|Shares Out. (in M):||43||P/E||0.0x||0.0x|
|Market Cap (in $M):||700||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||0||EBIT||0||0|
I have a long recommendation on Lumina Copper.
Lumina Copper owns a giant copper project in the Salta province of Argentina. The project is called Taca Taca. Taca Taca is the largest undeveloped copper project in the world in hands of a junior mining company.
Lumina Copper currently has 43 million fully diluted shares outstanding for a market cap of 700 million CAD. The company has no debt.
The first reaction will logically be: Argentina! No way I will invest a dime there. However, the Argentinian government (however unreliable it is in the case of YPF or Telecom Argentina) needs the mining industry as a source of revenues. Also, much of the decisions on mining are taken on a local level and the governor of Salta is pro-mining as can be judged from many mining projects going ahead in the province.
Whenever looking at a resource company the most important question to ask who is behind the company. Here we are assured by a team led by Ross Beaty and David Strang. Management and Beaty control over 30% of the company. Over the last decade Ross Beaty and Strang have invested 124 million USD in various mining companies and sold them for a total sum of 1,8 billion USD creating gigantic shareholder value. Recently Ross Beaty gave an interesting speech at a Casey conference which highlights his modus operandi as a developer who buys mines on the cheap, drills holes (hopes for success), de-risks the mines and sells it to a producer who is willing to give him a premium for de-risking it. The YouTube clip can be found here: http://www.youtube.com/watch?v=7509Rry2ptQ
A summary of the companies where Ross Beaty was involved and the price they were sold:
Global Copper: was a project based in Argentina and Chile and had 9,9 billion pounds of resources. It was sold to Teck Cominco in April 2008 for 425 million CAD.
Northern Peru Copper: was a project based in Peru and had over 11 billion pounds of resources. It was sold to China Minmetals in December 2007 for 455 million CAD
Regalito Copper: was a project based in Chile and have over 7,2 billion pounds of resources. It was sold to Pan Pacific In 2006 for 137 million CAD
Lumina Resources Corp: was a project based in Canada and had over 11 billion pounds of resources. It was sold to Western Copper in a share swap.
Currently Ross Beaty is involved in four listed equities: Pan American Silver (Chairman of the board), majority owner of Alterra Power (an alternative energy company I would avoid), Anfield Nickel and Lumina Copper.
The location of Lumina Copper’s Taca Taca project is interesting at it is only 90km away from Escondida. Escondida is the largest producing copper mine in the world owned by Rio Tinto and BHP Billiton. I cannot copy/paste maps in the write-ups but as one can look up on google earth or other mapping services we can see the project of Lumina Copper is located in a desolate area (no worries about local inhabitant issues) but does have access to power, railway capacity and close enough access to Antofagasta port.
Having recently visited Argentina and spoken to various mining experts it is my strong belief Lumina Copper is currently actively being marketed for sale. This also can be gleaned from Ross Beaty’s references in above mentioned YouTube clip. It is easy to discount his comments as promotional but given Ross Beaty’s track record in selling projects it is worth mentioning. To make things clear the thesis behind Lumina is for a SALE of the company in the short term. If the company is not sold, the company will have to raise over 2 billion USD to develop it themselves and the management has no intention of going this road.
The history of Taca Taca
(copied from Laurentian Research report, January 2012)
The Taca Taca property has a long history of exploration conducted by some of the largest
mining companies in the world. However, many of these companies were searching for different
styles of mineralization, or drilled exploration holes that were not sufficiently deep. Copper
mineralization was first discovered in the mid-1960s by Fabricaciones Militares during a United
Nations sponsored program of government exploration in Argentina. Two zones of porphyry style
mineralization known as the Lower and Upper Zones were recognized. Fabricaciones Militares
carried out property scale exploration on the Upper Zone, but the Lower Zone was not explored
until the early 1970’s when Falconbridge drilled three BQ drill holes into the leached cap before
abandoning exploration and exiting Argentina in 1975. The tenements of both the Upper and
Lower Taca Taca prospects were filed under a newly formed company called Taca Taca S.A.
