Wednesday, January 23, 2013

Copper Fox 1st Offer Window Nears

As the company draws closer to the official BFS filing date Teck has a window to make an offer. It doesn't surprise me that a small group of investors shook the tree this morning (again). They have a rather large short position. Their idea is simple, try to cause fear. People who know the official filing is coming see the sp drop suddenly without reason should begin to question what's going on. In this case the BFS is rock bottom bare bones. They suspect Teck may make an offer and want to create a large difference between the sp and the offer price. The more the price drops the lower the offer should be based on 30 day averages.

This won't make a hill of beans! See below:

Summary of Economic Results
ItemUnitBase Case3-Y Avg* CaseSpot Price** CaseReal Options Case
Metal Price
Exchange RateUS:Cdn0.970.991.020.97
Pre-tax Economic Results
Operating Cash FlowCDN$ M10,74612,06512,16111,284
NPV (at 5%)CDN$ M1,6942,3482,4192,665
NPV (at 8%)CDN$ M5139671,0241,382
NPV (at 10%)CDN$ M25388437836
Cash Cost/lb CuCDN$/lb1.
Total Cost/lb CuCDN$/lb2.
Avg Annual operating Cash Flow***Millions371414425640

Let's look at the ROV at 5%. This is the real world evaluation of operations.   The chart calls for a NPV of $2.66 billion. Due to the scale of the operation IRRs at 15% are actually very good. This demonstrates the very long term nature of the project. To go that long you have to be huge. But, more important to us is what the after tax figures look like so here's the chart.
Base Case and ROV (Case 4) after-tax economic results are:

After Tax Economic Results
DescriptionBase CaseROV Case
Net Cash Flow (CDN$ million)4,2705,133
Discounted Cash Flow NPV (CDN$ million) at 5%9561,260
Discounted Cash Flow NPV (CDN$ million) at 8%67529
Payback (years from start of mill operations)6.85.7
IRR (%)8.312.7

The NPV at 5% is $1.26 billion. Oh, and why do I say use the 5% model? No mine is valued at 8% after derisking and just prior to the start of operation. That's just not how a mine is evaluated on paper. Once we have actual figures we expect them to be very close to the actual calculated annual figures. Not discounted! Highland Valley is a good example as the CEO (Elmer) tells us. If they valued it under discounted cash flow it would currently be worth ZERO.

In our case the real world figure if converted to gold at $1700/oz would mean a production of about 750,000 ounces a year after tax. That would mean cuu's share at full back in would be about 190,000 ounces. But, let's not forget that cuu will own about a 5% royalty that comes off the top. That's $63 million after tax dollars. Yes, it kicks in when the cap is paid off but then it's there for a minimum of a decade. Let's call it $630 million. But as we all know, the resources will get expanded and it sure looks like they will be mining this for 50 years. But 10 years of royalty is a known so let's just keep it there.

So, cuu has about 25% of the ATNPV and 5% off the top. $315 million NPV and in time $63 million for royalties. $5.355 Billion plus $630 million LOM. That's $6 billion LOM after tax! That's $14 a share LOM.
There's a number of things that also have to be accounted for. This assumes Teck pays the 4 times expenses to get its 75%. So about $400 million can go to expand the resources or it could even be used to pay down the capex. Then, Teck has to finance the project at a spread of 2% and that's pretty good for cuu considering what it would cost if they had to go get their portion of the money. The interest spread is substantial.

We also know that the real recoveries are higher than those stated and cuu says that can be improved. I've heard they could improve it by 6%. That's a lot LOM. As in that makes a huge difference. There's about 7 anomalies that drills proved (on a couple) have a 1 to 1 correlation with what's already proven. Those need work. One in particular has higher silver grades. We also know from the starter pit that there's another deposit under it. At 800 meters, we will have to figure out exactly how to get at those high grades. That will come in time.

Last, is the waste rock. There are enough historical holes to give us a pretty good idea what cash flow we can expect from what is now classified as waste. You saw the results in the NR from the limited data and that was outstanding. It's not really waste. I'm not going to do up my spec numbers for it. I just want to build a case for my idea of value. Lastly, the BFS was for just 1/2 of the deposit!

If we asked for 33% of the LOM value it's about $4.60 before waste conversion. Then add a $1 for the contract and you get a tidy $5.60 per share based off the lowest case info. Add in all the other factors and you get...

Now lets suppose Teck takes 20% just to keep a toe hold on the property. This makes sense over just taking the royalty since they also own 1/2 of Galore Creek. (Why build 2 air strips, 2 fuel depots etc). Now what are we worth with a much much larger royalty and 80% of the NPV?

You do the math.


  1. Interesting article. I can't say that I agree with your valuation. I'm afraid the IRR is still far too low for Teck to be interested, and I'm pretty convinced they will pass on this.

  2. The IRR changes a lot when the waste is converted even if you just used the historical holes. Also, the size does matter. I've studied a decade's worth of BFS material and this one is the most base case I've ever seen. They were religious about understating it so it conformed with the requirements. The metals price is off set by the recoveries.

    Our retained portion and royalty is what would cause Teck to take a back seat. We did meet their requirements to the letter on the BFS and no more. So there's about a 13% upside that's obvious. Without our portion it's hard to achieve. That's Teck's conundrum.

  3. If you like this post please share it. It does help to get the word out.

  4. There's some question as to if this is conservative? Yes but assumptions and trade offs need to be made. Ramp up time, payback period etc.

  5. So now we are at $5.60? What happened to $7.87??? I am guessing u pull all this out of your yazz!

  6. Not quite, this is based off the BFS numbers with all the waste included.