Peter Epstein, CFA, MBA Twitter: @peterepstein2

Copper Supply Far From Secure, Production Costs Rising

It’s widely known that average copper grades have been falling for decades. The conventional wisdom is that the average grade from producing mines is down from about 1.0% to roughly 0.60%. That trend is likely to persist. Labor, energy, water, legal, local populations, compliance and environmental challenges and costs are up, resulting in the time from discovery to production nearly doubling since the year 2000. This suggests that a number of mid-tier and major base metals players could be looking at acquisitions to offset ongoing depletion. As I hope to demonstrate, Nevada Copper (NCU.TO) (NEVDF) leads the pack in this regard.

An example of what’s going on in the copper space can be found by highlighting Chile’s Escondida mine, operated by BHP. According to reports,

“the project includes construction of a seawater desalination plant and the piping and electrical infrastructure needed to transport water to the mine, 114 miles away and 10,170 feet above sea level.” More astonishing, according to an April, 2015 FT article, “…Chile State-ownedCodelco, plans to spend $25bn over the next five years just to maintain current production…”

Time is Approaching for Potential Suitors of Nevada Copper to Step Up

Everyone agrees that Nevada is a safe and attractive jurisdiction. The same can no longer be said about Peru. That country’s rankings have collapsed as chronicled in the 2014 Fraser Institute Mining Index. In 4 categories Nevada ranked on average # 6 out of roughly 125 countries/territories. By contrast, Peru ranked # 33. Why pick on Peru? It was the 4th largest copper producer in 2014. Even as I write, escalating protests against the $1.4 billion Tía María copper mining project in southern Peru is in the news again. And today, reports of serious delays in another BHP Copper project, this one in Chile. [see links at end of article for these 2 stories.]

Also in the top 10; China, the DRC, Russia and Zambia. So much for security of supply! Half of the top 10 are in unstable countries (my opinion only). Compare those with others in the top 10, the U.S., Canada, Mexico, Chile and Australia. With this in mind, it may be no surprise that I believe Nevada Copper is reaching a critical stage where a number of acquirers might be circling.

Nevada Copper’s flagship Pumpkin Hollow project is a high-grade Iron Oxide Copper Gold deposit within a porphyry copper district located in Nevada, not in a some scary country. As it stands, the combined 1 & 2 Stages represent a highly attractive, large, long life asset. The company’s upcoming Integrated Feasibility Study, “IFS,” has the potential to both expand reserves and resources and enhance the combined grade. The identified proven and probable reserves approximately 5 billion pounds of copper, plus gold and silver at a copper equivalent grade of 0.49%. This is a solid grade for a new entrant and compared to many depleting mines.

Tremendous Capital and Managerial Resources Soon to Pay Off

Given extensive knowledge of the project as evidenced by years of work on both Stages, key risks factors have been mitigated or removed entirely. Nevada’s known and consistent permitting regime and other elements of the combined project delineate many of the cost estimates and other forecasted operating metrics. This is due to Nevada Copper’s Pumpkin Hollow, having been continuously explored and developed for the past decade.

The remaining factors in moving the project into production are well understood by Nevada Copper’s experienced management team and Board. This is not conjecture, this is fact, supported by both internal and external studies. The Pumpkin Hollow project has the potential to be a significant mine in North America commencing as soon as late 2016. Exploration upside by Nevada Copper or a buyer of the company makes the opportunity even more compelling.

Brief Review of Pumpkin Hollow

Pumpkin Hollow is more than a near-term development asset. It also boasts substantial exploration opportunities, excellent infrastructure including power, rail, roads, labor, water and meaningful local and State support. As mentioned, the copper equivalent grades are attractive and poised to move higher with the inclusion of additional drill holes, especially from Pumpkin Hollow’s high-grade underground endowment.

Having reached a shaft depth of 1,906 feet, significant underground drilling will commence shortly. With all required permits for Stage 1 in hand and Stage 2, permitting expected by mid-year, Pumpkin Hollow is well on its way to becoming North America’s next mid-tier, high margin mine. Please visit CaesarsReport for excellent information and commentary on Nevada Copper, including a recent site visit.

More Than Ever Companies Need a Strong Management Team & Board

In looking at Nevada Copper’s excellent website, it’s notable that 16 of 16 profiled management and Board members have specific mining experience across a wide range of disciplines. Many with decades of global experience and proven mine building backgrounds including senior roles at much larger mid-tiers and Majors. This is one of the best pre-production management & Board I’ve ever seen.