(TACSA), and in 1992 TACSA entered an exploration agreement with Recursos Americanos
Argentinos (RAA). A detailed exploration program of the Lower Zone was eventually completed
with the participation of GAMSA Argentina S.A., a subsidiary of Gencor. Exploration by GAMSA
focused on two main targets: porphyry style copper mineralization and epithermal style gold
mineralization in sheeted veins on the northern end of the property. Gencor drilled 18 short
reverse circulation holes on the property primarily in the epithermal veining area immediately
north of the porphyry mineralization but failed to penetrate through the leached cap. GAMSA
returned the property to RAA, who eventually returned it to TACSA in 1995. Corriente Resources
Inc. signed an exploration agreement with TACSA later that year and formed a joint venture with
BHP Minerals in 1996. In 1997, BHP tested the potential for a zone of supergene enrichment
beneath the leached cap of the porphyry system. BHP completed a 35-hole diamond drilling
program totalling 11,483 m. The program successfully discovered a significant zone of supergene
copper mineralization. The company completed an internal preliminary resource estimate and an
economic assessment in 1997 but concluded that the deposit did not meet its corporate criteria
and returned the property back to Corriente.
Corriente completed an additional 14-hole diamond drill program totalling 3,246 m in 1998
targeting the shallow zones of supergene enrichment at the north end of the property and initiated
a surface trenching program to explore for oxide copper deposits. In 1999, Corriente followed up
on the previous drilling and trenching with an additional 80 reverse circulation drill holes totalling
4,428 m. The drilling highlighted promising copper and gold veins in the north end of the property
with intersections of 3.32 g/t Au and 1.31% Cu. Rio Tinto optioned the property from Corriente in
1999, and conducted geological mapping, ground magnetic geophysical surveys, and a 9-hole
reverse circulation drill program. Rio Tinto returned the property back to Corriente as the project
had insufficient tonnage to be of economic interest. Lumina Copper acquired the Taca Taca
project from Global Copper Corp. in 2008 through a spin out transaction following the acquisition
of Global Copper by Teck Resources. Substantially all of Global Copper’s assets other than the
large Relincho copper-molybdenum project in Chile were transferred to Lumina Copper. In
addition to Taca Taca, Lumina Copper had the following assets:
? A 1.5% Net Smelter Return (NSR) royalty on the Teck Resources’ Relincho coppermolybdenum
project in Chile.
? A 1.0 – 2.0% NSR royalty on Los Andes Copper’s Vizcachitas copper-molybdenum project
located in Chile.
? A 1.08% NSR royalty on the Taca Taca copper-molybdenum-gold project located in
? A copper royalty, including the advance royalty payments, on Coro Mining's San Jorge
copper-gold-molybdenum project located in Argentina.
In June 2011, Lumina Copper completed a strategic reorganization of its own business by
spinning out all of its assets other than Taca Taca to a newly created company called Lumina
Royalty Corp. Each shareholder of Lumina Copper received a share of Lumina Royalty, which
remained private until it was acquired by Franco-Nevada in late 2011
Taca Taca has measured and indicated resources containing 6.6 billion lbs of copper, 2.0 million
ozs of gold, and 205 million lbs of molybdenum. Based on an assumed 110,000 tpd throughput
rate, we forecast average annual contained production of 425.8 million lbs of copper, 9.2 million
lbs of molybdenum, and 57,447 ozs of gold at an operating cash cost of US$0.87/lb (net of byproduct
credits and including royalties) over a 26-year mine life.
Current drilling is ongoing and recent updates indicate that the next resource update should see a material increase. One should expect these results to come out by the end of April or latest in May.
As with all development companies the valuation is up to many variables.
The NPV is very sensitive to what discount rate you use and what copper price. Assuming a 2,5 USD/lb copper price and 10% discount rate a valuation of 27 CAD per share is reasonable. It is our understanding from previously being involved with Ross Beaty related companies that they will leave some upside on the table and a sale price of 24-25 CAD would be reasonable.
If one is more optimistic on the copper price you get much higher valuations. Raymond James sell-side analyst assumes a total NAV of 40 CAD.
BHP Billiton or Rio Tinto (or combination of both)
Time Frame of sale of company?
Next 3 to 6 months
Upside from current stock price?
56% (assuming 25 CAD sale price)