|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|
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:
But insiders and prominent value investors want it. There is an impressive cast of characters involved with this microcap:
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):
|mm lbs||mm lbs||mm lbs||mm OZ||mm OZ|
|NovaCopper total resources||Indicated||1,914||2,491||415||0.5||37|
|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||$695|
|Total inferred copper equivalent (mm lbs)||2,377|
|Total copper equivalent resources (mm lbs)||5,591|
|$m, except per lbs metrics||Attributable resources||Cu resource|
|Company||Location||Ticker||Mkt Cap||EV||MMt||% Cu||% Cu eq||$/lbs|
|Castle resources||Northern BC||CRI||58||55||47||1.26%||1.52%||0.035|
|Copper explorers/developers avg||0.031|
|Trevali mining||New Brunswick||TV||197||186||48||4.17%||2.84%||0.062|
|Zinc explorers/developers avg||0.030|
|Cu Eq||EV ($m) at different $/lbs||Imlied Mkt Cap ($m)||Upside / (Downside)|
|Cash as of Aug 2012 ($m)||29|
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.
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.