Nevada Copper- Production Next Year, Largely De-Risked

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The following interview is with the CEO, President and Founder of Nevada Copper, Giulio T. Bonifacio. This interview was conducted in the last week of January, 2015. I, Peter Epstein, have no prior or existing relationship with any company mentioned below.

Q. Can you describe Nevada Copper for those not familiar with the story?

A. Nevada Copper (NCU.v) (NEVDF) was formed in 2005 to acquire and advance the Pumpkin Hollow copper project near Yerington Nevada. Yerington has a mining history with the former Anaconda open pit mine operating successfully from the 1950’s to 1980’s. The Pumpkin Hollow copper project encompasses several copper deposits all in close proximity. The East and E2 deposits are high grade and, being deeper, are being advanced for underground exploitation. Two other deposits, the North and South, are suitable for open pit mining.

Q. How long has Nevada Copper been working on Stage 1 of Pumpkin Hollow? How much has been invested to date?

A. As mentioned above, Nevada Copper has been working on advancing the project for about 9 years. Nevada Copper, in 2012, recognized that the project has the natural ability to be developed in two stages because the high grade underground deposits could be permitted much more quickly with State permits (no Federal permits needed, as the Stage 1 project is entirely within private lands) – and at a much lower initial capital cost than would be required for a large open pit operation. So a stand-alone underground operation, designated as “Stage 1”, would be development of the East and E2 deposits.

Nevada Copper has invested over $180 million in Pumpkin Hollow since formation in 2005. About $69 million of that has been directed at Stage 1 development since 2012 including hoist, head-frame, shaft sinking infrastructure, and engineering.

Q. Please explain the importance of the December 12th and December 19th press releases about the transfer of BLM property to the city of Yerington, Nevada?

A. December 19th 2014 is really the only date to remember.  It is the date that President Obama signed into law a bill that contained language that directed the BLM within 180 days, to sell at fair market value approximately 10,400 acres of Federal land surrounding Pumpkin Hollow to the City of Yerington. (The date to underline is June 17, 2015 – 180 days from December 19, 2014). We expect the acquisition price to be about $2 million based on our recent independent valuation.

Our agreement with the City of  Yerington is that we fund the acquisition for the city and, once acquired, they would deed almost all of this acquired property to Nevada Copper except for a small portion (not affecting Pumpkin Hollow) retained for “public event” purposes. The land deeded to Nevada Copper essentially converts this property into private ownership of both the surface and mineral rights by Nevada Copper – note we already had the mineral rights. The importance of this is that with no Federal land now involved we can quickly permit the larger Stage 2 open pit development – much like we were able to for Stage 1 – by June 2015.  In short we expect to be fully permitted on both Stage 1 and Stage 2 by June 2015 which is a significant milestone and re-rating event.

Q. Please describe your capital structure including drawn debt and cash, will you require an equity raise anytime soon?

A. We currently have 80.5 million shares outstanding, $36 million in cash, $90 million drawn against the $200 million Red Kite facility and a $15 million draw against a $20 million bridge facility. With a substantial cash position, we are not pressed to do an equity raise, but would consider doing so sometime later in 2015.

Q. Can you describe the off-take agreement that comes along with the new secured credit facility?

A. Red Kite debt facilities typically include a copper offtake component and ours is no different. It is notable that the Red Kite offtake arrangement applies only to the Stage 1 development – not the larger Stage 2. Under the new facility Red Kite is entitled to buy a proportion of the remaining available Stage 1 concentrate production – pro-rata to loan draws. With 25.5% of offtake already committed under the previous facility, under the new Red Kite facility it has rights to buy 45% ($90/$200) of the remaining 74.5% of the Stage 1 offtake available. At this point a total of 59% of offtake has been allocated on the Eastern deposits representing only 12% of the total project reserves. Under Red Kite’s offtake arrangements, Nevada Copper pays a small premium on top of annual “benchmark” TC/RC’s. Metal pay-factors are industry standard.

Q. Pro forma for the Nevada Copper’s new $200 million secured loan facility, how much additional capital do you believe is needed to get stage 1 into production?

A. Stage 1 name plate initial cap-ex was $329M including $25M of contingency. We have spent approx. $70 million leaving $259M. This leaves a shortfall of approximately $140 million which will be raised by way of equity, but is not required based on the current facility until later in 2015. This is also a key benefit of this debt facility. We are also exploring several financing alternatives which will likely reduce the equity requirement. In short we have been very disciplined with our share structure and there is no reason to assume that this will change.

