SWITZERLAND (ResourceInvestor.com) -- Guillermo Salazar, President and CEO of Copper Fox [TSXv:CUU] likes to tell the story of his first job in the mining business several decades ago. Arriving at Butte Montana as a fresh nosed graduate in Geology, he recalls his first month working for the legendary Anaconda Copper Mining Company. He was told he would be assigned to a difficult manager for a one-month trial period, and that most greenhorns usually only survived an average of 20 days before being booted out!
His first job was to descend to the working faces of the various underground levels in production and estimate the value of the ore in dollars/tonne. He not only survived the difficult first 30 days but ever since has been able to look at ore samples and estimate the dollar value without recourse to lab assay results or other aids!
The Richest Mine on Earth
The history of the copper mines at Butte, Montana is a fascinating story, and well worth a quick revisit before looking at Copper Fox’s Schaft Creek project today.
Butte, Montana at its peak in the 1890’s was described by Irish immigrant Marcus Daly, who along with fellow Irishman William Clark and the German F. Augustus Heinze, made their fortune with the copper mines there, as “the richest hill on earth!”
Annual production of refined metals - chiefly copper but also zinc, lead, silver, and gold - was worth $50 million and enough to load a freight train 20 miles long!
In mid-October 1895, the Rothschilds, French and British bought one quarter of the stock in Anaconda for $7.5 million. By the late 1890s, the Rothschilds probably had control over the sale of about 40% of the world’s copper production. During that decade Anaconda was the premier copper producer in the world and therefore an important link in that control.
This was sufficient to attract the attention of Henry H. Rogers, CEO of the Standard Oil Trust, of J.D. Rockefeller fame.
In 1898 Daly, in declining health (and later Clark, more interested in his political career to become a Senator) commenced negotiations to sell out his stake in “the richest hill on earth” to the “greatest trust on earth.”
The Amalgated Copper Company, the holding company organised, took over the Anaconda properties, (and eventually became The Anaconda Copper Mining Company). The most interesting aspect of the deal was how it was financed. They acquired Anaconda - the company worth millions - without the expenditure of a single dollar of their own.
In order to pay Daly and his associates the agreed $39 million, ACC’s public offer to raise $75 million at $100 per share was more than five times oversubscribed at $412 million. Subscriptions of only $130 million were accepted, and 1 share for each five sought was allocated. This provided the promoters with $26 million in cash and left them with 500,000 shares in the company, equivalent to two thirds of the stock, valued the day after the transaction at $70 million.
Heinze, through skilful use of the Apex laws fought an ongoing legal, political and sometimes physical battle with ACC until he also eventually sold out his interests to the Cole/Ryan Butte Coalition in 1906 for $10 million, including in the deal the dismissal of 100 law suits involving property worth $50 million. He later caused the financial crash of 1907 which brought another well known character to the rescue, namely J.P.Morgan.
Present Day Copper Mines
Most copper mines in the late 20th and early 21st centuries have much lower grades than Butte; for example, Bisbee in Arizona, yielded over 100 years ago, but modern technology and the current ascending copper prices still enable them to be very profitable today.
Mining grades of less than 1 % Cu can now be mined profitably, compared to the bonanza high grades of over 10% sporadically found in Butte in its hay days. Mechanisation and huge scale operations have reduced inflation adjusted costs dramatically compared to 100 years ago.
For example, Teck Cominco's [NYSE:TCK; TSX:TCK-B] last 6-month report as of 30 June 2006, reported their operating profit, from milling an average of 124,309 tonnes per day of 0.394 % copper ore, with by-product molybdenum production of 1/10 pounds per tonne, at 531 million Canadian dollars or some C$23.60 per tonne.
Copper Market Trends
Copper prices have risen from 10-25 cents/lb in the 1890’s era to $3.40/lb today. However, inflation adjusted prices are still moderate and demand is outstripping supply.
Source: Copper Fox.
Some Wall Street analysts claim the commodities boom is already over after only 5 years, but others such as Jim Rogers maintain we are only in the middle of the latest one, and previous commodities bull markets have averaged about 19 years or so whenever supply and demand have gotten out of balance.
China and India going through a fast-track industrial revolution will provide substantial demand for copper for many years to come.
Schaft Creek Overview
The main asset of Copper Fox is its Schaft Creek project described as follows on its website:
“The Schaft Creek Property comprises 12 mineral claims covering an area of 10,269.3 hectares. It was discovered in 1957 and has been investigated by prospecting, geological mapping, geophysical surveys, diamond and percussion drilling. A large volume of technical data, including assays, analyses and preliminary engineering studies, has been amassed. This copper-gold-molybdenum-silver deposit is located in the Liard District of Northwestern British Columbia, Canada.
