Lumina Copper: Massive Return In Sight For Patient People

| About: Lumina Copper (LCPRF)
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In today's article, I will discuss Lumina Copper Corp. (LCPRF.PK) and will make clear why the stock has an upside potential of over 100%.

What is Lumina Copper?
Lumina Copper Corp. operates as a resource exploration company. It focuses on the exploration, development, and advancement of the 100% owned Taca Taca copper/molybdenum/gold property located in Salta Province, northwestern Argentina.

In other words, Lumina's market capitalization actually equals the current value of the Taca Taca project. The current value the market has given to the project is around $201M, with shares quoted at $4.62.

Sale of the project
In June of last year, Lumina announced that it had begun a strategic review process to consider a range of alternatives aimed at enhancing shareholder value, including the potential sale of the project. In late November, CEO David Strang said Lumina was determined to sell the project during 2013. Since then, Lumina's share price has been falling from $16 to $4.62.

Does this mean the Taca Taca project is only worth $201M? I don't think so. Let me explain why the project is more valuable than its current valuation.

Information about the Taca Taca project
First of all, the project envisages a mine operating over a 28-year life delivering 120,000 t/d of throughput (for an initial period of seven years) to a concentrator comprising two milling and flotation lines. An expansion of the concentrator through the addition of a third line is contemplated to increase the total throughput to 180,000 t/d from year 8 onwards, making it one of the most productive mines in the world.

For example: The Taca Taca mine would produce more than any of BHP's copper mines, except for Escondida, which had about 1,076,000 tons of output last year.

Unique location with strong infrastructure
While the project is remote, there is good regional infrastructure. The project is located within 10km of a railway line that can be used to transport concentrates and select consumables to and from the port of Mejillones. A well maintained network of paved and gravel roads should also provide easy access to the project whenever needed. Furthermore, there is an electrical power connection to the national power grid that will provide the project with electrical power and although the region is arid, subsurface water is available in the local area.

The above mentioned facts give Taca Taca a massive competitive advantage to other similar projects. Mining companies, looking for new properties, will consider Taca Taca's strong infrastructure as a definite plus.

Why the project is attractive for mining companies

I've multiplied the projected annual production of the raw materials by 28 (the expected LOM) and have multiplied this number by their current market price. If prices would stay the same, the sum of the total value of these raw materials would be $49B.

The company buying the project, will need around $3B to start the mine, and around $1.8B to maintain it during its life span. Further, the company will have to pay around $1.1 per pound of copper that gets sold. In my projection I assumed that all the copper would get sold so that the estimated cash costs of this would be $15B.

If prices of raw materials stay about the same, the company buying the project should gain around $20B in 28 years. Or $714M annually.

I believe a lot of mining companies are interested in the project and are very aware that this would be an excellent, profitable buy.

Valuation of the project based on the PEA study
A cash flow valuation model for the project has been developed based upon the geologic and engineering work completed to date for the PEA. The model was developed using a long term forecast copper price of $2.75/lb. This price forecast is consistent with the current, consensus long term price forecast of $2.89/lb copper made by 21 banking analysts. In addition, long term by-product metal prices of $1,200/oz gold and $12/lb molybdenum were used.

The following table shows the estimated after tax NPV (Net Present Value) for the Project's cash flows at various discount rates:

Following the above table, the Taca Taca project has a net present value of $2.1B, indicating that Lumina's shares are actually worth over $40.

The most reassuring about the cash flow model, is that even with the highest Discount Rate of 12%, Lumina would still have a Net Present Value of $820M. Still four times as much (!) as its current market value, indicating a possible takeover price of $17 or an upside of 400%.

Management is very experienced

While investors are probably getting desperate by the constantly declining share price, Beaty Ross, the main shareholder of Lumina with a stake of 22%, saw this decline as a buying opportunity. You don't need to have an IQ of 160 to know that the $200M currently appointed to the project is too little and that a takeover will make you a lot of money.

The fact that Beaty Ross a.k.a. 'the broken slot machine', is buying shares should definitely boost shareholders' confidence. Beaty Ross and Lumina's management are known for their ability to make their shareholders wealthy. As a group, they were able to sell six companies in six years (mostly enterprises largely founded by mining-preneur Ross Beauty), making its shareholders $1.5B richer. I'm sure that Lumina's management and Ross are doing everything they can to sell this project as soon as possible at a decent price.

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As a wise man once said: There might be a million reasons for an insider to sell shares, but there is only one reason for him to buy shares.

Problems considering Lumina Copper
There are two main reasons why the project hasn't been sold yet. First of all I want to point out the economic environment. Generally speaking majors are reviewing their capital expenditures in light of softening global demand and are not capable or not willing to spend $3B at the moment. Secondly, there are a few political challenges in Argentina. In mid 2012, oil giant YPF got renationalized. This was a complete fiasco in which the Argentine government expropriated energy assets. These actions also called into question Argentina's commitment to foreign companies in non-energy sectors. This made share prices of mining companies drop more than 30% f.e. Lumina Copper fell from $15 to $8 during this week. But as far as mining goes, the risks seem to be overblown.

While I believe Taca Taca (Lumina Copper) is an excellent takeover candidate, I expect it to be challenging over the next few months to find a buyer at a price Lumina want to sell at. Demand for projects is not very strong at the moment as producing companies face financing problems and majors are trying to reduce capital costs and divest non-core assets. Inhospitable behavior towards foreign companies by the Argentinean government could also be a factor that has scared away some companies.

However, at its current share price of $4.62, Lumina is incredibly cheap. The cheap valuation could stir companies' interests much faster than I suspect and therefore the project could be sold within a few months if lucky.

Either way, I honestly don't know how long it will take for Lumina to find a takeover candidate. What I do know, is that the company is substantially undervalued and that a very experienced team is well determined to sell this company at a much higher price than its current share price.

I strongly believe that good things will come to those who are patient and that a take over price of at least $8 will be obtained.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTC:LCPRF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.