Q. If the copper price keeps falling, is there a level at which you would slow development of Stage 1?

A. We, of course, monitor current copper prices, but our focus is on copper markets in 2016 and beyond. We have already slowed Stage 1 engineering and procurement to match shaft sinking progress.  As a significant de-risking event, we elected to continue shaft sinking which is now close to 90% complete. Of course with the land bill passed and the open pit development permits expected in June 2015, we can now consider whether we use the underground as a high grade feed supplement to the open pit ore, feeding a single large concentrator. The smaller Stage 1 mill would not be required. No decision has been taken yet.

Q. How important are your gold and silver credits to the prospective all-in operating costs in Stage 1?

A. Gold and silver are important revenue credits in our copper concentrates accounting for 5-10% of revenues.

Q. How close is Nevada Copper to finishing digging its shaft for Stage 1? Are you encountering any budget or timing issues? 

A. The shaft is at 1,761 feet, about 92% to the main 1,900 foot haulage level and is expected to reach that level next month.

In dealing with sometimes variable, and unexpected, ground conditions, shaft sinking commonly presents challenges and these can add to costs.  Our case is no different, but the few problem areas were not unexpected and were overcome in a professional manner by Cementation, our shaft contractor. These challenges are now behind us – a major milestone is within sight.

Q. What should prospective investors expect to see in your mid-year updated Phase 2 open pit feasibility study? 

A. Indications from preliminary engineering work is the updated Stage 2 will see an improved early copper production profile which in part is based on the additional 10,000 meters of drilling which did not get captured in the last updated reserve. Cap-ex will be updated but is not expected to change materially. All mining costs will be reviewed and updated including lowered diesel prices.

The results of the drilling noted above further supports additional drilling in 2015 in view of the open extend of the open pit deposits.

Q. GMP describes the combined Stage 1 & 2 projects as a, “world class project.” How does the expected overall size of the project compare to global peers? 

A. Pumpkin Hollow projected Stage 1 & 2 combined copper production is approximately 250+ Mlbs annually with first production 2016-17.

This is certainly the only new large scale U.S. copper project projected to come online in this time frame while also being completely permitted by June, 2015 which is contrast to other projects in the U.S. with permitting timelines that have not been achieved.

In short to have a fully permitted project of size in Nevada, located in an ideal jurisdiction, puts Nevada Copper in a very enviable positon as it relates to the growth profile in the short term.

Q. How would you describe the pipeline of copper-focused projects around the world. Do you envision a number of new projects coming online before the end of the decade?

A. Without doubt, additional copper projects now in the pipeline will come into production. However, one should note that several large scale copper projects are required each year simply to match a copper demand that is relentlessly increasing– albeit at a somewhat slower pace than in past years. And these new copper projects entail inevitably higher capital costs and lower grades, with many located in politically risky parts of the world with high infrastructure costs. Pumpkin Hollow is a very low risk jurisdiction with labor and infrastructure available close at hand.

Q. Some analysts consider Nevada Copper to be a prime takeout candidate. What are your thoughts?

A. Our primary focus is to continue to add value and with the current strong shareholder support this is only possible at levels that are multiples of the current share price. The current shareholder base has an appreciation of the context of the market, which has not currently valued Nevada Copper at a value that would be considered. As our valuation improves, and it will due to location, size, low risk profile and full permits, a takeout is entirely possible.

Q. Why should investors buy shares of Nevada Copper? How does the investment opportunity compare in terms of valuation to peers and recent M&A activity?

A. Low risk, fully permitted (June 2015) ; large scale copper project in the U.S. Southwest; close to infrastructure and abundant local support. See below re: copper valuation comparables.

Q. Are there any misconceptions about Nevada Copper that you would like to address?

A. A true lack of understanding that with the passage of the land bill, we will be fully permitted in the short term and not a complete understanding that Nevada Copper is in possession of a project of significant size with further upside in one of the best mining jurisdictions worldwide.

As we bridge this gap, which will be achieved in the short term with full permits and an updated feasibility study on the larger operation, it is likely in our view that our current valuation of 2.0 cents per Reserve pound will increase. By comparison, there has been much consolidation in the copper sector for which the values garnered were in the plus 10 -15 cents range per proven and probable reserve.

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