With M&A activity picking up pace in the mining space of late we felt it was a good time to review the largest fully permitted copper deposit in the Americas that is not already owned by a major; namely the Pumpkin Hollow project located on the outskirts of Yerington in Nevada.
This project is fully owned by junior exploration and development company Nevada Copper (NCU.TO), a junior company whose market capitalization has been reduced to less than $50M by the ongoing resource sector bear market.
The Pumpkin Hollow project is a remarkable asset in many aspects, and represents a unique investment proposition for those willing to think beyond the bear market. Here is why.
The history of Pumpkin Hollow
The Pumpkin Hollow project originally started out as an iron ore project in 1959 and was initially developed as such by US Steel. By the time the project was acquired by Nevada Copper its copper potential had been recognised, most notably by the preceding owner Anaconda Mining which operated the large copper mine on the other side of Yerington. Over the past 10 years Nevada Copper has spent $210M advancing the project to today’s shuffle-ready status.
There are two distinct components to the Pumpkin Hollow project: a proposed high-grade underground project and a lower grade bulk mineable open pit project. One could even say that there are two individual mines, located almost on top of each other.
Each of these mines would be attractive assets in their own right, but having them in such close proximity creates optionality and synergy. Both optionality and synergy are reflected in not one, but two feasibility studies completed by Nevada Copper, each study documenting a different approach to benefit from the unique combination of the two mines in one location. Both studies are based on proven and probable reserves of 0.84B lbs of copper at a grade of 1.38% for the underground mine, and 4.21B lbs of copper at a grade of 0.41% for the open pit. Additionally, the deposit contains significant by-products totalling 760,000 ounces of gold, and 27.6M ounces of silver.
The new feasibility study integrated the underground and open pit mines
The first feasibility study released in 2012 outlined a staged development scenario, starting with a 6,500 tpd underground operation and using the early cash flow to finance a good portion of the development of the open pit. Just a few months ago Nevada Copper followed up with a second feasibility study which detailed an alternative integrated development scenario whereby the underground and open pit mines would be put into production concurrently. Both scenarios have their merits, and both scenarios are an attractive investment proposition (at a normalized copper price of $2.75+ per pound).
The staged scenario requires only $329M in up-front capex to bring the underground mine into production, and yields a present value of $353M at a 5% discount rate after deduction of taxes; the integrated scenario on the other hand has initial capex requirements of $1.0B, but also yields a much higher after-tax NPV(5%) of $1.1B. Both scenarios result in low-cost operations which would generate solid free cash flow even under today’s bear market circumstances once in production.
Only very few shuffle-ready copper projects of comparable size and grade exist world-wide, and we know of none in the Americas. Nevada is one of the most desirable jurisdictions for metal mining anywhere and the specific location is prime mining real estate even in Nevada. The Pumpkin Hollow project is situated close to all necessary infrastructure and services, including railway access, power lines, roads and the services and man power offered at the nearby City of Yerington, the county capital. The old Anaconda copper mine operated until 1978, also right at the outskirts of Yerington, ensuring a mining tradition in the area that has embraced the arrival of Nevada Copper to the neighbourhood.
All permits have now been received – a milestone
Permitting will no longer be an issue for either scenario contemplated in the feasibility studies, after successfully completing land acquisitions and obtaining all necessary permits to start construction in 2015. The company has cooperated closely with its host City of Yerington and has devised a genius plan to circumvent permitting of the open pit mine through a federal process. Instead, the City of Yerington has negotiated the acquisition of the land required to build the Pumpkin Hollow mine with the Bureau of Land Management, and has then sold the land to Nevada Copper cutting the permitting time line by a minimum of two years, and reinforcing the friendly relationship between the town and the future provider of hundreds of jobs.
The mentioned permits are crucial for the development of the open pit mine. Permits for the underground portion on the other hand had already been in place, and have allowed Nevada Copper to sink a 24 foot diameter production shaft with a production sized headframe and hoist including associated surface infrastructure. The main haulage level at 1,900 foot was reached early in 2015, which represented another major milestone achieved this year. The company has started lateral development at this level, which has finally put Nevada Copper in a position to initiate underground drilling.