“Copper Fox Metals entered into an option agreement with Teck Cominco to acquire up to 93.4% interest (70% direct, 23.4 indirect) in the Schaft Creek copper property located in northwestern British Columbia. The porphyry copper deposit at the Schaft Creek Property comprises a large ‘porphyry copper’ resource. Past expenditures on the property exceed C$10 million. The Schaft Creek Property’s mineral inventory has been defined with 63,200 metres of diamond drilling at 76 meter (250 ft) spacing.
“Pre-1982 metallurgical testing on core by Teck Cominco and Hecla Mining [NYSE:HL] indicate recoveries of 85% of the copper, 90% of the molybdenite and 50% of the gold. The core is stored on the property with the resulting database being very well preserved. During the 2005 season, Copper Fox completed a 3,000 metre, 15 hole PQWL (3.5'' diamond core) program to confirm:
- The integrity of the data base received from Teck Cominco;
- The repeatability of the assay results and ;
- To conduct its first floatation test on fresh rock.”
Guillermo Salazar worked as a geologist for Hecla Mining at the Schaft Creek project during 1970-1973. During that time, his re-interpretation of the geological model of the deposit allowed Hecla Mining and Teck Cominco to expand the potential resources of the deposit from a maximum of 300 million tonnes to a minimum of 2.5 billion tonnes of the same grade. Today’s geological models being used for the deposit are slight variations to the one developed by Salazar at that time.
Schaft Creek is a neighbour of NovaGold’s [AMEX:NG; TSX:NG] Galore Creek project, so it is interesting to compare the two projects and attempt a comparative evaluation. Taking figures from a recent Copper Fox presentation (page 5).
Comparison
Source: Copper Fox.
NovaGold of course has other major assets, Donlin Creek and Ambler, plus several smaller projects including Rock Creek at Nome, which explain the much larger market cap.
Conventional value assessments of Schaft Creek by Copper Fox show solid valuations compared to the present market cap.
Potential Project Economics
Source: Copper Fox.
The often recently quoted method of the late Julius Baring for investors to evaluate a company against its current share price was described as: “Buy up to 10% of the in situ value of a deposit using current metal prices, hold up to 40% and sell above 40% taking no prisoners!”
The remaining 90% of in the ground metal not valued accounts for capital and cash costs of extraction, and all the many risks of bringing a mine along the 7-year (minimum) path from exploration through pre-feasibility, feasibility, permitting, financing and construction into production.
Other risks include access, location, country, environment, local population, climate, currency exchange rates and metal prices to name only a few of the better known ones!
The following table compares four similar projects in the same proximity in BC.
Conclusion
From the table above we see that Copper Fox has a Julian Baring valuation ratio from 80 times down to 20 times the current market valuation, depending on the back-in scenario.
This corresponds to C$ 46.40 per share against its current price of C$0.58 (if we assume CUU retains its 93.4 % share of Schaft Creek). The worst case scenario, if Teck were to earn the maximum back-in of 75% still leaves a theoretical share price value of C$11.60 per share.
The extreme undervaluation of CUU is not unique in the market place, and comparative figures shown in the table above show quite a range of valuations depending on the project itself and also alternative back-in scenarios in the case of Schaft Creek.
In my recent essay on NovaGold we see similar figures, which tempted their JV partner at Donlin Creek, Barrick [NYSE:ABX; TSX:ABX] to launch a hostile take over bid for NovaGold in July, which NG is still fighting off today. Thus a similar danger lurks for Copper Fox at its current market share price.
It would cost Teck under the option agreement in a worst case scenario 4 x C$15 million = C$60 million to earn its 75% back-in. This is more than the current C$42 mill market cap, or in other words Teck could pay up to C$0.83 per share in a takeover of Copper Fox to gain 100% of the company for the same outlay.
From this standpoint, the current CUU share price is well underpinned by the back-in terms.
Copper Fox needs to not only focus on their business plan, (which appears to be well on schedule) but also to adopt an investment relations strategy to increase their share price. Perhaps they should also consider introducing some kind of poison pill, such as the Shareholders Rights Plan of NovaGold, and also just introduced by BcMetals [TSXv:C].
An SRP does nothing to prevent a hostile takeover, but it does provide some time, usually at least 60 days, for the company subject to a hostile takeover to look for a white knight or some other method to fend off the bid and maximise shareholder value.
Copyright © 2006 Alan Leishman
Disclaimer: Alan Leishman is not a registered Investment Advisor or a Broker/Dealer. Readers are advised that the information contained herein is issued solely for information purposes and is not constructed as an offer to sell or the solicitation of an offer to buy. The author is a shareholder of Copper Fox and NovaGold.
