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Following with a recent surge in the copper price culminating with the Comex price surpassing $5.00 /lb last week, we increase our LT copper target from $4.35/lb to $5.00/lb and as such provide updated price objectives for the copper producers & developers we currently cover. Most timely to begin with is Copper Fox Metals (CUU) which has seen some dramatic (+200% at peak) price swings last week. Since our initial report dated August 30 2023, much has happened on the development front at many of the key copper portfolio properties. Ultimately, our thesis and positive view on this name remains intact, highlighted by a tier-1 portfolio of billion+ lb copper projects located exclusively in the United States and Canada. Owing to the revised price deck, our newly established 12-month price objective amounts to C$0.67 per share, equating to +153% from an intraday quote. In light of the recent volatility, we highlight the short-term, situational openings, but stress that the opportunity lies within the company assets, spread over the much longer term.
INVESTMENT THESIS REMAINS INTACT
Copper Fox Metals maintains an enviable copper portfolio with various projects boasting a billion+ lb copper resource located in tier-1 North American mining districts. Spanning between BC’s Golden Triangle and Arizona’s Laramide Copper Province, the portfolio comprises two advanced stage projects (Schaft Creek and Van Dyke) and three exploration stage projects (Mineral Mountain, Sombrero Butte and Eaglehead). The company benefits from a current JV partnership with Teck Resources (TECK) on Schaft Creek (75% TECK, 25% CUU) and even has ISR exposure via the wholly-owned, Arizona based Van Dyke copper project. Out initial report from August 2023 is posted on our website.
Though the recent price spike (followed by a large retracement) was hard to miss, the bottom line is that slowly, the market is starting to recognize the various portfolio projects which are all advancing and de-risking simultaneously. Though the company issued a statement in which management was unaware of any material change in fundamental operations, speculation persists that the price spike was potentially sparked by ETF buying. Given the relatively low float and tightly held registry (~60% owned by insiders), the conditions were ripe for such a price spike.
Copper Fox's portfolio is underpinned by the advanced stage Van Dyke ISR project along with the Schaft Creek JV (Teck 75%). Both projects have had extensive study with corresponding PFS' or PEA's exhibiting strong economics when compared to peers. With Van Dyke, a revised PEA was issued in January 2021. A 17-year LOM project was envisioned (previously 11 years) averaging nearly 80M lbs of copper production (AISC $1.14 per lb) annually. Assuming a $3.15/lb LT copper price and given an estimated capex of $290.5M, the 2020 PEA estimated an after-tax NPV8% was estimated at $645M with an after-tax IRR of 43.4%. Concerning Schaft Creek, using metal prices of Cu US$3.25/lb, Au US$1,500/oz, Mo US$10/lb, Ag US$20/oz, a September 2021 PEA highlighted production of 5.0B lbs of copper, 3.70M ounces of gold, 16.40M ounces of silver and 226.0M lbs of moly over a 21-year LOM. That said, the after-tax NPV8% was seen at $842.1M with the after-tax IRR at 12.9%. Both Van Dyke and Schaft Creek rank well when compared to other North American advanced stage projects:
As developments at Taseko Mines (TGB)' Florence project continue to advance (ISR production is expected next year), Van Dyke is starting to garner more interest in the very limited copper ISR pool in Arizona. Within Arizona's ISR sector, Arizona Sonoran's (ASCU) Cactus and Excelsior Mining's (MIN) Gunnison are the projects which are slowly advancing.
We stress that from the ISR peer group above, both Arizona Sonoran and Excelsior Mining remain one-project companies (Cactus and Gunnison, respectively). Taseko has had years of current cashflow from the Gibraltar Mine and the strong share performance of late is a testament to Florence's near-term production start (expected in 2025). Apart from Taseko with longer term projects such as Yellowhead, New Prosperity and Aley, Copper Fox is the only other company with a solid project pipeline and established JVs.
SCHAFT CREEK
The developments at Schaft Creek have come quickly – this past January, analytical results were announced for the 2023 geotechnical drilling program. Five of the eight geotechnical drillholes completed along the highwall portion of the Paramount zone intersected significant intervals of porphyry style copper-molybdenum-gold-silver mineralization. Highlight assays from a particular drill hole (DDH SCK-23-468) included a core interval of 166.4m averaging 0.308% copper, 0.019% moly, 0.117 g/t gold and 0.82 g/t silver. Additionally, from 481.80 to 687.94m, a core interval of 206.14m averaged 0.494% copper, 0.029% moly, 0.282g/t gold and 1.79g/t silver. Additionally, surveys were completed as part of the geotechnical program. Spread over five holes, 2,327m of downhole geophysical surveys were completed along with the installation of Vibrating Wire Piezometers for hydrogeological test purposes. Lastly, a pit slope stability study is in progress. Recall that the Schaft Creek project represents one of the largest undeveloped porphyry copper deposits located anywhere in North America. The deposit also contains significant gold-moly-silver by-products. Last year the Schaft Creek JV approved a C$17.2M budget to advance key project activities including the collection of geotechnical, metallurgical, engineering, and environmental data and community engagement. Planned expenditures this year include C$18.7M for the completion of metallurgical work along with a 4,500m focused drill program targeting the key technical areas (highwall, tailings storage facility and rock storage facility). With budgets approved and TECK being the project operator, activity the goals are many this year as the project looks to shift from scoping stage to PFS stage (by early 2025).
