.TO, NYSE:FNV) and Royal Gold (NYSE:RGLD) might be the main suitors for a streaming deal.
The positive thing about selling a gold and/or silver stream is that Nevada Copper will be able to raise the needed funds to start developing the open pit mine. However, on the negative side, by selling the gold and silver at a discount to the prices assumed in the feasibility study, the cash cost for the copper will increase and Nevada Copper will miss out on any positive developments in the gold and silver price.
A second option might be to find a strategic partner for the project. As the Pumpkin Hollow project will ensure a steady supply of copper over at least the next two decades, several Asian conglomerates could be interested to take a stake in the project. We think this is a more likely scenario than selling a precious metals stream, as Nevada Copper would continue to keep the upside potential of the precious metals which would keep the cash cost of the copper at least stable.
Strategic deals on copper projects have happened in the past, where for instance Baja Mining (BAJ.TO) sold 30% of its Boleo copper project to KoRes (Korea) and Copper Mountain Mining (CUM.TO) and Taseko Mines (TKO.TO, NYSE:TGB) sold 25% of their projects to respectively Mitsubishi Minerals (Japan) and Cariboo Copper (also Japan).
Based on the after-tax NPV of the project, the long mine life, great logistics, and the political stability in Nevada and the USA, we think the scenario of a strategic partner is very likely, and we’re confident Nevada Copper won’t have to sell more than 25% of the project to be fully funded to start production (assuming the strategic partner arranges the debt financing as well).
3. The upside exploration potential and the iron ore
We would like to emphasize the currently proposed 22 year mine life is just the beginning and will very likely be extended as the total tonnage in all resource categories supports a mine life of in excess of 30 years. The company seems to be quite positive on extending the mine life at the North pit, as it has deferred the recovery of iron ore to a much later phase in the mine life to fully focus on expanding the northern pit.
Recovering the iron ore in a later phase of the mine life could once again be a huge boost for the annual cash flow. Based on a cutoff grade of 20%Fe, the Pumpkin Hollow project contains over 500 million tonnes of iron ore at an average grade of 31.4% iron. This could result in a substantial production of iron ore containing at least 62%Fe, which currently sells at approximately $130/tonne. This could be huge, as not a single tonne of iron ore has been included neither in the feasibility study nor in the net present value of the project.
4. The Land Transfer Bill
The Eastern deposits are located on privately held land, but the Western deposit’s (where the open pits are planned) infrastructure and pit layback are located on unpatented mining claims on federal lands. Because the open pits expand out on to federal land, the permitting process would be much longer as an environmental impact study (EIS) would have to be completed. However, if the land would be bought by the city of Yerington, these studies wouldn’t be required and only state and city approval would be needed. We estimate the land transfer would save Nevada Copper approximately 2 years in the permitting process.
As the mark-up action by the House Natural Resources Committee has been completed, there are just two steps left to confirm the land transfer. First of all, the bill has to be brought on the House floor for passage where after it will be sent over to the Senate for floor action. As this bill is being supported by both the Republicans and the Democrats, we have little doubt this bill will pass both the House and the Senate. It takes a bit longer than expected, but that’s not really surprising, considering there usually are delays in political decisions. We expect the bill to pass the House and Senate in the first half of this year.
Management Team
Giulio Bonifacio – President & CEO
Mr. Bonifacio has over 28 years in senior executive positions in the mining industry. Mr. Bonifacio is the founder, President & CEO of Nevada Copper. Among his many accomplishments Mr. Bonifacio has been instrumental in providing over $400 million of capital to projects of merit while being involved with and having a very good understanding of every stage of development from exploration to production. Mr. Bonifacio is a professional accountant with extensive experience and knowledge in areas of corporate finance, securities matters, project finance and mergers & acquisitions. Mr. Bonifacio has held senior executive roles with Getty Resources Limited, TOTAL S.A., and Vengold Inc.
