5bn lb Copper Resources Possible over 18 Years

We’ve been traveling this spring and summer and have visited some premier mining projects. All this really ties together with the global commodities picture as well, which, despite a good deal of uncertainty in the near term, looks impressive in the mid- to long term (2011-2012).

Investors don’t often get a chance to visit projects prior to investing in them much less speak to the folks directly involved. In fact, a lot of advisors will make a buy decision without ever speaking to the management team. That’s not surprising, but not particularly trustworthy either. You can glean a lot of information by talking to the CEO of a company. Arguably you can learn even more by walking the project and kicking the rocks and tires you come across.

Copper Mountain happened to be on my route to summer holidays this August. My girlfriend obliged me a visit (bless her). I jumped out of our car and wandered around till I found the site foreman. Copper Mountain is in the final stages of rebuilding a mine here – it was in production from 1923 on and off till 1996. What was left behind are three huge open pits and beneath them a mother-lode of low grade copper ore. Amazingly there are over 5 billion pounds of copper remaining in the low grade ore. The company plans to begin mining a “super-pit” next year. The question is: Can the company economically extract this, and to what cut-off grade?

The nearby town of Princeton is exceptionally pro-mining. The company’s site video has an interview with the mayor who dreams of a day when the mine is running again. I spoke with several townspeople on the way in, each hoped to work at the mine. On the road up a highway construction worker told me he’d heard the mine was hiring 250 new staff and that he was hoping to be hired; I joked that I’d put in a good word for him. This isn’t all just warm sentiment: Mines need the support of the local people, the province or state and the federal government. That Copper Mountain has such a history of production speaks volumes.

That the mine will go into production is a foregone conclusion really: Construction on the site is nearing completion. On my tour I saw several 250 tonne Komatsu trucks and a loader in action, moving old stockpiles. The foreman told me there would be a total of 13 of these behemoths, plus some more loaders.

All this will be necessary for a 35,000 tonne per day (tpd) operation. At peak production up to 150,000 tonnes of material will be moved daily, producing a life-of-mine (LOM) average of approximately 83 million pounds of copper per year with gold and silver credits over an 18-year mine life.

There’s a lot of upside to this project: 5 billion pounds of copper at today’s prices is a huge amount of revenue. I don’t think the company would necessarily be able to mine all that in the long term, however. As copper prices taper off, they’ll need to adjust the cut off grade and pit accordingly. Nevertheless, some quick math shows a lot of of flexibility: When I adjust to a higher cut off grade – 0.2% instead of the 0.15% used to achieve 5 billion pounds – and a lower long term copper price (say $2.50) per pound… the company’s 75% interest after operating and capital costs still amounts to $3.3 billion dollars or $36 per share (before tax). (Please feel free to email me if you want a specific breakdown of that — or do the math yourself by visiting Copper Mountain’s Profile and Calculator at http://shareknow.net/companies/2265.) With a market cap of $260 million, CUM is trading at a fraction of its value.

Also interesting to note is that the Feasibility study for the Copper Mountain project was completed at a low, low copper price of $1.80 per pound. The project costs are approximately $1.00 per pound and project payback period (100% Other People’s Money!) of four years. Now go back and do the math again at present (and/or analyst-projected) copper prices. In other words, the conservative picture is a strong one. The reality of this project is so bright you gotta wear shades.

As I mentioned, the company holds a 75% interest in the project. CUM is in bed with a global giant: Mitsubishi purchased 25% of this deal for $28.75 million and a promise to arrange a $250 million project loan, and contract to purchase all the copper concentrate (approximately 150,000 dry metric tonnes per annum for the first 10 years) from the mine. That sweet deal says a lot considering that Mitsubishi has made such a deal only four times before: Los Pelambres and Escondida (both in Chile), Huckleberry (Canada) and Batu Hijau (Indonesia). That places Copper Mountain in very good company.

For a further boost of confidence, investors may want to tap their way over to GlobeInvestor’s website. GlobeInvestor maintains analyst ratings daily: most recently CUM has 5 Strong Buys, 1 Buy and a Sell, for an average of a Buy rating. Price targets are around $3.50 per share, though once production kicks in by summer 2011, expect to see that revised upward, particularly if the analysts at BMO are correct in their glowing report on copper for 2011.

As I left my host at the project, I asked him if he planned to continue on the project once Copper Mountain moved to production next year. He told me yes, and reminded me that the LOM for the project is 18 years, and that he was 18 years from retirement. This, he hopes, will be his last job.

Copper Mountain is not a client of Resource Intelligence and has not compensated Resource Intelligence in any way for this article.