VAN DYKE
In late March an update was provided for developments at the wholly-owned Van Dyke ISR project in Arizona. One drillhole was successfully completed with the intent of the program to assess the potential for rehabilitating historical drillholes for use as hydrogeological monitoring and water sampling stations. Work has consisted of the installation of vibrating wire piezometers and a data recorder in drillhole M-3. A total of four stations are now recording hydrogeological data. Analysis showed that the formational waters from the Gila Conglomerate collected during the drillhole rehabilitation program returned concentrations of metals, anions, and cations well below acceptable limits established by the Environmental Protection Agency. From work completed last year, test work at Van Dyke already demonstrated a high degree of oxidization, rapid leaching rates for the copper minerals and low acid consuming gangue and host rock mineralogy. Though an upgraded resource to Measured & Indicated will be still needed to move the project to the permitting stage, the recent developments at Taseko Mines’ Florence copper project already point to a successful blueprint to eventual ISR production.
As per our estimates, we model a slightly updated 16-year LOM averaging 64.7M lbs of copper annually (with a steady state of just under 85.0M per year between 2029-2038). Over LOM, we see the C1$ cash cost averaging $1.15/lb with the AISC averaging $1.35/lb.
EAGLEHEAD
Located in BC’s Liard Mining district, the Eaglehead project hosts four open-ended porphyry copper deposits. Exploration completed prior to 2023 include 126 diamond drill holes (36,605 m), preliminary metallurgical testwork, airborne and ground geophysical surveys, soil, stream sediment and water quality geochemical surveys and prospecting and mapping. An updated NI-43-101 compliant resource was announced on August 30, 2023. Using a base case C$5.50/tonne NSR cutoff, the pit-constrained resource was as follows:
SOMBRERO BUTTE
In February the entire property was covered by a Full Spectrum Hyperspectral Survey which collected continuous Visual and Near Infrared (VNIR), Shorth Wave Infrared (SWIR) and Long Wave Infrared (LWIR) data. The surveys indicated that the phyllic and argillic alteration signatures at Sombrero Butte are more widespread than previously known. The recently identified anomalous areas correlate with airborne anomalies (magnetic and radiometric) which is indicative of a porphyry copper system. Moreover, the data suggests the presence of a significant number of potential breccia pipes which are an indicator of a potential buried porphyry copper system. From drill hole DDH SB-03, the specific interval between 492m-578m returned a weighted average of 1,414 ppm (0.14%) copper and 30 ppm molybdenum over the 86m core interval with individual sample intervals up to 0.64% copper and 190 ppm molybdenum.
MINERAL MOUNTAIN
As announced earlier in April, three distinct areas of higher positive chargeability located within a larger 18 milliradians (mrad) chargeability anomaly were identified. These areas of higher chargeability and associated magnetic signatures have been specifically interpreted to represent three potential porphyry copper centers. SWCA has been retained to assist with the determination of the scope and scale of the ER in conjunction with the BLM. An Environmental Review along with the Solicitation of Public Comments on the Plan of Operations must be completed before receiving a final decision from the BLM on the drilling permit. Work on this front is on-going, SWCA is currently working on the needed field studies and associated literature review. It is expected to be completed in four months. Recall that Mineral Mountain is strategically located 25km southwest from the giant Resolution (Rio Tinto, BHP) copper-moly deposit and approximately 25km northeast of Taseko’s Florence porphyry copper deposit.
VALUATION
In light of the recent price volatility (recall the low liquidity and 60% insider ownership) we decided to shed some light on the company's portfolio of assets. In a best case scenario contingent on financing post an estimated Q1/2025 positive PFS for Van Dyke, we see initial ISR production commencing in late 2027 and reaching a steady state of just under 85.0M per year between 2029-2038. Given our cost assumptions (outlined above) over 16 year LOM and using a LT 5.00/lb copper price, our after-tax NPV8% for Van Dyke equates to C$2.82 per share. For Schaft Creek, owing to the fact that Teck Resources is the 75% owner and project operator, we use a pro-rata valuation based on ownership and 2021 PEA after-tax NPV8%. Note that this benchmark is conservative owing to the PEA having been conducted at a $3.25/lb LT price. We give minimal valuation (C$15M) for Eaglehead, Sombrero Butte and Mineral Mountain, acknowledging that the market currently ascribes nearly zero value to these high potential yet currently peripheral assets. Adjusting for financials, we see that given the most recent market close, Copper Fox is trading at a 0.08x discount to NAV. This steep discount is not atypical for exploration/development juniors however we see an overly steep (and unwarranted) disconnect due to asset quality and development plans coupled with the very under-owned nature of the company itself. Given the most intraday quote, our 12-month target is predicated on a 0.2x NAV multiple which equates to 153% upside. The project specific sensitivities (in C$) and NAV sensitivities are below:
Since last year, we've seen the close of several large-scale M&A copper transactions, most notably highlighted by Rio Tinto/Turquoise Hill and BHP/OZ Minerals. On back of BHP's recent bid for Anglo, we expect more transactions to come. Further consolidation will likely be the route for additional value creation as an increasing copper price ($5.00/lb+) will shift the focus to smaller companies with quality assets within the exploration/development phase. Quality, shovel ready projects (let alone large scale deposits) are becoming scarce and difficult to find and/or build. Though currently very under-owned, we would expect the Copper Fox portfolio to garner increasing amounts of attention going forward. There will always be short-term, situational openings, but the opportunity lies in the longer term.
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