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Buyers Guide News Markets Buyer's Guide Advertise RSS Newsletter The Northern Miner MINING.COM Canadian Mining Journal Sign In Join Profile Sign out Copper Gold Lithium Nickel Commodities Iron Ore Rare Earth Coal Uranium Cobalt Diamond Zinc Platinum Palladium Silver Potash Suppliers Equipment TOP 50 USA Canada Australia Regions Africa China Latin America Europe Asia TNM Maps TNM Marco Polo A candidate for ‘deal of the year’ in British Columbia Streetwise Reports | January 19, 2018 | 11:45 am Base Metals Canada China Copper Zinc
Kutcho project 1. Introduction
Very rarely I come across a junior that simply seems to tick almost all boxes, and it looks like new sponsor Kutcho Copper Corp. (KC:TSX.V) is doing just that. From project profitability to management, from financials to geology, from location to metal prices, it comes across as a genuine display of quality and excellence. CEO Vince Sorace certainly made the most of Capstone Mining’s strategy change a few years ago not to develop relatively smaller, non-core assets, and now looking to divest assets to clean up their troubled balance sheet. Sign Up for the Copper Digest Sign Up
In an impressive stream/convertible debt/equity deal with Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) to the tune of C$120M, Sorace managed to buy the Kutcho Copper Project outright in C$28.8M all cash plus an equity interest in the new to be formed company from Capstone, when Kutcho Copper still was predecessor Desert Star Resources, with a market cap of only C$10M at the time. As a consequence, the company is also fully financed to the FS under the current mine plan. I can’t recall (I’m in this industry since 2010) ever having seen deals being done that are so much bigger than the involved junior itself, and are so well structured, with such a quality asset, so as far as I am concerned this should be a prime candidate for deal of the year for 2017.
Although Sorace would certainly deserve all the acclaim for this deal he could possibly get, the main purpose of this article is of course providing an outlook on upside potential for investors. When management would decide to just advance the project, which already boasts an excellent 2017 Pre-Feasibility Study (PFS), to Feasibility Study (FS) stage and having it fully permitted, there is already realistic potential for a double at current strong (and expected to go higher) base metal prices. But there is more. The company has several possibilities to include considerably more resources into the mine plan, which could increase the Net Present Value (NPV) of Kutcho Copper significantly. In this analysis I will discuss this potential, compare the company with peers, and indicate valuation upside.
All presented tables are my own material, unless stated otherwise.
All pictures are company material, unless stated otherwise.
All currencies are in US Dollars, unless stated otherwise. 2. Company
Kutcho Copper Corp. is a Canadian resource development company focused on expanding and developing the Kutcho high grade copper-zinc VMS project in northern British Columbia. The project is located nearby the richly mineralized Golden Triangle Zone, in hilly/moderately mountainous terrain. As can be seen below by the number of projects and mines, British Columbia is a familiar mining jurisdiction, and has a solid ranking on the Policy Perception Index according to the last Fraser Survey of Mining Companies, coming in at #41 out of 104 jurisdictions worldwide.
Location map: Kutcho Copper: Kutcho project
The company signed a definitive agreement with Capstone Mining to acquire the Kutcho high grade copper-zinc-gold-silver project for C$28.8M and a 9.9% equity interest in Kutcho Copper, and at the same time released an updated PFS on June 15, 2017, which showed excellent figures. Seeing this being done at the same time is pretty unusual as well, but definitely confirms the can-do mentality of Sorace and his team for me. The base case scenario generates an after-tax NPV8 (8% discount) of C$265M and an after-tax IRR of 27.6%, using metal prices of US$2.75/lb copper, US$1.10/lb zinc, US$17.00/oz silver and US$1,250/oz gold and a currency exchange rate of 0.75 USD/CAD. This is all based on a modest initial capex of C$220.7M which is well below base case NPV, which is a strong feat for a base metal project in general. With current (much higher) metal prices this already proves to be a conservative PFS, and there is much more upside. More on this later.
Kutcho Copper could buy this asset as it made an impressive set of deals with Wheaton Precious Metals, formerly known as Silver Wheaton, and raised cash in the market. Besides the streaming deal which will provide US$65M for FS, permitting and early construction, a combination of a C$20M convertible debt loan and a C$4M equity financing with Wheaton, plus a mostly brokered C$14.7M equity financing (the aforementioned C$4M Wheaton equity was included here) provided for the C$28.8M cash component in order to acquire the Kutcho project from Capstone. I followed it closely and was amazed at the achievements, as I know how hard it can be for juniors to just raise a few million dollars. The Wheaton deal obviously opened many doors.
After closing the acquisition on December 15, 2017, which happened just a week after raising the C$14.7M, Kutcho Copper commenced trading on December 21, 2017, at the TSX Venture Exchange under the ticker KC.V.
As of January 16, 2017, Kutcho Copper has a share price of C$0.76 and a market cap of $36.82M, with only a very tight 48.45M shares outstanding (fully diluted 70.42M, all options and warrants out of the money at C$1.00, expiry in 3 years). The average volume since trading on December 21 is a pretty liquid 475,000 shares.
