We have discussed Nevada Copper (NCU.TO) quite often in 2014 and even though the company initially met our expectations and saw its share price roughly double since our initial report, we’re now almost back at the same level we started 2014 at, despite some recent good news from the copper market and increased M&A activity.
[margin20]
The two main things holding Nevada Copper back – and the solutions
Generally speaking there are two issues which will need to be solved sooner rather than later to remove a certain overhang over the depressed share price.
First of all, passing the land change bill will play a pivotal role in the revival of Nevada Copper’s share price. There’s only a few more weeks to go in the political year and it’s quite likely the bi-partisan bill will get pushed through the senate before the end of the year as from next year on, majority leader Reid which supported the bill on the condition a wilderness clause would be added will be replaced by a Republican as the latter party now has the majority in both the House and Senate.
Reid will indeed want to push it through as it’s not unthinkable now the House and Senate are controlled by the Republicans, the latter will try to remove the wilderness clause from the bill. This means there would be no ‘compensation’ at all for the disturbance of the land and that would be a bitter pill to swallow by the Democrats. Additionally, this could be Reid’s last achievement as he would be able to get back to his voters with an approved land change bill which would create hundreds of direct jobs and very likely a few thousand indirect jobs in the state of Nevada. We are keeping our fingers crossed to see the land bill change being placed on the agenda before the end of this year as Harry Reid might want to do his state a favor before leaving office.
A second issue is the financing deal for the first phase of the Pumpkin Hollow copper project. We received several questions about the deadline to secure the funding being pushed back from ‘by the end of 2014’ to ‘Q1 2015’. We got in touch with the company and apparently there are several options on the table. No decisions have been made yet, but Nevada Copper’s management team has made it very clear that a move which would see the current shareholders being heavily diluted is not an option right now. So yes, unfortunately the target date to secure the funding has been extended, but if that means that a more optimal financing mix would be achievable, we wouldn’t mind the extra delay.
The financing situation could also be seen as connected to the land bill change. If the permitting process for the second phase of Pumpkin Hollow would indeed be fast-tracked, we expect several parties who might be interested in taking a strategic stake in the company will line up, as then Nevada Copper would have a very clear and straightforward path to become a 250M+ lbspa copper producer in a mining-friendly and safe region.
The copper market is on fire again
Meanwhile, we have seen some interesting action on the copper market. We saw how First Quantum Minerals (FM.TO ; LON:FQM) acquired Lumina Copper for its Taca Taca copper project which has an initial capital expenditure of several billions of dollars. More recently, Bloomberg reported on a Qatari-backed fund being interested to cough up $1B to acquire full ownership of Nevsun Resources (NSU.TO, NYSEMKT:NSU) whose Bisha project (which is 40% owned by the Eritrean state- is producing roughly 200 million pounds of copper per year. $1B sounds a bit like a lowball offer, but it’s definitely good to see that private equity is looking at copper mines to invest in.
But what might be more important is BHP Billiton’s (BHP) update. It now expects to see its average copper grade at the Escondida copper project drop to less than 1% in the 2016-2020 period. This will obviously have an impact on the copper production as a whole, and after talking to some analysts, we believe the copper output from Escondida might be reduced by 250,000 tonnes per year, which is in excess of half a billion pounds of copper.
Copper buyers will need to find a solution for this unanticipated shortfall, and guess who’s planning to be in production in 2016? Indeed, Nevada Copper as it has one of the very few copper projects which are under construction. It looks like the smart money isn’t scared of the Chinese economy and the impact on the copper demand. And even if the copper price would go a bit lower, even at a price of $2.75/lbs, the NPV of Pumpkin Hollow is much, much higher than the current market capitalization.
Conclusion
We are still extremely confident in the future of Nevada Copper. We agree there’s still some uncertainty surrounding the company, but none of both issues threatens the existence of the company. There’s very little doubt Nevada Copper will secure the necessary funding for Phase I in one way or another, and the land change bill isn’t really necessary to get the second phase permitted, it would only fast-track the permitting process.
There’s clearly a lot of interest in the copper space right now and Nevada Copper’s current share price definitely doesn’t reflect the true value of the company. We are buyers at the current share price and will continue to add to our position. Additionally, if Nevsun Resources indeed gets sold we will reinvest those proceeds into Nevada Copper as well as it is by far the best near-term copper producer out there.
Disclosure: Nevada Copper Corp. is a sponsoring company. Please see our disclaimer for current positions.
