Mikko Leivo is a Finnish family office investor who contributed this article for CRUX Investor.
Shares fully diluted 259M
Market cap on fully diluted basis CAD$262M (14.10.2019, CAD$1.01)
In short: Why invest in Copper?
Copper demand is growing. Its main use is electric wires and as we consume more electricity we will need more and more Copper. Total electricity consumption in projected to grow by 60% in the next 20 years.(1) Besides growing energy consumption, we need more Copper because renewables (solar & wind) are extremely Copper intensive. EV’s also require more copper than traditional combustion engine vehicles.
But the main story in Copper is the supply side. In the last commodity cycle the Copper industry spent over USD$100Bn exploring and has almost nothing to show for it. Permitting is becoming more and more challenging and the average time to get from discovery to production is now +15 years (2). From. The average grade has also been falling steadily from c. 1.65% in 90’s to c. 0.9% today (3). The Project pipeline is even worse. Way worse. For the pipeline to become economical Copper prices have to rise. With current prices, supply will drop by 3%-4% pa.
Short-term recession will change things and push the crunch further, but according to Wood MacKenzie we will see a 10Mt deficit before 2030 (3). Advances in Technology will make it more economical to mine low grades, but 10 years is a short time. I don’t think we will see peak Copper, but I feel confident enough to predict a bull market in Copper in 20’s. And I want to position myself for that bull market.
The Asset: Gunnison Arizona
Gunnison is a wonderful asset. It’s not a Tier 1 asset size-wise (4,500 Mlbs proven Reserves & 5,000Mlbs Measured & Indicated Resources), but it has ridiculously low production costs and low capital intensity. Based on Excelsior’s Feasibility Study (FS) it has AISC of USD$1.23$/lb making it one of the lowest cost Copper producers globally. Gunnison has a unique geology that allows in-situ leaching (ISR/ ISL) as the mining method. ISR uses leach solution to extract Copper directly from the ground via wells. It’s basically pumping Copper solution from the ground using wells. ISR mines tend to have extremely low operational costs combined with low initial CAPEX. Those familiar with Uranium know that the cheapest production in the world is ISR production (4). ISR has also been successfully used to “mine” Copper in Arizona.
The mine will be built in 3 Stages. In Stage 1, 2 and 3, Gunnison will produce 25Mlbs, 75Mlbs and 125Mlbs of Copper pa respectively. Stage 1 is fully funded and on schedule. Production starts at Q4/19.
Funding was a combination of new shares, a Royalty and a Copper Stream (majority). Excelsior didn’t need to raise any debt. CAPEX for Stage 2 will be $146M and for Stage 3 $230M. Gunnison has an NVP of USD$807M with an IRR of 40% and a life-of-mine (LOM) of +20 years. Copper companies often prefer to use $3/lbs sand 5% discount rate in their assumptions. Excelsior uses a way more reasonable $2.75/lbs as Copper price and a 7.5% discount rate.
For a company with a market cap of US$195M these are robust numbers and make Excelsior extremely cheap on paper. In fact, looking at the corporate presentation (5) you will notice that at full production the project will be generating more EBITDA pa. than Excelsior’s market cap.
Disclosure: I am/we are long EXMGF.
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