Wednesday, July 17, 2013

Copper Fox - Teck

The very long awaited answer is finally here. The question seems to have changed a bit. No, no buyout. Instead, we got a JV that seemed to take way too long. I think there were a few things that held it up. Voting rights for the Liard shares for one. The other biggie, how much was CUU going to give up to get a deal? You can't put $400 million into drilling! So this was going to be one of the big questions that had to be answered.

In past talks with Elmer he said they could build a road or use it for other developments etc. What appears to have been decided was to give it to Teck no strings attached. Well, perhaps one small string, a free ride to production. But wait, didn't they already have that? Well, no, not exactly.
From the Sedar filing:

4.1 Acquisition of Interest. 

(a) Teck hereby covenants to Copper Fox that: 
  (i) concurrently with the entering into of this Agreement by the Parties, 
Teck will make a cash payment of $20 million to Copper Fox; 
  (ii) subject to §4.2(b), Teck will make a cash payment of $20 million to 
Copper Fox within three Business Days of the Production Decision; 
  (iii) subject to §4.2(b), Teck will make a cash payment of $20 million to Copper Fox within three Business Days of the Completion Date. 

(b) Teck hereby acquires, in consideration of its commitment to make 
payments as set out in §4.1(a), an unconditional 75% Direct Holding in the Property which, together with the share of the Indirect Holding it will retain under this Agreement, comprise an unconditional 75% Interest. 

4.2 Further Payments. 

(a) Teck hereby further covenants to Copper Fox that Teck will:
  (i) be responsible for and contribute 100% of Pre-Production Costs, 
without dilution to Copper Fox, until Teck has paid an aggregate of 
$60 million of Pre-Production Costs; and 
  (ii) contribute further funds, by way of loan to Copper Fox, as provided 
in §10.4(b). 

(b) In the event that Pre-Production Costs exceed $60 million, Teck will fund Copper Fox’s pro rata share, in accordance with its Interest, of such PreProduction Costs with such funding: 
  (i) firstly, applied to reduce the amount required to be paid under 
§4.1(a)(iii), and the amount of the reduction shall be deemed paid 
by Copper Fox; 
  (ii) secondly, if the amount of the payment under §4.1(a)(iii) is reduced 
to zero, applied to reduce the amount of the payment required 
under §4.1(a)(ii), and the amount of the reduction shall be deemed 
paid by Copper Fox; and (iii) thirdly, if the amounts of the payments under §4.1(a) (iii) and §4.1(a)(ii) are reduced to zero, paid by loan as provided in §10.4(b).

You can see some differences. For one, there's no claw back until $60 million is spent and that's going to be pretty hard to do. A revised Resource Estimate is coming and an updated FS is in order but the bulk of these two items are already done so they are just in need of updates. Between Teck and the CUU money it total $120 million.
In addition, there's further protection that any over runs would be credited to Copper Fox by way of loan. NO DILUTION!
Unincorporated JVs are, relatively speaking, the easiest to set up.  They are creatures of common law and equity and the rights of the JV parties will be wholly housed within the JV agreement (as opposed to some reliance on corporate law under an incorporated JV).  An unincorporated JV structure is generally also an effective flow-through vehicle for tax losses and revenues.
 Another thing that didn't quit go unnoticed... If the project economics don't look so goo then why did Teck form the JV and why are they now the explorer? The drill program is going to extend the North and the geo drilling will improve our understanding of what's under the mountain. Elmer, in the conference call said, should our understanding of the deposit bear out the extra width will allow the pit to go deeper. Yes, simple geometry. The drills ended in improving copper grades. We need to go deeper.
Does the new deal improve the odds of a buyer? Yes. From FRoR to RoFO. A right of first offer is related to a right of first refusal, but the former is considered to favor the seller while the latter is considered to favor the rights holder. Assets that have a right of first refusal attached to them can be more difficult to sell because potential buyers may not want to go to the trouble of negotiating a deal that must be offered to another party first.  
Overall, the path is becoming clear. CUU has the best operator money can buy ($360M worth). Teck will focus on their prime agenda and that's the main deposit and the economics. They have the CUU EBI money and can go nuts. CUU has a no obligation agreement and royalties that under the worst case per the FS comes in around $100M or so. 
Highlights from the conference call:
We'll be trying to move the project forward no matter what. The 2013 drilling should generate a 2014 drilling plan. 
CUU hasn't thought out in detail they're going to do with that money. We will be spending some money on AZ. 
No offer was made under the First Right to Offer clause. Given the climate today, it's not in the best interests of shareholders to make an offer. My own prediction is that 2015 will be the return to normal. The new exchange is going to help that in a big way.
Drilling will take about four months this summer. We have drilled into Dec. in the past.
Are lots of people showing interest? I think there is a distinct possibility that now we can be approached by companies. The way we're set up now with the interest in the JV solidified we would be of interest to other parties. Just watch and see as the USD changes. Just that alone is enough to spark interest.
All future expenditures of Schaft Creek will be paid by Teck.
Liard shares translate to about $100M per year. We also hold 2% Liard interest outside the JV. Our portion is not subject to the voting clause!
The FS has three very significant upside components to it. 1. considerable amount of inferred resources that is currently treated as waste. 2. Can we expand the paramount to the east, would probably result in pit change that allows greater depth  3. We have other remaining resources that could be upgraded to a resource that would add considerable value to SC.
My conclusions. This will become a mine. It's true that the whole world is suffering because of what a handful of bankers did. It's true that economics will have to improve before many mines turn dirt. I have given Spring 2014 as a date for real meaningful turn around. By 2015 the sp should be really performing. This gives less than 2 years to buy cheap. I'm still going to be wary of a snafu caused by hfts before the new exchange comes online. But, I think this deposit is safe because of the results obtained over the last 3 years in particular.
Vancouver, British Columbia -- July 16, 2013 -- Copper Fox Metals Inc. ("Copper Fox") (TSX-V: CUU) today announced the formation of a joint venture (the "Schaft Creek Joint Venture") with Teck Resources Limited ("Teck") to further explore and develop the Schaft Creek project located in northwestern British Columbia, Canada. 

