January 28, 2013 - 8:55pm EST by
2013 2014
Price: 2.00 EPS $0.00 $0.00
Shares Out. (in M): 61 P/E 0.0x 0.0x
Market Cap (in $M): 122 P/FCF 0.0x 0.0x
Net Debt (in $M): -29 EBIT 0 0
TEV (in $M): 93 TEV/EBIT 0.0x 0.0x

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  • Spin-Off
  • Micro Cap
  • Baupost (Klarman)


Recommendation: Long NCQ common stock with 60-170% upside.

NovaCopper Inc (NCQ) is a copper exploration company that was recently spun-off from NovaGold (NG), whose main focus is developing an asset in Alaska that has 39 million ounces of gold. NCQ owns 180,000 acres in the Ambler District in Alaska - a high-grade copper-zinc-lead-gold-silver property. Resource at the Arctic deposit averages +7% copper equivalent containing 3.3bn lbs (indicated) and 1.6bn lbs (inferred) of copper equivalent resources. There is an additional 1bn lbs of copper at Ruby Creek (Bornite) at a grade of 1%. The management is still drilling and has stated a target of 10bn lbs of copper in the Ambler District. NCQ trades at $2.00/share and has a market cap of ~$120m. The company had $29m of cash as of August 2012 and no debt.

Classic spin-off dynamics have pushed the price of NCQ down from $4.70 to $2.00: 

  • NCQ market cap is $120m, less than 10% of NG (after NG's price dropped from $15 to $5), i.e. too small for most institutional investors 
  • Investors in NG want exposure to gold and not copper 
  • Many institutional investors have restrictions as to minimum size of positions, liquidity, etc.

But insiders and prominent value investors want it. There is an impressive cast of characters involved with this microcap: 

  • Rick Van Nieuwenhuyse, ex-CEO and founder of NovaGold, became the CEO of NCQ. Rick has over 30 years of experience with natural resources and his strength is exploration. He has been instrumental in building NovaGold to a multi-billion dollar company and has worked at the Ambler District since 2004 so he knows the local geology extremely well. He has 1.875m options with a strike price of $3.11 
  • Thomas Kaplan is the chairman of NCQ (as well as chairman of NG). He holds 19% of the stock. Thomas Kaplan is a very successful executive and investor in natural resource companies. (See 
  • Baupost has built a 10% position. Their most recent purchase at the end of November was at ~$2

The CEO explained the reasons for the spin-off in July 2011:

“NovaGold has substantial and very valuable copper assets,” said Rick Van Nieuwenhuyse, Company’s President and CEO. “In the current supply-demand and commodity price environment, these copper assets, comprised of the Company’s 50% share of Galore Creek and the wholly-owned Ambler project are not in my view fully reflected in NovaGold’s current market capitalization of approximately US$2.2 billion. This dichotomy becomes even more pronounced considering the value of NovaGold’s 50%-owned flagship Donlin Gold project in Alaska which hosts over 33 million ounces of gold reserves. Management believes the recently completed economic analyses of Galore Creek and Ambler clearly demonstrate that NovaGold’s copper assets are considerably undervalued having regard to their size, favorable geopolitical location, projected long life and low operating cost.”

He also outlined the attractions of NCQ in March 2012:

"I am very excited to be heading NovaCopper as we execute our business plan to unlock the value of one of the world's most exciting copper exploration investments. As we did so successfully with Donlin, now one of North America's premier gold development projects, the strategy here is to create extraordinary returns through the drill bit. We have an excellent team focused on determining the extent of the mineralization at Ambler and, with four rigs on the property; we should be able to complete 15,000 meters of drilling this year." Mr. Rick Van Nieuwenhuyse continued, expanding on the investment thesis: "NovaCopper holds highly valuable assets. One of the deposits along the Ambler belt, Arctic, had a net present value of between approximately $500 million and $1,600 million, depending on metal prices, in the Preliminary Economic Assessment filed May 10,20111. Yet, Ambler is more than just Arctic; it is a major world-class poly-metallic district. This notion was demonstrated very clearly by the recent drilling success at our Bornite deposit when DDH RC11-187 encountered mineralization of 4% copper over 178 meters, including a very significant high-grade intersection of 34.7 meters grading 11.4% copper. (See the Company's press releases dated November 10, 2011 and December 14, 2011) These are results that would rival any copper project in any part of the world. Yet, at a time when resource nationalism and jurisdictional instability are becoming ever greater risks to the copper mining industry, these outstanding results come from a project in the United States. Our ultimate objective is that the twin attributes of high grades from multiple deposits, when combined with jurisdictional safety, will result in NovaCopper being rated as the premier vehicle in its class.”

The $120m market value of NCQ is slightly above the amount of capital invested in since inception. The land was purchased for $30m, there have been $39m of cumulative property development expenses since 2004, and cash on the balance sheet was $29m as of August - all this adds up to $98m. With the cast of characters mentioned above, one would think that they can at least get their money's worth if they were to sell the asset.

What is NCQ worth today? Public comps trade at an average of $0.03/lbs of copper equivalent resources, which implies a value of $200m. The range of the comps is $0.02-$0.04 so even at the lower end of the range, the company should be worth $150m. If management is able to hit the target of 10bn lbs of copper equivalent resources, the company should be worth $230-$430m. 


