As a general
rule, the most successful man in life is the man who has the best information
So what is a
pound of copper (Cu) worth in the ground (in situ) to an exploration or
development story?
Analyst Mike
Bandrowski at Clarus Securities shows a chart suggesting the price of an average
pound of copper in the ground between a few South American copper deposits is
$0.04.
Why are some
pounds worth more than others - are there recognizable intangibles assets
that are imperative to build a mine and maximize shareholder value? This
author believes if you have the operational team and financial partners to
move into production you can potentially create many more times shareholder
value above and beyond the average exploration and development company.
For example:
Company XYZ -
with few or no recognizable intangibles assets - has 5 billion lbs of copper
and gets bought out at .04 per lb - the company would be worth
$200,000,000.00.
On the flip side,
the assets of a company such as operational experience, speed to
production advantage and in place financial partners for production are the
“intangibles” that ultimately create the most shareholder value.
Assume
XYZ’s project could support a 250M lb per year copper producer netting
$1.50 per lb in cash flow and has the intangibles assets of management
that can and will take it all the way down the development path to a mine -
their operational experience and deep pocketed financial partners giving them
a speed to production advantage over their peers.
250M lbs X $1.50
per lb = $375M in cash flow. Most analysts would suggest a five times cash
flow multiple implying a $1.875B company. This could create a producing
company potentially valued many times more than a deposit sitting there
waiting to be purchased.
This is why I
like the potential of an AQM Copper (TSX.V - AQM). Management has a combined
280 years of mining experience. Bruce Turner (former President of BHP
Billiton's Minera Escondida) played a significant role in the development and
management of Escondida for over 19 years - which became the world's largest
copper producing mine. Juan Villarzu was the Chairman of Codelco - the
world's largest copper company for nine years. The rest of AQM’s
management team is equally experienced in their respective fields - there are
officers and mine operators from Codelco and geologists who have run the
drill programs for several high profile South American deposits.
As operator of
the Zafranal project AQM is working on developing something substantial with
50/50 JV partner Teck Resources (TSX – TCK). To date the Zafranal Main
Zone has been drilled out to 3300 meters by up to 600 meters wide with
thicknesses ranging from 50 - 150 meters.
Wonder why Teck
wanted to have AQM as their exclusive partner and operator of Zafranal? The
reason is twofold: Drilling results have been outstanding and with the
operational guidance of AQM the project can have a much quicker timeline to
production than if a major was moving it forward at this stage.
Without the
bureaucratic red tape of a large mining company stalling development, AQM can
advance Zafranal through final feasibility much quicker than a major could.
One only needs to look at Teck’s recent acquisition of the Relincho
project in 2008. Since acquisition, it took Teck almost one year to complete
a scoping study (with no drilling at all in 2009). AQM expects to have their
Zafranal scoping study completed by the end of Q4 2010!
More recently AQM
announced two significant new discoveries, at Sicera Sur and Sicera Norte,
within the Zafranal Property boundaries and in close proximity to the Main
Zone. Drilling is to start soon testing the size/grade potential of the
mineralized zones of these satellite areas as their proximity to the Main
Zone could mean additional mine life.
To date,
Zafranal, in this authors opinion, shows excellent potential to be a robust,
economic deposit capable of supporting production. The Zafranal Main Zone
remains open in multiple directions and there is a higher grade area –
perhaps a starter pit - of close to 1% Cu.
Conclusion
In the fall of
2009, before AQM went to work on Zafranal, there was no way to effectively
quantify and value the intangibles of the company. The deposit had seen
limited work (36 holes by Teck in 2004) and the tangible asset had yet to
deliver and give a valuation to the company.
Most juniors look
to drill and sell a deposit and have no real significant intangibles to
contribute to a valuation. However, with 280 years of combined management
experience comes operational experience, speed to production advantages and a
financial partner further de-risking the project.
What does that
mean to AQM shareholders?
As Clarus
securities put it “We feel the stock is significantly undervalued
compared to its peers and should be trading between 75% and 100% above its
current level. We also note that due to the project location, infrastructure
and management team will likely result in Zafranal going into production
before any of the deposits in its peer group.”
AQM Copper TSX.V
- AQM and its Zafranal joint venture with Teck Resources should be on every
investors radar screen.
Is it on yours?
Richard Mills
Aheadoftheherd.com
Richard
is host of www.aheadoftheherd.com and invests in the
junior resource sector. His articles have been published on over 60 websites
including - Wall Street Journal, 24hGold, Kitco, USAToday, Safehaven,
SeekingAlpha, The Gold/Energy Reports, Gold-Eagle and Financial Sense.
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