As of August 17 2015 Nevada Copper (NCU.TO) is fully permitted for construction and operation of a 70,000 tons per day integrated open pit and underground mine at its Pumpkin Hollow copper project.
This represents a major achievement and important milestone for one of North America’s largest and most attractive copper projects, and the significance of finally having all the paperwork in place cannot be under-estimated.
To be clear, the underground mine at the Pumpkin Hollow site near Yerrington has had all permits in place for some time, but finally achieving the same for the adjacent open pit mine is the culmination of years of hard work and quite a bit of creativity on management’s behalf.
Nevada Copper is now fully permitted for construction
Nevada Copper has systematically de-risked the Pumpkin Hollow project over the past years, and conclusion of mine permitting is yet another signal to resource investors that unlike many other base metal projects, the Pumpkin Hollow project will go into production at some point in the not too distant future.
In fact, only a few weeks ago the company has presented its integrated feasibility study documenting a project that combines both the high-grade underground mine and the large open pit mine into one large 70,000 tpd operation. This integrated project represents a development alternative to the original staged project which envisaged initial production and cash flow from the underground mine funding construction of the stage 2 open pit. Having both development alternatives worked out at feasibility level will add optionality in coming months when funding negotiations will move to the forefront. The company will most likely need to attract a partner in order to move the Pumpkin Hollow project into production, and having flexibility in the development of this world-class project is a major asset in this context.
To call this project shuffle-ready would be an understatement since Nevada Copper has already completed a 580m shaft with a production sized headframe and hoist and associated surface infrastructure, and sure enough, the company is already putting the shaft to good use.
The ore contribution from the underground mine will be key
The feasibility study for the underground mine only considered reserves at the so-called East deposit, which in itself supports a 12-year mine life at the planned mining rate of 6,500 tons of ore per day. The newly completed shaft bottoms out close to this East deposit and lateral development to access this deposit has already commenced.
Nevada Copper has already delineated a second underground deposit named E2 in addition to the reserves at the East deposit. This E2 deposit will eventually also become a part of the underground mine adding reserves sufficient for 3 or 4 years of production, on top of the currently published mine plan. The E2 deposit will be reached by a future underground drift which passes nearby yet another ore body called the JK-34 zone. This zone has not been drilled out to reserve status just yet since doing so from surface has been deemed too expensive.
The shaft has put the Nevada Copper into a position to explore the JK-34 zone and other promising targets from underground drilling stations, at hugely reduced costs. Results from the ongoing 7,900 metre underground drilling program should provide an interesting news flow for the remainder of this year, and we would not be surprised at all if the underground mine life could be expanded to beyond 20 years as part of this process. On top of that, we think it’s also likely Nevada Copper will be able to boost the economics of the underground mine as it might prioritize the higher-grade copper zones to be processed first.
Additionally, and quite possibly more importantly, development costs per pound of copper could be reduced significantly if the JK-34 resource can be converted into reserves, by spreading the cost of the mentioned drift over more reserve pounds.
And Nevada Copper continues to drill at the open pits
Results from a second drilling program with the goal of exploring certain targets in proximity to the two planned open pits have already started to trickle in. Results from the so-called Connector area are of special interest, since this high-grade copper zone appears to form a connection between the North and the South pit, firming up options to merge the two open pits into one super-pit (comparable to what Copper Mountain Mining did in British Columbia).
If this option can be substantiated through the ongoing drilling program then significant future cost savings can be expected in addition to the associated reserve expansions. Additionally, there are substantial inferred resources within the current pit shells, and upgrading these inferred resources to a higher confidence class will allow their inclusion in the mine plan, again lowering projected costs and adding copper pounds to the mining inventory.
First results from this surface drilling program include an intersect with true thickness of 112m at 1% copper, including 57m at 1.49% from the South pit, and 64m at 1.39% copper from the connector zone. News flow from this open pit exploration program can be expected to keep investors interested well into the second half of this year.
Pumpkin Hollow remains one of the largest and most appealing copper projects in North America, and is the only fully-permitted non-producing project owned by a junior
Current proven and probable reserves of just over 5B lbs of copper (plus by-products of 760,585 ounces of gold and 27.6M ounces of silver) already support a mine life of 23 years for the integrated development scenario.
This is one of the largest development projects in North America and according to our data the largest permitted project not owned by a senior copper producer. It will generate a net present value of $1.129B at an IRR of 15.5% after tax for the base case documented in the integrated feasibility study, and it will require initial capital expenditures of $1.07B which is rather modest when compared to other projects of similar size.
The ongoing exploration program will almost certainly add value to this already robust project by converting in-pit inferred resources into reserves and therefore converting waste into ore, by adding high-grade underground reserves that require very little additional development, and possibly by proving up the connector zone allowing for a merged open pit instead of the currently planned two individual pits.
Why we are hoping for a bounce in the iron ore prices
And there is yet another kicker to the Pumpkin Hollow project that has received relatively little attention – but we don’t want to ignore the potential additional revenue. Nevada Copper originally acquired Pumpkin Hollow as an iron ore project with a substantial NI 43-101 compliant resource of 395M tons at an iron ore grade of 32.1%.
This iron ore is of course still present, and much of it is located within the pit shells but has not been accounted for in the economic studies so far. In a recent development the company has reported the signing of an MOU with an as yet unnamed large international steel company to assess opportunities with regards to this iron ore resource. A by-product of magnetite could potentially be generated at minimal or no cost from the tailings of the copper concentrator and utilized as feed for downstream iron ore processing in steelmaking.
Among other aspects the studies will look at optimizing mining plans to deliver additional magnetite in the copper concentrator feed while minimizing loss of copper. In actual fact, such magnetite recovery circuits are not uncommon with copper operations which contain magnetite in their mill feed, for example at the Candelaria mine in Chile or at the Earnest Henry mine in Australia operated by Glencore.
Pumpkin Hollow is located in close proximity to rail infrastructure which is important for moving the larger tonnages associated with any future iron ore production. Investors should keep in mind that adding iron revenues has not been factored into any previous feasibility studies and has the potential to generate substantial improvements for an already attractive project, but everything will depend on the economics to separate the iron ore, upgrade it to a saleable product and the transportation costs to ship it to the customer.
Conclusion
Nevada Copper has a tight share structure with only 80.5M shares outstanding despite the advanced state of development. 75% of these shares are held by very strong hands, most notably long-term supporter Pala Investments and company insiders. The company is well funded and has a consistent history of raising cash when needed. This includes a loan and offtake agreement with Red Kite that has assisted greatly in keeping the share count low, while providing the funds to develop the project to its current advanced state while also completing the mentioned 580 meter shaft plus associated infrastructure.
The downturn in copper price has also affected Nevada Copper’s share price, and has reduced the market capitalization to under C$100M. If analysts predicting rising copper prices in the near future are correct, then the current share price of under C$1.20 certainly represents a true buying opportunity. Such an assumption is also supported by an EV/reserve valuation of less than 4.5 Canadian cents per pound of copper (and approximately US$0.033/lbs).
Recent M&A activity in the copper space has fetched a multiple of this value for less developed projects, and in less favourable jurisdictions.
Disclosure: Nevada Copper Corp. is a sponsoring company. Please see our disclaimer for current positions.
