“Copper has been beat up. It's a great metal, copper is a really good value today. I would buy copper companies almost across the board.” ~ Billionaire Mining Investor, Ross Beaty, in a recent interview
Copper has just begun to move up off multi-year low levels near US$2.50/lb, and many investors have little or no exposure to this red metal. Meanwhile, a veritable deluge of demand is forecast to enter the copper market over the next decade. Much of this demand will come from the production of electric vehicles, which require 80 kilograms of copper per electric vehicle (EV) on average.
The weekly chart of copper offers a similarity to April/May 2017 when copper bottomed around the US$2.50 level and proceeded to rally ~30% over the following six months. Could a similar scenario be on the verge of unfolding as a US/China trade deal comes to fruition and demand for copper continues to grow with the EV revolution and the ‘electrification of everything’?
The world’s largest copper buyer, China, has been using the recent downturn in the copper price to make significant investments across the copper mining sector. Investment bank Jefferies offered the following comments on the timing of China’s investments in the copper sector:
"We do not believe Chinese state-backed companies are concerned about near term cyclical risk. Their focus is more likely on the strategic benefit of controlling large-scale copper resources for decades via acquisitions at low prices during a weak point in the cycle.”
I certainly think there is a very good possibility that copper could be on the brink of a big upside move, and the June 2018 high of ~$3.30 could be a pitstop on the way to much higher levels. If copper is about to make a big move, how can investors benefit from such a move?
There are a few possible ways, ranging from buying copper futures, to buying copper ETFs, to buying large copper producers such as Freeport McMoRan (NYSE:FCX). However, the biggest leverage to a rally in copper is likely to come from mid-tier producers and developers whose projects will become significantly more attractive with a $3+ copper price.
One company in particular is about to begin production at its flagship copper project in the United States, and in my estimation its shares are still valued at a steep discount to fair value. Excelsior Mining (TSX:MIN) has completed construction at its Gunnison Copper Project in southern Arizona, and the company is on the verge of receiving final approval to begin injecting acid into its well fields. Gunnison is a relatively unique copper project because it uses the in-situ method of ore extraction as opposed to more common methods, such as open pit or underground mining. In-situ mining is cheaper because it is less labor intensive than other mining methods; Excelsior’s all-in cost of production is roughly US$1.25 per pound (over the entire life of mine), which is in the bottom quartile of copper production costs globally.
Excelsior checks all the boxes for what I want to see in terms of a developer becoming a producer:
- Excelsior is at the sweet spot of turning on, and ramping up production. This transition to producer generally attracts institutional investment:
- Excelsior is currently valued at roughly 20% of Gunnison’s after-tax NPV, which creates a substantial re-rating opportunity as Excelsior ramps up to full scale commercial production over the next six months (commercial production of 25 million pounds of copper per annum is targeted by Q2 2020).
- Gunnison is located in a safe and mining friendly jurisdiction (Arizona) with a full social license. Moreover, the project is environmentally friendly with a tiny carbon footprint.
- Gunnison is fully financed through to commercial production, and Excelsior has the backing of major financial backers, including: Triple Flag Mining Finance, Greenstone Resources, and Altius Minerals.
- Excelsior is forecast to be cash flow positive beginning in May 2020. Meaning, the company won’t need to do any more equity dilution in order to scale up production to an eventual goal of 125 million pounds per year (additional capex will be financed in part through debt and in part through retained cash flow). At this production level, Excelsior could generate free cash flow of a quarter billion dollars per year.
The key to big, long term, gains in investing is to buy stocks, sectors, and asset classes when they are out of favor and then hold them until they come back into favor. Copper is out of favor. The junior mining sector is out of favor, and Excelsior Mining happens to fall into both categories. This helps to explain why Excelsior shares are trading at ~20% of net asset value, despite the fact that the company is weeks away from initial production, and less than two months away from producing its first copper cathode sheet.
I believe Excelsior offers a sweet spot buying opportunity over the next 90 days. Continued weakness in the copper price, and tax loss selling from investors who bought earlier in the year above C$1.00 per share, creates an opportunity for new investors. However, this is considering that these new investors are willing to exercise some foresight and provide liquidity to sellers who may be selling for noneconomic reasons. From a long term investment standpoint, Excelsior is positioned to reach full scale commercial production of 125 million pounds just as the global copper supply deficit becomes more acute (2021 and beyond).
The opportunity for upward revaluation is significant, even if the copper price doesn’t move up much beyond the US$2.75/lb baseline scenario Excelsior used in its feasibility study. This is due to the fact that Excelsior shares are trading at a significant discount to its junior producer peer group.
As Excelsior transitions to a full-fledged copper producer over the next six months, there is ample potential for Excelsior shares to move much closer to its junior producer peer group average of 60% of NPV. This is why I view fair value to be C$2.50 per share at this point in time. As Gunnison gets further de-risked, over the coming months, I anticipate that MIN shares will move closer to my fair value estimate. Due to its low cost profile and tier one operating jurisdiction, there is also considerable potential for MIN to even trade above its peer group average.
Disclosure: The author of this article owns shares of Excelsior Mining that were purchased on the open market, and may choose to buy or sell these shares at any time without notice. The author of this article has been compensated for marketing and promotional services by Excelsior Mining Corp.
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