Timothy Arnold – Vice President, Operations
Mr. Arnold is a Registered Professional Mining Engineer with more than 30 years of experience in mine operations and management, mine engineering, project development, and permitting. He has diversified experience in North America and Africa in base metals and precious metals. Mr. Arnold’s past experience includes being the General Manager at the Mt. Hope and Liberty molybdenum projects for General Moly, Inc., Vice President and General Manager of Coeur d’Alene Mines where he managed the Kensington Gold Mine project, and Vice President and General Manager at the Coeur Rochester mine. He has a degree in Mining Engineering from the University of Idaho, and an Executive Certification from the Kellogg Graduate School of Management at Northwestern University. In addition to his mining experience, Mr. Arnold has held a variety of roles and directorships for numerous mining and trade associations.
Greg French – Vice President, Exploration and Project Development
Mr. French is a geologist with over 25 years of exploration experience in the western US and Canada . He has worked in various capacities for Homestake Mining Co., Atlas Precious Metals, and Cornerstone Industrial Minerals as well as consulting for numerous junior mining companies. Mr. French has a Nevada gold discovery to his credit and extensive project development experience including two projects taken through feasibility and production.
Timothy M. Dyhr – Vice President, Environment & External Relations
Mr. Dyhr has 35 years of experience in mining. He has led multidisciplinary teams to successfully permit copper and gold mines in Nevada since 1983, and worked on projects in Arizona, California, Washington, Montana, Wyoming, Peru, Chile, Argentina, Australia, Africa, Turkey, China and Papua New Guinea. His experience includes environmental, regulatory, land and legal affairs; and government, media, NGO and public relations. He has worked as a mine site environmental manager, environmental consultant, natural resources manager, and group environmental manager for BHP Copper.
Timothy Dake – General Manager, Project Construction
Mr. Dake has over 30 years of experience in the mining and construction industries. He has worked in diverse capacities in mining and mineral processing in Indonesia, Chile, Russia and Brazil as well as Montana, Arizona, Alaska and Nevada. He is a mechanical engineer with a successful record of project leadership from concept to completion.
Eugene Toffolo – Vice President, Investor Relations & Communications
Mr. Toffolo has over 25 years of experience in the investment sector. He has an in-depth understanding of public companies in the resource industry, raising capital and is responsible for the liaison with Investment Advisors, Retail and Institutional investors. Mr. Toffolo joined the company in 2006.
Gus McDonald – Vice President, Controller
Gus McDonald is a chartered accountant with over ten years of accounting, administration, and systems experience. His work experience includes international accounting experience in the USA and England. During the last seven years he has focused on the mining industry. Prior to joining the Nevada Copper team he worked in a financial reporting role at the KGHM Canadian subsidiary (formerly Quadra FNX Mining Ltd.).
Catherine Tanaka – Corporate Secretary
Ms. Tanaka has over 15 years of experience in the management and administration of public companies in the resource sector, including extensive experience in public company governance and regulation. Ms. Tanaka has served as Corporate Secretary to Nevada Copper since 2005. Prior to her role as a Corporate Secretary Ms. Tanaka was a paralegal for a US law firm specializing in corporate and securities law. Ms. Tanaka holds a Bachelor degree from the University of British Columbia.
Conclusion
Nevada Copper is an extremely enticing story, as not only has the company received all permits to start production at the underground phase of the project and has already started constructing the shaft. There currently is a funding shortfall of approximately $75-100M, but as we explained earlier, we don’t think this is problematic as Nevada Copper has several options to raise the cash. As CEO Giulio Bonifacio owns approximately 9.5% of the shares on a fully-diluted basis, we are confident he’ll be very mindful of dilution and will definitely choose the best available financing deal with as less dilution for the shareholders as possible.
The real game-changer is the large open pit on the Western side of the Pumpkin Hollow property that will produce a concentrate containing copper, gold and silver during an initial mine life of 22 years. 2014 will be full of catalysts as we expect the land transfer bill to pass the House and Senate , which would shorten the permitting process by at least two years. Should the open pit part of the project be fast-tracked, Nevada Copper will be producing almost 300 million pounds of copper, almost 50,000 ounces of gold and 1.2 million ounces of silver in 2017 and 2018.
We strongly believe Nevada Copper will be a winner, and the current market capitalization of just C$117M is way too low for a copper project developer in a safe jurisdiction with a total NPV5% of in excess of $1.1B based on a copper price of $2.75/lbs (whereas copper is currently trading at approximately $3.25/lbs).
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Disclosure: The author holds a large long position in Nevada Copper. Nevada Copper is a sponsor of the website. Please see our disclaimer for current positions.
