Phoenix Copper’s Empire mine has world-class potential – Hardman & Co Q&A (LON:PXC)

Hardman & Co

Phoenix Copper plc (LON:PXC) is the topic of conversation when Hardman and Co’s Analyst Paul Mylchreest caught up with DirectorsTalk for an exclusive interview.

Q1: Can you give us an overview of Phoenix Copper?

A1: The company is primarily a copper and precious metals mining exploration company, although it also has two nearby cobalt properties. It was listed on AIM in 2017.

Its flagship project – Empire – is a potentially world-class copper-gold-silver mine based near the town of Mackay in Idaho in the northern US. Jurisdiction is always critical in mining and it’s worth noting that Idaho was named as one of the most “mining-friendly” locations in the Mining Journal’s 2018 and 2019 Risk Reports and was ranked number one in terms of the lowest risk perception in world mining.

The acquisition of the initial Empire claim followed an extensive period of screening by the management team. In very simple terms, they screened for projects in the “right” metal or metals, in a safe jurisdiction, with the potential for large-scale mineralisation.

Q2: You emphasise in your recent report that the company has a slightly unusual strategy?

A2: Due to the scale of potential mineralisation and the challenges to the mining sector in raising large amounts of capital, the management team has been pursuing a deliberate strategy of staged mine development. The advantages of this strategy include:

– dramatically reducing the initial funding requirement;

– maximising near-term cash generation; and

– minimising risk to shareholders.

The first mine will be a “starter mine”, providing near-term cash flow to:

– explore the far more extensive mineralisation – copper-gold-silver-zinc – in the sulphide ore body located underground; and

– explore the adjacent land package, which has been significantly enlarged (to more than 5,000 acres) and includes three other former mines and the Navarre Creek Gold Zone.

Q3: And that strategy has been refined recently?

A3: “Stage one” of the strategy was to be an open-pit copper mine, targeting the near-surface oxide ore at Empire. However, the weakness in the copper price which began to take hold in the second half of 2019, necessitated a change in the near-term strategy and a re-ordering of mine development.

Instead of copper, the polymetallic nature of Empire allowed management to plan the development of a silver mine at the recent Red Star discovery. There were two advantages:

– silver is a monetary metal, as well as an industrial metal, and the outlook for the silver price was more upbeat; and

– the capital cost of the silver mine is about $32m, significantly lower than the $51m cost of the initial copper mine.

Recent exploration work has convinced management that the current 103,500 tonne ore resource can be enlarged to well over 1.0m tonnes. Indeed, the current mine plan incorporates 1.6m tonnes of ore over 10 years with recovered metal, in terms of ounces of silver equivalent, of more than 2.4m oz. Average cash cost per ounce is estimated at $7.60/oz.

A development decision for the mine is expected by the end of 2020 with production possible a year later.

We should also note that completion of the Feasibility Study for the open pit copper project will be delayed, pending a more attractive copper price environment. That said, work will continue to improve the project’s economics.

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Q4: You mentioned that Empire has world-class potential, that’s quite a statement. What makes you think that?

A4: Empire is the site of a former producing copper mine, which was shut down due to US entry into WW II. During 1901-42, the mine operators targeted the underground sulphide ore and from the detailed mine records extracted 364,000 tonnes of ore from which they recovered 3.64% copper.

The recovery rate needs to put into perspective:

– recovering 3.64% copper in that era implies an ore grade of probably 6-8%; and

– the average ore grade in new copper mines today is 0.5-0.6% with slightly lower recovery.

There is obviously significant potential from following the veins of very high-grade sulphide mineralisation further underground beneath the old workings – access to which should substantially reduce the cost of exploration drilling.

There has been almost no drilling at depth up to now, but the 2018 drilling programme achieved some initial sulphide intercepts at more than 100m. Drill hole KX-18-52 intercepted 4.6m of 3.88% copper equivalent and 1.5m of 7.16% copper equivalent.

Now that the company’s land package surrounding Empire has been extended by an additional 4,500 acres, there is more lateral exploration potential. This includes three other former mines as well as the Navarre gold zone and recent Red Star discovery, which we mentioned.

In all, the company’s consulting geologist estimates that less than 1% of Empire’s potential ore system has been explored.

Geologically, the deposit shows similarities with Antamina in Peru, the world’s largest skarn-hosted copper mine. Further work will confirm whether there are additional copper-tungsten-molybdenum porphyry resources at depth.

Q5: Can you outline some of the key investment criteria relating to Phoenix Copper?

A5: We have calculated a fair value for the share price of 31 pence per share, based on a DCF valuation for the initial Red Star silver mine only.

Our valuation uses an average long-term silver price of $19.00/oz, which takes no account of the strong investment case for silver, not least due to an indefinite need for central bank debt monetisation and a reversion to mean in the gold-silver ratio.

Our sensitivity analysis showed that PXC’s share price is highly geared to the upside thesis for silver. Indeed, we estimate that each $1.00/oz increase in the silver price adds an estimated to 6.2-6.3p per share.

We have used a very conservative discount rate, for now, of 15% ‒ some analysts value stocks like PXC using an 8% discount rate or lower. We expect to reduce this discount rate, with a knock-on benefit to valuation, with exploration success and the advancement of the project.

For the time being, we are excluding from our valuation of PXC four things:

– the initial copper mine (shallow oxide ore) for which PXC has completed a PEA – we estimate that the NPV of the initial open pit copper mine is £17.3m if it was greenlighted today;

– the nearby Navarre gold zone;

– two cobalt claims in northern Idaho, with mineralisation confirmed from initial sample results; and

– longer-term potential for developing a world-class copper-precious metals mine at Empire and the surrounding area.

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