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Copper Fox Metals: Playing The Waiting Game With Schaft Creek
Mar. 25, 2015 9:07 AM ET | About: Copper Fox Metals Inc. (CPFXF)Subscribers to SA PRO had an early look at this article. Learn more about PRO »
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary Copper Fox is in a pretty good financial state for a junior mining company.However, it may need to wait several years or longer for a production decision on Schaft Creek. Schaft Creek's economics have moderately improved with the weaker Canadian dollar.The climate for starting multi-billion mine projects is poor right now due to low commodity prices and challenging cash flow conditions for companies.Copper Fox may need to prepare to increase its cash balance further to wait for a production decision.
Copper Fox Metals (OTCPK: CPFXF) has recently seen its stock move significantly higher, with shares tripling off its lows. It received some positive news in the form of a tax refund, which makes its financial position healthy for a junior mining company. As well, Teck has increased the spending on the 2015 Schaft Creek work program to nearly double the budget for 2014. In addition, the weaker Canadian dollar largely offsets lower commodity prices in US dollars, so assuming that a majority of Schaft Creek's capital expenditure costs are denominated in Canadian dollars, its NPV should improve by a moderate amount.
However, it also appears likely that a production decision on Schaft Creek will not occur for some time due to Teck's commitment to get Fort Hills into production. When Fort Hills reaches production at the end of 2017, it seems more likely that Teck will be able to fund other projects at that time. As a result, Copper Fox likely still needs to raise additional funds to ensure that it can wait at least a few years for a production decision. It appears to have enough cash to fund basic operations until 2018, but that would require spending no money on development and exploration properties. If Teck decides to proceed with Quebrada Blanca Phase 2 before Schaft Creek, then Copper Fox would need to be prepared to wait beyond 2018.
Copper Fox primarily trades as CUU on the TSX Venture Exchange.
Project Timeline I had previously noted back in late 2013 that Schaft Creek was unlikely to proceed in the near to intermediate future due to issues including high capital costs and competition with other Teck projects for capital. It appears that not much has changed in that regard, and a production decision on Schaft Creek looks a few years out still.
Teck is moving forward with work on Schaft Creek and has increased its budget for the 2015 work program to $4.8 million. This is up from approximately $2.5 million in 2014. The main challenge is that low commodity prices have forced Teck to keep a close rein on its capital expenditure budget, with Fort Hills taking up most ($850 million in 2015) of the development capital. Quebrada Blanca Phase 2 has a $95 million budget in 2015, while the Frontier Oil Sands project takes up another $60 million.
It theoretically would make sense for companies to start building mines when the commodity cycle is at a low, in anticipation that the mines will be complete when the commodity cycle goes on an upturn again. However, this doesn't happen very often since low commodity prices also result in limited cash flow to build new mines without taking on large amounts of debt.
With Fort Hills scheduled to reach production at the end of 2017, that would make 2018 the likely point where Teck would commit significant resources to other projects.
Project Economics
The Schaft Creek project is most sensitive to the Canadian dollar for project economics. The weaker Canadian dollar helps it significantly, but at the same time metal prices have gone down considerably as well. I have taken the average annual production from the feasibility study and used the base case prices and exchange rate to calculate that the average annual production would have produced $1.266 billion Canadian in revenue for the base case scenario.
Base Case
| Average Annual Production
| $CDN Per Unit
| $CDN
| Copper (pounds)
| 232,143,000
| $3.35
| $777,798,711
| Gold (ounces)
| 201,000
| $1,489.69
| $299,427,835
| Silver (ounces)
| 1,195,000
| $28.60
| $34,174,536
| Molybdenum (pounds)
| 10,234,000
| $15.09
| $154,459,546
| Total
| | | $1,265,860,629
|
With an exchange rate of CDN $1.25 = US $1.00 and current metal prices, the average annual production at Schaft Creek would now generate $1.243 billion Canadian in revenue, with higher copper and gold prices being offset by lower silver and molybdenum prices.
Current Prices
| Average Annual Production
| $CDN Per Unit
| $CDN
| Copper (pounds)
| 232,143,000
| $3.49
| $809,598,713
| Gold (ounces)
| 201,000
| $1,493.75
| $300,243,750
| Silver (ounces)
| 1,195,000
| $21.25
| $25,393,750
| Molybdenum (pounds)
| 10,234,000
| $10.50
| $107,457,000
| Total
| | | $1,242,693,213
|
Assuming that most operating expenses are denominated in Canadian dollars, and a significant proportion of capital expenditures are also denominated in Canadian dollars (equipment costs may not benefit from the weaker Canadian dollar), Schaft Creek's NPV may receive a modest boost compared to the base case in the feasibility study. This benefit may reach a few hundred million dollars depending on the percentage of costs that are denominated in Canadian dollars. If around 80% of capital expenditures are denominated in Canadian dollars, then the weaker Canadian dollar would reduce the initial capital cost by around $400 million to $450 million in US dollars. The lower revenues would amount to around $390 million over the life of the mine, but the NPV of that would probably be closer to $150 million at an 8% discount rate.
Financial Status Copper Fox received a cash refund of $3.63 million Canadian recently. It had approximately $1.6 million Canadian in cash and cash equivalents at the end of October 2014. It has averaged $1.2 million Canadian in general and corporate costs per year, plus have another $220,000 per year in maintenance and other costs for its Arizona properties. It may have additional exploration and development expenses, including $750,000 to complete a PEA on its Van Dyke property and $300,000 to do a survey on its Sombrero Butte property.
While it is in pretty good shape financially for a junior company, it appears likely that it will need to raise some more money before a production decision is made on Schaft Creek. Copper Fox should likely be preparing to have at least 4 or 5 years of cash on hand given the current weak state of the commodity markets and Teck's commitment to Fort Hills over the next few years. It appears that Copper Fox may attempt to sell its Van Dyke property (either a full or partial stake) at some point to raise additional funds. However, if Copper Fox's share price goes up significantly higher, I believe it would be prudent to do an equity offering. For example, adding 20 million shares would likely give it another 2-3 years of runway allowing for modest development and exploration expenditures. With over 400 million shares already outstanding, and additional 20 million shares does not result in too much dilution.
Conclusion The weaker Canadian dollar likely improves Schaft Creek's NPV moderately if a significant proportion of its capital expenditure costs are tied to the Canadian dollar. Copper Fox also has enough cash to fund several years of basic operating expenses and Teck is slowing moving the project forward.
However, it likely will need to raise additional money (via an equity offering or asset sales) to wait for Teck's production decision, especially if Copper Fox wants to spend money on additional development or exploration of its other properties in the meantime. Schaft Creek will likely become a mine at some point, but it is uncertain when that will happen due to the current state of the commodity markets, and Teck's commitment to Fort Hills tying up most of its development capital expenditure budget. I'd rate Copper Fox as a hold right now due to the likely lengthy wait until a production decision at Schaft Creek. |
