Answer: Yes. Here is why:
Last week’s offer of C$455m for Northern Peru Copper (NPUCF.PK) by China Minmetals and Jiangxi Copper Company values NOC at C$13.75 per share. We had our bar set at C$20 originally. While not complaining too heavily about the deal (after all a win is a win, and this deal represents a 49.5% upside to our recommendation in just 3½ months), it does fall short of our original target.
If we take the NOC Galeno measured and indicated resource of 8.5Bn lbs copper (at 0.4% CuEq cut off), this means the Chinese consortium has paid 5.3c per pound of copper in situ. This compares favourably to the 2.3c/lb that Chinalco paid Peru Copper Inc (CUP, now de-listed) for the Toromocho copper project earlier this year. However, there are several reasons why NOC as a company is more valuable than CUP ever was:
a) The porphyry nature of the Galeno deposit makes recovery grades much higher and cheaper than Toromocho.b) The 5.3c/lb Cu in situ does not take into account the 2.9m oz gold, 66m oz silver and 224M lbs moly also at Galeno, which would bring down the price paid to approximately 4.6c/oz Cu.
c) The Chinese consortium is also getting two other NOC assets as part of the deal. Firstly, 100% owned Hilorico just 1km from Galeno is looking very promising. There is plenty of evidence to suggest that the present resource estimations of 1.1m oz gold and 5.4m oz silver will be improved upon by further drilling. Secondly, the 100% owned Pashpap copper/moly property (run in JV with Japan’s JOCMEG), still in early stage development. This property was estimated by previous owners Lumina copper to contain 101MT ore at 0.64% copper and 0.049% moly. Basic calculations indicate 1.4Bn lbs Cu and 109mm lbs Mo at Pashpap.
There is plenty of room for a counter bid. The market believes the deal in its present state is a good one for the buyers. On announcement of the deal publicly trade Jiangxu Copper rose 3.6%. The Chinese bid is considered friendly by management, and 42% of shares have been locked up. The deal in its present state will go through if it collects 60% of all shares. If broken, the not-too-punishing deal breaker clause attached to this friendly bid would add less than C$0.40 to the current offer price, thus any bid above C$14.15 is feasible.
As capex costs were previously estimated at U$1Bn for Galeno, the C$455m offer represents a small percentage of total outlay to bring the project to fruition. In line with recent developments, we expect cost creep to affect the project in much the same way as other mining projects both in the region and in the wider world, and would therefore estimate total capex at this point at U$1.2Bn. If a counter bid of, for example, C$500m came to pass (representing a offer per share of C$15.10 approx) the extra C$45m put on the table would represent less than 3% of total capex to put Galeno into production.
Our original valuation estimate was based upon NOC going to production. While we understand that buying into the company at this earlier stage should bring its own discount, we do believe that the present offer is lowball and if another mining company hungry for growth decided to move we would not be at all surprised. Galeno is slated to produce 200,000T copper plus metals credits per annum once fully operational, and this size of operation is good enough to attract the attention of even the biggest of the big world miners.
We believe the current share price of C$13.60 offers investors a no-lose trade. At worst, if the Minmetals/Jiangxi deal goes through then buyers today would make 15c on the trade which would more than cover any commission costs. The only possible negative would be locking cash away for an extended period in order to make just 1% profit. However if a counter bid came to pass the current PPS will move upwards rapidly, with rewards dependent on the heat of the battle that ensued. We believe the risk/reward equation (i.e. either no-lose or win) is a compelling reason to buy into NOC, even at this late stage in its life.
Disclosure: Author has a buy recommendation for clients on Northern Peru Copper.