Share price over 1 year period
As soon as the trading halt was lifted, the markets showed a lot of interest, and as fundamentals and future potential seem to be excellent, I see Kutcho Copper shaping up as one of the go-to base metal projects for the coming years.
Kutcho Copper has an estimated $4M in cash at the moment, and C$20M in debt. Management and Board controls 10% of shares, which is good to see; Wheaton Precious Metals holds 13% and Capstone Mining is the largest shareholder with 16%. There are 17.65M warrants, of which 6.37M are in the money and 3.4M of those will expire before the end of August. The balance has an expiry in 3 years @ C$1.00. The options have an average life of 4.25 years with a weighted average price of $0.62.
The management team and the board of directors consist of some very experienced quality people. For starters there is President and CEO Vince Sorace, who has been around for 25 years in the mining business, having raised over C$200M and founded various private and public resource companies. He managed to attract a few very interesting names to his team, as there are two key people from former high flyer Kaminak Gold: VP Community & Environment Allison Rippin Armstrong, and VP Exploration Rory Kutluoglu. COO Rob Duncan is also a household name in mining, having done a lot of exploration for majors including Rio Tinto and Inmet, with a lot of specific VMS experience. Eva Nakano does Corporate Development, and it’s the first time I see this job being done by someone who is a Professional Geologist with an MBA.
Recent additions are Len Holland and Angus Christie, no newcomers either in the mining industry. Holland led the re-commissioning of Trevali’s Caribou project, consults to Glencore, SNC Lavalin and First Quantum Minerals among others, and will lead the optimization of metallurgical processes. Christie, who led the Feasibility Studies by JDS for Sabina Gold & Silver and Kaminak Gold, will oversee the Feasibility Study process for the company. These two experts further complete and solidify one of the best technical teams possible.
The Board of Directors consists among others out of Stephen Quin, the current CEO of Midas Gold (who is also the former President and COO of Capstone Mining, and former President and CEO of Sherwood Copper, which amalgamated into Capstone during his tenure), Bill Bennet, former BC mines Minister for 3 periods, helped launch BC’s First Nations mine revenue sharing program, and Brad Mercer, who leads exploration at Capstone Mining, who also managed the Kutcho field program in 2010 that contributed to the 2011 PFS for Capstone at the time.
The Advisory Board has also three notable and very experienced names on board, as there are Peter Meredith, former CFO and Deputy Chairman of Ivanhoe Mines, Rob Carpenter, co-founder and long time President and CEO of Kaminak Gold, and Tookie Angus, current Chairman of Nevsun Resources and former Managing Director of Mergers & Acquisitions for Endeavour Financial, and former Head of the Global Mining Group for Fasken Martineau. With Sorace having arranged all financings necessary to complete the feasibility study under the current mine plan, I can’t think of a better team to handle exploration, project development and permitting.
I guess by now it becomes clear why I am pretty enthusiastic about Kutcho Copper, but first I will discuss the basics like the deals and main metals copper and zinc, before I delve into project, project economics and potential upside. 3. The deal and the financings
The acquisition of the Kutcho project by predecessor Desert Star Resources was a relatively straightforward deal, as the majority was cash, as can be seen in the summarized terms of the agreement as per the news release of June 15, 2017: Desert Star to acquire 100% interest in Capstone’s wholly-owned subsidiary Kutcho Copper Corp. which holds 100% interest in the Kutcho project Desert Star to pay Capstone C$28.8 million cash upon closing Capstone to become 9.9% shareholder of Desert Star at the completion of the Acquisition The shares issued to Capstone, will be restricted from sale for a period of two years from the date of issuance. Upon termination of the pooling restrictions, Capstone must give the Company written notice of its intention to sell any of the Purchased Shares, and Desert Star will have a 10-day right to designate the purchaser of such shares. For so long as Capstone holds at least 5% of the issued and outstanding shares of the company, Capstone will retain the right to:
– Appoint one director to Desert Star’s board; and
– Participate in any subsequent security offerings on a pro-rata basis in proportion to Capstone’s beneficial ownership interest in the Company’s outstanding shares immediately prior to such offering If the closing of the acquisition has not occurred on or before August 31, 2017, either Capstone or the Company may elect to terminate the Agreement
The C$28.8M cash component was puzzling to me when I first read about the intended acquisition, as normally it would be extremely difficult for an almost inactive C$10M market cap junior to raise that kind of money, not even taking into account the resulting amount of dilution. Therefore, the involvement of Wheaton two months later was quite a surprise.
The 9.9% stake of Capstone and a Board seat reinforces the relationship between the two companies, as director Quin was the former President and COO of Capstone, and already had the Kutcho project under his supervision as the CEO of Sherwood before it amalgamated with Capstone. VP Exploration of Capstone Brad Mercer is the representative for the 9.9% interest of Capstone in Kutcho Copper.
The last highlighted term turned out to be a formality, when the C$65M streaming deal with Wheaton was announced, Ca...