CEO Interview: Cardero Resources, a Cheap Copper Play?

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The following interview of CEO Stuart Ross of Cardero Resources was conducted by phone & email in the week ended December 3rd.  Cardero’s primary project, the Zonia Copper Oxide project is in Arizona, (USA), host to 65% of the Country’s copper production.  Two things stick out like sore thumbs in Cardero’s primary mining project’s PEA.  First, the mine-life mine life is just 8.6 years, but management thinks that can be extended with further drilling, and second the tremendous leverage to the copper price.  Even before considering the potential extension of mine life or a higher copper price, the after-tax IRR of the Zonia project is an impressive 29%. {corporate presentations}

Please describe Cardero Resource Corp.’s 2 projects.

We have two projects, one is an early exploration Nickel-Cobalt Massive Sulphide anomaly in British Columbia, Canada.  We will be doing some additional Geo physics and Geo Chem work on this project to establish potential drill targets. The flagship project is the Zonia Copper (“Cu”) Oxide Deposit (85 miles north of Phoenix, Arizona) that has been advanced to the PEA stage.  Zonia is a near-surface copper-oxide resource and a brown fields site as it was mined in the late 1960s and ’70s.  It has good access to infrastructure, located just 5 miles from highway 89 and roughly halfway between the towns of Wickenburg & Prescott.  

Power to the site is in place, but it would need to be upgraded to support actual production.  The Zonia resource is amenable to conventional mining and SXEW processing and there’s ample water on site.  We are now working on a Feasibility Study.  

Can you give readers the key findings of the PEA on your Zonia Copper Oxide project in Arizona? 

Key points from the PEA are as follows: {in US$}

Long-term base case copper price = $3.00/lb.

After‐tax NPV(8%) = $192 million

After-tax IRR = 29%; with a 2.9 year payback of initial capital

Initial capital cost =  $198 million

Mine life:  8.6 years

Average annual production = 49.1 million lbs. Cu

What does the Zonia project’s after-tax NPV & IRR look like at higher & lower copper prices?

Our project is quite robust.  At a copper price of US$2.70/lb. (about 10% below the base case of ~US$3.00/lb.), the after-tax IRR is still solid at 20%.  At US$3.30/lb., the IRR is a strong 36.6%.  Each 10% increase in the long-term Cu price adds roughly C$100 M to the after-tax NPV(8%).  That’s more leverage to the copper price than most projects we’ve studied.

In what ways might Cardero potentially be able to improve upon the PEA?  For example, might it be possible to extend the 8.6-yr. mine life or increase prospective copper recoveries in a pre-feasibility study?

That’s a great question, we get asked that a lot.  It’s important to recognize that the current mine plan doesn’t utilize our entire copper resource.  For permitting reasons, the mine plan was downsized to fit on our private land.  However, there’s more resource in the existing pit that can be utilized and the deposit continues to the north.  

We think that with additional drilling there could be more resource defined.  We completed a program of geo chem and IP covering the resource and the area to the north.  This work defined a significant target with very similar characteristics.  

All of this is described in our November corporate presentation.  We have received permits to drill that zone and believe it could substantially increase the size of our total resource. 

Can you talk more about private vs. Federal BLM land and how that dynamic informs your decisions on project development at Zonia? 

In designing the mine plan in the PEA, we purposely downsized it so that the pit would fit on private land and on our patented claims.  This negates the need for the BLM in the permitting process, significantly decreasing the time & cost.  The constraint on production from our existing private land position is a function of available space for heap leach pads..

In your corporate presentation you have a timeline that suggests phase 1 production could be achieved in about 5 years.  Conceptually, are there ways to get into production sooner? 

Yes, one of the main items in the timeline is two years for finance & construction.  We have advanced discussions underway with Private Equity groups & metals purchasers.  If we can come to terms, that 2-yr. timeframe could be potentially be shortened to one.  Also, we are looking into acquiring used equipment, which would decrease costs and provide greater flexibility to acquire equipment concurrently with the stage of development.

Phase 1 permitting is expected to take roughly 2.5 years.  Has the clock started ticking on that time frame?  How difficult is permitting in Arizona? 

Yes, some of the permitting discussions are already underway.  The authorities in Arizona are well aware of the benefits of mining, 65% of copper produced in the U.S. comes from the State and the permitting process is well understood.  The Zonia property has had mining on it in the past, so our applications will be made on the premise of being a reclamation project as well as a current mine. 

What are the biggest Company-specific risks at Cardero Resource? 

The primary risks are permitting & financing over the next few years.  We believe we have de-risked those items to a large degree — for example we have reviewed the permitting issues with our engineering partners and, we have engaged potential financing sources and have progressed those discussions.

You and your team are no doubt bullish on Copper fundamentals, which factors are most compelling?  

There are several large institutions that believe copper is in an upward trend.  BMO in a recent report indicated, ‘We would also note that the copper market is moving into significant deficit over the next two years owing to a lack of supply growth.‘  We believe that a lack of supply growth and increasing demand for copper is a key factor in the underlying fundamentals.

Electric vehicle adoption is only part of the story.  Renewables such as wind & solar could be even larger demand drivers by 2025.  Robert Freidland of Ivanhoe Mines was recently quoted as saying, ‘you’re going to need a telescope to see copper prices in 2021′ and the CEO of Freeport has also been bullish on copper.  Although the recent market is not reflecting those fundamentals we believe long term there will be an upward trend.

Why should readers consider CDU for their portfolios at this time?

Recently, a UK based global natural resources group studied the prices paid for Copper M&A over a ten year period.  It was determined that by segregating projects by various stages of development the in ground valuation of copper increased from exploration to production. 

Stage of Development                      Valuation of in situ Copper Equivalent Resource ($US/Pound)

Exploration                                                                                     $0.03

Feasibility                                                                                        $0.09

Pre-Production                                                                               $0.10

Operating                                                                                         $0.14 

Currently, the in situ copper equivalent resource for Cardero based on market capitlization is valued at $0.005 per pound.  The depressed market for resource stocks has created investment opportunities for informed, patient investors who can see that a return to synchronous global economic growth (once the temporary squabble over trade tariffs is resolved) is expected to put upward pressure on the base metals sector.

{corporate presentations} {PEA on Zonia Project}

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At the time this interview was posted, Peter Epstein owned stock options in Cardero Resources and the Company was an advertiser on [ER]. Readers understand and agree that they must conduct their own due diligence above and beyond reading this article. While the author believes he’s diligent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.