Sunday, February 17, 2013

Copper Fox Joint Venture Creates Value

Not many people are thinking about Copper Fox becoming a new company under a JV agreement. This is obviously what Teck and Copper Fox are heading towards. The first thing we look at is the beneficial tax incentives and what that can do for the new firm. Of course, an underlying rule is that both entities will want to be able to buy/sell their interests with the best tax advantage they can have. The structures also needs to allow for capital partners with a tax advantage. This is especially true when a First Nations group is involved. (no tax).

The JV will bring borrowing power. Not that CUU needs it, they have a billionaire patron. Instead, going forward, the JV will make the deal marketable.

Teck and CUU will have to haggle out who does what and is responsible for what. They will also need to agree on the launch. A number of structure considerations will have been ironed out as shareholders need to be rolled in. The new face will be Teck, CUU and a billionaire.

"Despite the simplicity of the general concept explained above, the negotiation of joint venture agreements in the international mining industry can sometimes be surprisingly difficult due to the differing perspectives and motivations of juniors and majors. This article seeks to briefly describe and explain some of the main tension points between juniors and majors which appear repeatedly in joint venture negotiations."

"A junior’s concern is often even more pronounced in relation to the joint funding phase."

In the case of CUU we see that they are on equal footing because of their patron. However, there can be a perception that the insider(s) is holding too much of the float. In some cases this is not received well. I should say in the past this over concentration worried retail share holders. In today's financial environment this is becoming a requirement. In past articles and other stuff you've probably read online there is the wide expectation that a massive weeding out will occur amongst the Jrs.

"Generally, a major will also worry that its junior partner may use any veto power as leverage to force a buy-out of the junior by the major or to achieve some other objective not originally bargained for, such as additional financial support from the major."

The Liard royalty is a hot button issue as of late. However, in discussions with CUU I've brought this up several times and my general conclusion is that they will cooperate with Teck until it hurts. The appointment to the Board of Directors was a good sign of what the two companies were planning. This is a chief negotiation position. It is leverage.

"Discussions around this general theme often focus on specific minority protections, which juniors would like to have and which majors oftentimes would sooner not grant. In particular, juniors seek minority protections (usually in the form of supermajority voting requirements, which effectively confer vetoes) in respect of such matters as:
  • disposals of project assets;
  • dividend or distribution policies;
  • project financing;
  • the granting of security interests over project assets;
  • affiliate transactions (i.e., between the project management company and other companies in the major’s corporate group);
  • mine development decisions (i.e. decisions to proceed with mine development, which are discussed under the next heading) and
  • decisions to cease or curtail commercial production once a mine is up and running."
I could add a number of specifics related to the contract between Teck and Copper Fox but I'm going to assume the reader is fully versed in the contract. If you are here for the first time this should give you an idea of what kind of items are being discussed. Due to the particulars of their contract there are a number of items in the article cited where the shoe is on the other foot!

"However, in other cases, juniors are instead more concerned that majors may fail to opt for mine development even when a favourable feasibility study exists, perhaps because the majors might prefer to dedicate capital to projects they deem more worthy."

This has been a subject of some public debate for the last six months. In this particular case the BFS just passed the bar due to a requirement that the inferred that is sitting on top of the deposit be classified as waste because it has not been adequately drilled. Some speculate this was a gamble on the part of CUU but in a past article I explained in some detail why they chose the route that led us to this point. Simply put, there are enough holes but they are historical in nature. They know it has value and even have a pretty good idea of what it's worth but they will have to do some drilling to bring it in as a resource.

"The junior may argue for a veto. However, if it is unable to negotiate a veto, the junior may instead propose that the board of directors may only make a development decision the basis of a "bankable feasibility study" and propose further that any dispute about whether a particular study is in fact a bankable feasibility study be resolved through a time-consuming referral to an expert."

This is one of the more complicated parts of the discussion. As we have seen, a number of experts have already been engaged. This is a unique case because this was done by agreement with Teck. Teck also wants the best plan because they do want to mine it. We all know about the impending copper supply shortages in part due to the decimation of the Jrs.

"Juniors often prefer to keep their options open as much as they can. They will seek contractual powers that give them leverage or exit options or that they may use to induce majors to purchase their interests."

This last item is where I think the discussions are at now. Our reluctant partner scenario has finally seemed to be shifting. Yes, the company wants out but to get the best for the share holders it's obvious that the JV route is going to be the most profitable. Once all the rights are determined and before the major capital commitments start is when CUU should sell.

It should be noted that there is a 4 year clause to production. There must be no delay in selling and I do expect this clause will be modified. The BFS gave a longer period to build so a more reasonable time line will be struck. I would not be surprised to see a "favourable conditions" clause inserted due to the impending change of government in BC. This would not deter another major from entering because both would understand the value to that.

Click this link if you want to see a template that covers a basic set up for a JV.


  1. Great article! I too believe this is the case. Very detailed and researched report. Thank you Webgogs for this post.
    In regards to timeline, how do you rationalize an end result? How long before these discussions/negotiations conclude? I would appreciate your reply. thank you once again for these blogs.

    1. Target date is April 21. It could come at anytime without warning. Typically, 6-12 months is enough time even for the more complicated deals. We also have to allow for any new interests that rush to the table at the last minute.

      The fact that the proverbial shoe is on the other foot may give us a lot more leverage but it may slow down negotiations.

      On a side note. This article has drawn a lot of reads. 650 people so far today and it's the weekend. I suspect there's a lot of people seeking clarity on the subject. I am surprised that no one has asked for a write up like this.

      The next article might be on the cycle so that people know what's next. Mind you, there's a wealth of info like that online.

  2. Excellent article

    I swear Salazar who wrote the Schaft Creek exploration proposal, employed a near perfect strategy with respect to what they were able to get Teck to commit to with regard to many of the points the author raised

    My main concern is that the current management appreciates the value of the negotiating levers that were provided and doesn't give them away, to be "co-operative"

    1. Oh, they do indeed know what they have. We should see some brush strokes coming soon the reveal their intent.

  3. web if you are correct what do you think will SP be on JV announcement?

  4. I'm betting it over runs the offer. It will take time to climb but then it will gain momentum. By they time the JV forms we should be looking at over $3. Then people will start to realize what the actual value is.

  5. Think anything will happen in march...although i have no intention of bailing i am getting tired of the red cuu in my account! or do we all wait till June?

  6. We are waiting for news now. I suspect they are looking at more land and they also have to review the data from Az. With the Galore news we could get an offer. I think that has been a major hold up for Teck and by proxy, us.

  7. webs, if you were to take a wild guess...what is possible first date when JV would form and last possible date when it would be formed? I appreciate your insight!

  8. This month we should be told by CUU if the FS was acceptable. It really is a dice roll on that one. Even if it was a better FS it would still depend on where Teck saw future money coming from. With that said, after the notice comes a drilling plan for SC and Az. Then a corporate update will be required. After that, near the end of April we should see a notice of JV. So if the FS has been accepted then we can expect the JV papers within about 30 days of the notice. The biggest hold up is getting the data in front of Teck's board for a vote. After that it goes faster because they have more control over their agenda and should be focused more on SC.

  9. I was under the assumption that they only had 30 days, and as no notice came by March 6th, its was automatically deemed an acceptable bankable FS and we had earned the Liard shares?