"This partnership is a key milestone for Copper Fox Metals and reflects the spirit of the 2002 Option Agreement with Teck," says Elmer Stewart, President and CEO of Copper Fox. "We are pleased to have Teck as our partner and look forward to the next phase of our relationship. The terms of the Schaft Creek Joint Venture Agreement reflect the advanced stage of the project, and with Teck's expertise in the development and operation of large mining projects and strong commitment to responsible mining we are confident the Schaft Creek project will continue to benefit the Tahltan people, local communities and shareholders.

This agreement gives Copper Fox immediate access to funds and a viable partner to continue the work we have done on the Schaft Creek property without diluting Copper Fox's 25% interest in the Schaft Creek Joint Venture. With Teck's agreement to fund future costs, we have reduced the uncertainty around Copper Fox's future expenditures for the project."

Dale Andres, Senior Vice President, Copper for Teck, commented "This agreement represents an important milestone for our relationship with Copper Fox. We are pleased with the progress they have made and believe they will continue to be a valuable partner going forward."

Terms of the Agreement
  • The agreement replaces and supersedes the 2002 option and joint venture agreement between Teck and Copper Fox in connection with Schaft Creek.
  • Teck will hold a 75% interest and Copper Fox will hold 25% in the Schaft Creek Joint Venture.
  • Teck will be the operator of the Schaft Creek Joint Venture.
  • Teck will pay a total of $60 million in three direct cash payments to Copper Fox: $20 million upon signing the Schaft Creek Joint Venture Agreement, $20 million upon a Production Decision, and $20 million upon the completion of the mine facility.
  • In addition, Teck will fund 100% of costs incurred prior to a production decision up to $60 million; Copper Fox's pro rata share of any pre-production costs in excess of $60 million will be funded by Teck and the direct cash payments payable to Copper Fox will be reduced by an equivalent amount, and Teck will fund any additional costs incurred prior to a production decision, if required, by way of loan to Copper Fox to the extent of its pro rata share, without dilution to Copper Fox's 25% joint venture interest.
  • On signing Teck will reimburse $3.93 million for Schaft Creek mineral tenure acquisition costs and costs related to Stewart Bulk Terminal land reservation agreement incurred by Copper Fox.
  • Management of the Joint Venture will be made up of two representatives from Teck and Copper Fox with voting proportional to equity interests.
  • Teck has agreed to use all reasonable commercial efforts to arrange project equity and debt financing for project capital costs of constructing a mining operation upon a production decision being made; Teck has agreed to fund Copper Fox's pro rata share of project capital costs by way of loan, if requested by Copper Fox, without dilution to Copper Fox's 25% joint venture interest.
Teck and Copper Fox's Interest in the Liard Shares

The shares representing the 78% interest in Liard Copper Mines Limited ("Liard") that are included in the Schaft Creek Joint Venture will be held in the name of Teck for the benefit of Copper Fox (25%) and Teck (75%). Liard holds a 30% net profits interest in the Schaft Creek property.

Summer 2013 Exploration Program

The Schaft Creek Joint Venture intends to approve a Phase I, 2013 summer program aimed at increasing the value of the Schaft Creek project. The program will consist of approximately 10,000 metres of diamond drilling and geotechnical studies. The objective of the drill program is to test the extension to the east of the mineralization in the Paramount Zone and to collect additional geotechnical information for ongoing pit slope stability studies. Drilling is expected to begin before the end of July 2013.

BC Hydro Agreement

In March 2013, Copper Fox entered into a Facilities Study Agreement with the British Columbia Hydro and Power Authority ("BC Hydro") to assess the electrical and equipment requirements to connect the Schaft Creek project to the forthcoming BC Hydro Bob Quinn electrical substation.

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