The copper market is set to move into an increasingly undersupplied situation over the coming years as a combination of global growth (primarily in emerging market and BRIC countries) and surging demand from electric vehicle production bumps up against declining copper ore grades, in addition to a lack of new production coming online:
The global copper market is forecast to be increasingly undersupplied between 2019 and 2022 according to Bloomberg Intelligence:
While there are potentially many ways to play an investment thesis around a looming copper shortage, the largest potential returns are likely to come from junior copper explorers set to become producers at a time when the copper price could be soaring from a globally undersupplied situation.
A company called Desert Star Resources (TSX-V: DSR, OTC: DSRRF) offers a particularly compelling investment proposition after completing a unique deal to acquire the Kutcho Project from Capstone Mining (TSX: CS) for C$29 million (upon closing the acquisition DSR will be called Kutcho Copper).
It’s not every day that a junior exploration company with a less than C$10 million market cap is able to acquire a high-grade mine with a completed pre-feasibility study, mineral resource estimate, and preliminary economic assessment. Desert Star had a C$7.4 million market cap on the day the deal was announced, and managed to pull off one of the more significant project acquisitions of 2017 in the Canadian mining sector.
Under the leadership of CEO Vince Sorace DSR was able to pull off the deal by entering into a gold and silver streaming agreement with Wheaton Precious Metals (TSX: WPM, NYSE: WPM) for the gold and silver component of future Kutcho production (which consists of less than 10% of the revenue of the project). DSR raised C$43 million in total (C$29 million to consummate the purchase, the remainder going towards completing the feasibility study and permitting process), with C$33 million being provided by Wheaton, and the remainder raised in an equity offering at C$.65.
This deal is unusual for Wheaton (the world’s largest precious metals streaming company) because Wheaton typically provides the metals producer with cash in return for a streaming contract imposed upon the asset. Wheaton rarely sponsors companies from an equity or debt perspective. The fact that Wheaton has stepped up and done this deal with Desert Star is a huge vote of confidence in the technical merits of the Kutcho Project.
Kutcho is located in an area of northern BC that is known for its prolific mines (Red Chris, Brucejack, etc.), which has substantial infrastructure already in place:
The Kutcho Project is a copper-zinc VMS style deposit with measured and indicated resources of 10.4 million tonnes grading 2.01% copper and 3.19% zinc (2.92% Cu-equivalent which includes a small silver and gold component). Capstone had completed a prefeasibility study (PFS) in 2011, but quickly decided that Kutcho wasn’t a priority project for them. Desert Star improved upon Capstone’s PFS during the summer of 2017. The 2017 PFS yielded tremendous economics including a C$265 million NPV(8%), using conservative metals prices (US$2.75 copper and US$1.10 zinc, US$1250 gold, US$17 silver):
Not only are the project economics compelling, but there are several ways in which Desert Star can deliver significant upside for shareholders down the road:
- Increase reserves through existing resource conversion.
- Significant upside to metals prices given that project economics are currently based on US$2.75 copper, US$1.10 zinc.
- Mine plan optimization including potential increase in production capacity.
Desert Star also stands to benefit tremendously from the significant zinc component (31% of projected revenues) of the Kutcho Project; zinc is currently in an undersupplied market dynamic that is forecast to only get worse over the coming years, unless the zinc price rises high enough to motivate marginal projects back into production:
Desert Star plans to begin infill drilling and geotechnical engineering work in Q2 2018. Once the infill drilling is completed in Q3 2018, exploration drilling will begin in Q4 2018. A resource update is planned to be completed by Q1 2019 followed by the final feasibility study in Q2 2019:
Desert Star is uniquely positioned to advance Kutcho to production in 2021 just in time to reap the rewards of bringing supply to a badly undersupplied global copper market. After the closing of the December 2017 private placement DSR has ~46 million shares outstanding which gives the company a market cap of ~C$26.3 million, which is less than 10% of Kutcho’s NPV(8) using US$3 copper (copper is currently US$3.10) and US$1.20 zinc (zinc is currently US$1.46):
As Desert Star methodically advances Kutcho to production over the next several years, there is substantial room for an upward revaluation of DSR shares to more accurately reflect the project’s NPV in a robust environment for copper, zinc, and gold/silver prices. Upon closing of the transaction Desert Star will become Kutcho Copper with a new trading symbol on the TSX-V, KC (shares are expected to resume trading a couple of days after the acquisition closes).
Disclaimer:
The article is for informational purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. Readers of the article are expressly cautioned to seek the advice of a registered investment advisor and other professional advisors, as applicable, regarding the appropriateness of investing in any securities or any investment strategies, including those discussed above. Desert Star Resources Ltd. is a high-risk venture stock and not suitable for most investors. Consult Desert Star Resources Ltd’s SEDAR profile for important risk disclosures.
EnergyandGold has been compensated for marketing & promotional services by Desert Star Resources Ltd. so some of EnergyandGold.com’s coverage could be biased. EnergyandGold.com, EnergyandGold Publishing LTD, its writers and principals are not registered investment advisors and advice you to do your own due diligence with a licensed investment advisor prior to making any investment decisions.
This article contains certain forward-looking information and forward-looking statements within the meaning of applicable securities legislation (collectively “forward-looking statements”). Certain information contained herein constitutes “forward-looking information” under Canadian securities legislation. Generally, forward-looking information can be identified by the use of forward-looking terminology such as “expects”, “believes”, “aims to”, “plans to” or “intends to” or variations of such words and phrases or statements that certain actions, events or results “will” occur. Forward-looking statements are based on the opinions and estimates of management as of the date such statements are made and they are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of the Company to be materially different from those expressed by such forward-looking statements or forward-looking information, standard transaction risks; impact of the transaction on the parties; and risks relating to financings; regulatory approvals; foreign country operations and volatile share prices. Although management of the Company has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements or forward-looking information, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Actual results may differ materially from those currently anticipated in such statements. The views expressed in this publication and on the EnergyandGold website do not necessarily reflect the views of Energy and Gold Publishing LTD, publisher of EnergyandGold.com. Accordingly, readers should not place undue reliance on forward-looking statements and forward looking information. The Company does not undertake to update any forward-looking statements or forward-looking information that are incorporated by reference herein, except as required by applicable securities laws. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.