Thursday, April 21, 2011

Imperial Metals, Duluth Metals and Amerigo Resources

In Canada mining companies are required to publish their best estimates of the net present value of their mines. In the US, only oil companies are required to do this. The value of a mining company should equal the future net discounted profits from mining operations, so this is really a great resource.

So I've been spending some serious time going through the filings. I found 3 very interesting firms. First:

Imperial Metals:

Imperial Metals is listed in Canada ticker: III.TO but also has a US OTC listing. III mines copper and gold -- have two main mines now that generate around $C40M at $3.40 copper and $1000 gold -- stock is at a market value of $781M -- the net present value of a new project, Red Chris, is $C2.5Bn, at $3 copper (current copper is at $4.10 per pound) and $1000 gold (currently gold is at $1500 ou). Revenues will be about 70-30% copper gold. Red Chris is starting up at Dec 2013.

Present value of the current projects are around the current market value, so once the market anticipates the Red Chris, the market value should appreciate to around $C2.5Bn. This is a gain of 210% by the end of 2013, so in 2 and a half years (we'll see if we get this, but do expect Imperial to sell close to net present value). I've checked many other mining firms and they sell close to the market value of the mines. This one is unusual since they don't highlight the Red Chris project very much in their investor presentations, I had to dig to find it.

The Red Chris project in British Columbia is really large -- has about 2 M tons of copper at a cutoff of 0.3% grade and 5.5M ou gold at a cut off rate of 0.55 g ton. To put this in perspective, the largest copper co in the world is Codelco (Chile) which has 77 M tons of copper (albeit at a cut-off grade of 1%), and Barrick is the world's largest gold producer, with 130 M ou gold -- Red Chris is smaller, but still isn't too small.

Environmental issues have been settled at the supreme court of British Columbia so the mine is moving forward with high probability.

Duluth Metals:

Duluth (DM.TO) has a 50% concession of the Nokomis reserve in Northern Minnesota, which is 48% Nickel, 36% copper and approx 8% palladium. The future value of this reserve is $800M (for Duluth's share) albeit starting in 2017, while Duluth's current market value is $269M, so a gain of 200% by 2017. The present value of the income is calculated based on $7 nickel (currently nickel is at $11) and $1.75 copper (Copper is currently $4.10) -- so really the net present value should be significantly higher.

Duluth has a major mining partner, Antofagasta, so the project is likely going through. The main issue is the 6 year wait to production, but note Duluth has a net cash position of $26M so won't go bankrupt and Antofagasta will pick up the majority of the development costs. In anticipation of the production, the share price should rise -- or the co can sell itself.

Last firm: Amerigo Resources:

Interesting company, Amerigo (ARG.TO) treats the tailings (the waste rock and sludge) from Codelco's largest mine, El Teniente -- which is the world's largest underground copper mine and also a major producer of Molybdenum. Interestingly, the tailings have an average grade of 0.125% copper -- probably due to the fact that the El Teniente mine has very high grade reserves, in excess of 2.0% copper. Many new mines are coming online with around 0.3% copper, since new high grade copper deposits are very, very rare -- Amerigo has all the infrastructure set up and electricity etc, so margins are ok.

Amerigo produces a lot of copper, in excess of 1M pounds per year -- also produces a lot of Molybdenum by treating the tailings (I don't know the split between copper and Moly revenues -- need to research). They have forecast production of over 1 M tons of copper to 2021, which is a lot.

The co was selling at around $C2-$C3 before the financial crisis, now it's at $C1.20 , market cap of $C200M -- back in 2007 they earned $30M, in 2007 they earned $40M (but with a $8M one time gain). They paid dividends of $7M in 2006 and $11.2M in 2007 so should have record earnings this year, as copper prices are at an all time high.

I found a research report here: Fair value is estimated at $2.00 per share, approximately, according to this report.

NPV is not given in the technical reports since the mine isn't fully owned by them but projections are given, production is expected to remain steady to at least 2025.

One issue, is that they have the contract with Codelco until 2021. They have renewed it twice in the past so shouldn't be a problem but there is still risk.

The El Teniente mine is set to produce for several more decades.

1 comment:

Steve Cooper said...

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