* Western Copper Holdings Ltd. (WTC : TSE : $5.10 : Issued 12.6M)
Mining companies are investments where the future value is based on a
geologic discovery or a rise in the price of a commodity. In the
context of today's depressed metals market, it takes strong geologic
upside to add future value to a stock. We believe one of the best
vehicles for investors to participate in a future discovery is Western
Copper. The Company is active through partnerships with Teck and RTZ
in four historic mining states of central Mexico (below). We
recommend the stock as a BUY, with a one-year target price of $12.75.
We encourage investors to read Canaccord's April 2, 1998 report and
subsequent Daily Letter comments for a background on the Company.
What do the June 26, 1998 drill results indicate for Chile Colorado?
The Company released assay results from two additional holes. WC-05 is
located 100 m north of WC-03 and WC-08 is located 50 m south of WC-03;
both were drilled at the same angle and direction. The results limit
the deposit north and south of the high-grade zone at Chile Colorado.
Based on eight drill holes (PN-19, 26-28, WC-01, 03, 05 and 08),
Western Copper estimates a potential resource of 35M t with an average
grade of 0.3-0.5 g/t gold, 90 g/t silver, and 2.5-3.0% combined
lead-zinc. The broad deposit is probably not feasible at today's metal
prices. However, Western Copper estimates that Chile Colorado has a
rich, high-grade core in the order of about 5M t (inferred resource),
with average grades of 0.5 g/t Au, 280 g/t Ag, and 7-8% combined Pb-Zn.
The high-grade zone could be accessed by an underground ramp and CAPEX
would be likely in the order of US$50M. For such an underground
operation, we doubt that RTZ will exercise a back-in right for 51%.
Overall economics at this early stage look promising, but the project
requires additional work to reduce the error in a valuation. Other
high-grade mineralized lenses on the property have already been found
by previous Kennecott drilling. Finally, the lower grade resource halo
surrounding Chile Colorado could possibly be developed once the cost
of infrastructure is recovered.
Silver fabrication demand has consistently outstripped the supply from
the world's mines.
Last year, according to the Silver Institute, silver demand exceeded
supply from mine production and the recycling of scrap by 198M ozs. In
1997, the world's silver mines produced 512.6M ozs. and recycled
silver scrap accounted for 152.5M ozs. Mexican mines produced 86.2M
ozs, with over one-third coming from the Mexican mining company,
Industrias Pe¤oles. Industrial uses for the metal are strong, as is
buying for decorative/religious items in India. Since 1990, silver
fabrication demand has exceeded production by 2,226M ozs. The excess
demand has been filled through recycling and a drawdown of 1,084M ozs.
of silver bullion inventories. The Silver Institute estimates only
575M ozs. of silver remain in identifiable bullion stocks. Silver
stocks on the COMEX are presently at a multi-year low. In February,
Warren Buffet of Berkshire Hathaway disclosed the purchase of 111M ozs.
of silver as a long-term investment. While the prospects for the
silver market are positive, there is a strong tendency for demand in
India to decline when the price rises. The amount of silver hoarded by
private investors is also a concern.
What does all this mean for Western Copper?
Western Copper could net, using optimum mining rates, approximately
5.0M ozs./year from Chile Colorado (assuming 100% ownership) and 2.3M
ozs./year (22.5% ownership) from the high-grade zone only at San
Nicolas, for a total of 7.3M ozs./year (at a recovery of 80%). This
level of production equates to 1.4% of the world's silver production
from mines in 1997. In the context of future production, with several
new mines in feasibility and the profitability of one of the world's
largest silver mines at Real de Angelas in doubt, Western Copper could
produce 1% of the world's silver production from mines by the year
2002. With its current assets and prospective ground in the prolific
Mexican silver belt, Western Copper provides leverage to copper and
zinc. However, the Company is also a silver investment. Based on our
estimates using the proceeds from zinc, the silver comes for free.
Is there potential for more high-grade zones at Pe¤asquito?
Chile Colorado is associated with branching magmatic intrusions within
a layered suite of sedimentary rocks. With the exception of a small
outcrop, all rock is buried beneath about 10-30 m of gravel alluvium.
Kennecott punched over 200 reverse air-blast holes through the
overburden to sample the bedrock, exposing a regional hydrothermal
system with patchy zones of alteration over an area of 9 km2.
The metal-rich zones in this type of ore deposit typically fill
fractures and form wandering pipes or "chimneys". The fluid or vapours
that fed the deposit can spread laterally leaving sheets or "mantos"
mantle) ore along planar contacts within the formations. In some cases
a complete collapse of the host rock allows the mineralization to fill
cavities within the broken rock or "breccia". Mineral deposits such as
Pe¤asquito are therefore referred to as "chimney-mantos-breccia"
deposits. In Mexico, mining companies drift into mantos ore at an
early stage of the valuation, in a explore-as-you-go operation. The
discovery at Pe¤asquito has already caught the eye of the experienced
Mexican mining houses. Empressa Frisco, for example, recently optioned
neighbouring claims to the southeast, owned by Minera Tayahua.
Chile Colorado lies within gently folded sandstones of the rather
monotonous Caracol Formation. Fault structures related to regional
breaks and intrusive domes provided the pathway for upward moving
waters to enter the permeable mid-section of the Caracol. In general,
a dense vein system starts at a 170 m depth, containing high-grade
layers sometimes exceeding 300 g/t Ag. The pipes, alteration, and
hydrothermal minerals are indicators of a deep-seated intrusion that
supplied hot metalliferous waters into the overlying, permeable
stratigraphy along a faulted plumbing system. Other high-grade zones
could be present within the intrusions and the Caracol Formation, and
even within the more open limestone formations beneath the Caracol.
Is anything known about the metallurgy at Chile Colorado?
Kennecott conducted metallurgical tests on samples from the property
and reported favourable results. The coarse-grained sulphides are
easily separated by gravity and floatation. The zinc is hosted by
honey sphalerite", a low-iron version of the mineral preferred by
smelters. We do not expect any problems here.
Has in-fill and step-out drilling at San Nicolas added new value to
Western Copper?
SAL-70 intersected 137 m of sulphides with grades of 3.56% copper,
2.38% zinc, 31.5 g/t silver, and 0.23 g/t gold. At a depth of 188 m,
the hole discovered 103.5 m of sulphides with a grade of 4.25% Cu.
This rich zone does not correlate in grade with the sulphides in the
neighbouring holes, located only 50 m away. SAL-69 intersected 280 m
of sulphides, moving the branch point for the two limbs of the deposit
further to the west. With results from this latest phase, we believe
that additional drilling will continue to add value to the deposit.
Western Copper continues to provide leadership in a depressed resource
market. The Company has a foundation of value at San Nicolas and
Pe¤asquito. We recommend the stock as a BUY with a target price of
12.75.
Glenn Brown, Ph.D. (416) 869-3073
Richard Gray, Associate (416) 869-3260
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