The reason for Nevada Cooper’s recent increase in news flow is due entirely to the past decade of hard work by the company’s management team and Board. This highly experienced team is led by the Mr. Giulio Bonifacio, the Founder, President, CEO and Director of Nevada Copper. The following is a brief description of  accomplishments.

He has over 28 years in senior executive positions in the mining industry, and has been instrumental in providing over $400 million of capital to projects of merit. Mr. Bonifacio is a professional accountant with extensive experience and knowledge in areas of corporate finance, securities matters, project finance and mergers & acquisitions. This makes him ideally suited to get Pumpkin Hollow over the finish line on time and on budget as he has in the past.

His team has the collective vision that Nevada Copper will become the next producing mid-sized, copper-focused mine in North America. The team has stated in interviews that it will continue to advance Pumpkin Hollow in a robust yet prudent manner creating stakeholder value, mitigating the need for near-term equity raises and engaging with strategic and financial investors.

Nevada Stakeholders in no Rush to Sell

The stakeholders of this company are looking for bigger and better outcomes. I for one believe that a takeout of the company (at a much higher valuation) could be coming next year, with pivotal events in the second and third quarters of this year. Readers are encouraged to take a virtual tour of Pumpkin Hollow to see what an advanced development project looks like. Notice the extensive equipment and personnel? Not an open field with tumbleweeds, like so many other stranded green field exploration companies around the world.

Nevada Copper is a relatively low-risk emerging, mid-tier copper company in one of the best jurisdictions on the planet. M&A is picking up in the gold sector and copper M&A could soon follow. A number of companies have signed Confidentiality Agreements to take a closer look. A reason for Nevada Copper switching gears and generating an IFS is in part due to requests from suitors already kicking the tires. In previous periods of healthy M&A activity, near-term producers have been snapped up relatively soon after releasing a Feasibility Study. Nevada Copper’s IFS will almost certainly show materially improved economics, (my opinion only) why else do it? For more detail on the Nevada Copper opportunity, see this excellent SeekingAlpha article.

Nevada Copper is blessed with a tremendous management team and Board, highly skilled in taking prudent steps in dealing with potential takeover attempts. With many potential buyers interested in Nevada Copper, the chance of competitive tension, i.e. more than 1 bidder, appears to be a reasonable assumption. M&A begets M&A. Once PE firms like  X2 Resources, run by former Xstrata CEO Mick Davis  or industry leaders get the ball rolling, a handful of companies, especially Nevada Copper, will be prime targets. The longer the wait, the higher the takeout valuation. The beauty of the Nevada Copper takeout thesis is that if the company were to be acquired in the next 6-12 months, the acquisition could come before the need of further equity dilution. What backs my takeout thesis?

Near-Term Catalysts

A prime reason for writing this article is that there are a number of near-term catalysts. Upon completion of the land transfer and conveyance, expected in 3q 2015, all project activities will be regulated under Nevada State and local regulations. Permitting for the underground mining and processing component of the project has been completed and shaft sinking to the 1,906 foot depth is complete and underground development continues to advance.

As of May 8th, all permit applications necessary for the large open pit and underground IFS have been submitted and are progressing according to plan. Also, the underground drill program from the 1,906 foot level and the new IFS results are expected by the end of May. These are truly near-term catalysts, any one of which could cause the stock to move higher as soon as this month.

Conclusion

As the above-mentioned catalysts come to fruition. Nevada Copper is truly in the sweet spot. It has a talented management and Board with proven mine building experience as well as a diversified skill set. The company has an advanced development project in Nevada, one of the best jurisdictions in the world. Pumpkin Hollow is close to world-class infrastructure and skilled labor. It’s one of a few near-term copper producers boasting both size and grade, with both still growing.

What is the market missing? Nevada Copper maintains blue-sky exploration potential, a fact not lost upon parties that have signed Confidentially Agreements. All of this, yet the stock price is lower today than it was a year ago. Despite weak copper prices, Scotiabanks’s analyst recently reiterated his $4 price target on the company. More than double the current stock price. I believe that Nevada Copper should be trading a lot closer $4 per share than $2. As mentioned, time is money. Less time to production can only lead to one thing, a higher valuation.

BHP Copper, copper project at risk.

Copper Troubles in Peru.

Peter Epstein, CFA, MBA Twitter: @peterepstein2

Disclosures:  Please see applicable disclosures here