Total NovaCopper’s Resources (as of November 2012): 

      Copper Zinc Lead Gold Silver
      Cu Zn Pb Au Ag
      mm lbs mm lbs mm lbs mm OZ mm OZ
Ambler Indicated   1,735 2,491 415 0.5 37.2
  Inferred   873 1,217 200 0.2 17.2
Bornite Indicated   179        
  Inferred   883        
NovaCopper total resources Indicated   1,914 2,491 415 0.5 37
  Inferred   1,756 1,217 200 0.2 17
Price     $3.93 $0.90 $1.08 $1,815.00 $40.55
Value of indicated     $7,521 $2,242 $448 $908 $1,510
Total indicated copper equivalent (mm lbs) 3,213        
Value of inferred     $6,901 $1,095 $216 $436 $695
Total inferred copper equivalent (mm lbs) 2,377        
Total copper equivalent resources (mm lbs) 5,591        


Comparable Companies:
                EV/lb attrib
$m, except per lbs metrics         Attributable   resources Cu resource
Company Location Ticker Mkt Cap EV MMt % Cu % Cu eq $/lbs
Aquila resources Michigan AQA 33 31 12 0.23% 2.72% 0.042
Castle resources Northern BC CRI 58 55 47 1.26% 1.52% 0.035
Sunridge Gold Eritrea SGC 45 39 70 0.74% 1.84% 0.014
Tintina Montana TAU 55 46 17 3.08% 3.88% 0.031
  Copper   explorers/developers avg         0.031
Canadian Zinc NWT CZN 84 81 11 12.08% 10.89% 0.030
Ironbark North Greenland IBG 78 65 133 3.58% 1.55% 0.014
Tamerlane Northwest Tettrit TAM 11 17 50 2.67% 1.51% 0.010
Trevali mining New Brunswick TV 197 186 48 4.17% 2.84% 0.062
Zazu metals Alaska ZAZ 51 46 13 8.34% 4.76% 0.035
  Zinc explorers/developers   avg         0.030


NCQ implied valuation:
  Cu Eq   EV ($m) at different $/lbs Imlied Mkt Cap ($m) Upside / (Downside)
  (mm lbs)   $0.02 $0.03 $0.04 $0.02 $0.03 $0.04 $0.02 $0.03 $0.04
Internal est. 5,591   112 168 224 141 197 253 15.9% 61.9% 107.9%
Mgmt target 10,000   200 300 400 229 329 429 88.4% 170.7% 253.0%
Cash as of Aug 2012 ($m) 29                    


Near term, catalysts are mainly exploration driven: 
  • Initial metallurgical results from Bornite - South Reef Zone - Q1 2013 
  • Bornite - South Reef Zone deposit NI 43-101 resource estimate - Q1 2013 
  • Ambler - Sunshine deposit NI 43-101 resource estimate - Q2 2013 
  • Resumption of drilling at Bornite - Q2 2013 
  • Pre-development agreement on building an access road, to be funded by the government and paid for on a usage basis over the life of the mine. This has been agreed on and is with lawyers. The Alaskan governor has placed $8.5m in his budget for 2013 for the permitting process. The road should be financed with state revenue bond and take two summer seasons to construct
  • PEA for Ambler as an open pit mine to be released in 3Q (previous PEA was for an underground mine) 

Longer-term, the ultimate catalyst is the realization of the value of the resources which will be achieved either through a sale of the property, or through a development.

There is a long list of risk associated with NCQ, most are typical for any exploration company. But given valuation and the people involved, NCQ is very attractive.   

  • Technical risk: uncertainty remains regarding the mineability and recoverability of metals. Alaska is a challenging operating environment, but at least political risks are minimal unlike is many other natural resource companies 
  • Permitting risk and community relations: the projects are located not far from natural parks and protected areas and will require various federal, state and local permits. To date, the company has had a very strong relationship with the local community. The local government is supporting the exploration efforts offering to build the access road mentioned above 
  • The access road is estimated to cost $300m. The Alaskan government has previously funded major road and port infrastructure for Teck’s Red Dog mine on a user-fee basis, which is a successful precedent 
  • Exposure to metal prices: copper represents 70% of the value of the deposits, zinc 20% 
  • Liquidity: the remaining liquidity is projected to last till end of 2013. Management has indicated they are not willing to issue stock at $2; at $3 they would feel better about raising capital
  • Lack of cash flow: no production is envisioned before 2018

The macro picture for copper is positive. The world output is ~15m tons per year and supply and demand are roughly in balance currently. However, demand is increasing, whereas supply is shrinking. China is building a new grid for half a billion people; predictions show 5-10% annual increase in copper consumption in the near term. Electric car production worldwide should reach 10m vehicles by 2012 (10-12% of total production), which will add 3-5% to demand. The electric infrastructure of the US and other developed countries requires significant upgrades. The growth of alternative energy, with solar and wind farms often built in remote locations, also adds to demand. New gas power plants, which are currently built to replace coal plants and often are at different locations, further boost demand.

Most of the supply of world's copper comes from 30 or so very large mines. 20 of them are on their last leg, i.e., they have 10-20 years of life left. Given the long cycle to develop and extract new resources, the big producers need to be investing a lot now. But they are not. In fact, exploration has scaled down since the last recession. Global copper warehouse stocks tracked by LME are near the 2009 low.

[Copper spot price and warehouse stock level charts omitted]

Where this leaves us with respect to copper prices 1, 2, or 3 years from now? Not sure. But a significant decrease is unlikely.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


 Near term, catalysts are mainly exploration driven:
  • Initial metallurgical results from Bornite - South Reef Zone - Q1 2013
  • Bornite - South Reef Zone deposit NI 43-101 resource estimate - Q1 2013
  • Ambler - Sunshine deposit NI 43-101 resource estimate - Q2 2013
  • Resumption of drilling at Bornite - Q2 2013
  • Pre-development agreement on building an access road, to be funded by the government and paid for on a usage basis over the life of the mine
Longer-term, the ultimate catalyst is the realization of the value of the resources which will be achieved either through a sale of the property, or through a development.
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