Why we see more upside beyond the feasibility study
The current mine plan for the underground mine only considers reserves at the so-called East deposit, which in itself supports a 12-year mine life at the planned mining rate of 6,500 tons of ore per day. The newly completed shaft bottoms out close to this East deposit and lateral development to access this deposit has commenced. Nevada Copper has already delineated a second underground deposit named E2, with reserves sufficient for 3 or 4 years of production, on top of the currently published mine plan. This deposit will be reached by a future underground drift which passes nearby another deposit called JK-34 zone. This zone has not been drilled out to reserve status just yet since doing so from surface has been deemed too expensive.
Drilling on the underground deposits from surface was suspended in 2011 in view of the proven and probable reserves already proven up at the time which were sufficient to demonstrate the viability of the project. With the shaft practically completed comparatively inexpensive underground exploration has become possible and Nevada Copper has already completed a first 2,965m underground drilling program during autumn this year. Results for the first 10 holes have been reported and already show the potential to add significant amount of copper reserves for the underground mine. Highlights include 121m at 1.21% copper, or 26.4m at 2.79% copper to name just two. Expansion of the underground mine life to 20 years or more would not be a surprise at all considering these results; but perhaps more importantly, development costs could be reduced significantly by expanding the JK-34 resource and converting it into reserves in due time.
Infill drilling between the two pits could be a game changer
The mentioned upside from underground drilling is not the only glimpse of potential blue sky, however. Surface drilling has discovered significant amounts of copper between the two pits that are currently under consideration for the open pit mine plan, opening the potential to merge the two pits, increase copper content and perhaps even grades, and reduce the strip ratio all at the same time.
And finally, there is also an option to use a very simple magnetic separation process at the backend of the plant to produce high-grade iron concentrate from the copper tailings, and generate additional by-product credits at a presumably very low additional cost.
Before the turmoil in the copper market, Nevada Copper had excellent access to the capital markets
Nevada Copper is led by a highly experienced and dedicated management team, and is supported by a group of committed shareholders that share a long-term vision. Pala’s support has not waivered for many years now, and the loan facility and off-take agreement with Red Kite has also provided a sound basis for Nevada Copper’s progress over the years. At the current share price the enterprise value computes to around $150M, of which only 30% is equity and the rest is debt comprised of a secured loan from off-take partner Red Kite and a bridge loan from Nevada Copper’s largest shareholder Pala.
Furthermore, 75% of the company’s shares are held in very tight hands including Pala which has a firm long-term view with regards to Pumpkin Hollow. This capital structure implies that any move to the upside has immense leverage and will happen violently as soon as catalysts prompt it. The current enterprise value implies only $0.03 per pound of copper, which is bordering on the absurd when considering the advanced development stage of Pumpkin Hollow. It is for this reason that we expect news about financing to represent the most logical candidate to act as such a catalyst.
So how could Nevada Copper finance this project?
There are several avenues for Nevada Copper to follow with regards to financing further development activities, including mine construction. A partnership at project level is one option that several other large base metal miners have chosen. Copper Mountain with its partner Mitsubishi Materials Corporation, is just one example; or Taseko Mines with its Japanese 25% partner called Cariboo Copper Corp. operating the Gibraltar copper mine is another.
Streaming agreements have been come back into fashion lately, and considering the plentiful by-products present at Pumpkin Hollow this would certainly represent another option for Nevada Copper to raise funds. And finally, there is certainly the option of an outright takeover. The Pumpkin Hollow project has been showing on every large base metal miner’s radar, and right now is the time in the cycle where M&A generates the greatest value for large mining houses which can still afford it. Gold mining has seen corporate activity pick up lately, and copper might well be next. Nevada Copper will certainly be at the very front of the queue when copper’s time finally comes.
Conclusion
The year has been busy for Nevada Copper, and has added value to the Pumpkin Hollow project by completing the feasibility study on the integrated scenario, by completing the land acquisition, by finalising permits to construct the open pit mine, and finally by completing the shaft and conducting the first underground drilling program to complement surface drilling to add pounds and ounces to the mining inventory.
The company remains focused however, and has now started a process of optimising the two projects outlined in the feasibility studies. Nevada Copper will be updating the geological models for the open pit and underground resources, and will consider production of iron ore by-products. And most importantly, management will evaluate the most attractive financing mix for construction of the Pumpkin Hollow mine.
Disclosure: Nevada Copper Corp. is a sponsoring company. Please see our disclaimer for current positions.
