VANCOUVER — Nevada Copper (TSX: NCU) has spent the past three years de-risking its Pumpkin Hollow copper project, 13 km southeast of Yerington, Nev., and the result has been one of the more intriguing undeveloped copper prospects not currently in the hands of a major mining company.
Industry observers will be familiar with the fact that development-stage, long-life copper assets have become scarce, as exploration expenditures wane and many of the larger companies turn inward to focus on brownfield sites. This is especially true for red metal deposits located in low-risk jurisdictions that boast strong infrastructure and lack socio-political concerns related to permitting and social license.
This new reality makes Pumpkin Hollow somewhat of an outlier as it sits in a mining-friendly state, features a relatively clean permitting scenario, and has ready access to road and power infrastructure.
But Nevada Copper’s big victory came in late 2014, when U.S. President Barack Obama passed a land transfer that makes project activities regulated under Nevada state, and local regulations and requirements.
Pumpkin Hollow has two mine-development components: a smaller-scale underground element that is fully permitted; and a a larger-scale open-pit plan that requires modification to existing air and reclamation permits. The company expects to receive the modified documents during the third quarter.
Before the land transfer, Nevada Copper had been advancing a staged-build approach at Pumpkin Hollow that would have seen the underground operation hit production two years before the open pit started up.
The company has already finished most construction activities at the underground East deposit, but the possibility it might permit the larger operation has made it re-assess an option that would see the underground and open-pit mines built simultaneously.
On May 28 Nevada Copper released a feasibility study at Pumpkin Hollow that models the integrated scenario, which marks the first economic update on the larger development option since 2012. The new mine plan isn’t vastly different, though it does feature a longer mine life, higher daily throughput and lower upfront development costs.
“We have a larger deposit and we’re three years down the road, so it’s a more advanced document, from a design standpoint. There has been a lot of work done during the interim, and we now have access to the high-grade underground, since the shaft is sunk. It’s not just a plan on paper; we’re there, and we have the head frame. It’s been de-risked in a significant way, and that includes on the permitting side,” president and CEO Giulio Bonifacio said in an interview.
“Both the staged and integrated options are attractive, but I’ll point out the leverage on the larger project is something that demands attention. It’s a project that, for many reasons, should be at the top of the development queue,” he added.
Total life-of-mine capital expenditures (capex) are estimated at US$1.71 billion, which includes US$1.1 billion in initial capital and US$640 million in sustaining capital. Under the integrated plan Pumpkin Hollow would annually produce 198 million lb. copper, 22,500 oz. gold and 683,000 oz. silver over a 23-year mine life, which marks a five-year increase for operations compared to the previous study. Cash costs are estimated at US$1.73 per lb. copper.
Open-pit operations are modelled around proven and probable reserves of 489 million tonnes grading 0.4% copper, 0.03 gram gold per tonne and 1.25 gram silver per tonne. Contained metals total 4.2 billion lb. copper, 592,000 oz. gold and 24 million oz. silver. Meanwhile underground reserves include 30 million tonnes of 1.38% copper equivalent.
In terms of mining and milling, Pumpkin Hollow would feature a 58,000-tonne-per-day open pit element and a 5,900-tonne-per-day underground component, which would each feed a 64,000-tonne-per-day copper concentrator. The project’s copper concentrates, containing gold and silver, are reportedly “clean and marketable,” and will be trucked 30 km to a new rail loading facility on Union Pacific tracks.
From an economic standpoint the integrated package features an after-tax net present value (NPV) of US$1.1 billion at a 5% discount rate, along with a 15.5% internal rate of return (IRR).
The numbers look relatively strong for a large-scale copper development, though it should be noted that Nevada Copper assumes a copper price of US$3.15 per lb. in its base case. If variables are shifted to a US$2.85 per lb. copper price, Pumpkin Hollow has a US$560-million after-tax NPV and a 10.4% IRR.
“Projects of this size will garner certain NPV and IRR numbers, but they will never be at certain levels, because that just doesn’t happen on large-scale development projects. It gets back to the fact you’re spending significant capital to build the mine, and I think our annual output metrics indicate just how well this project compares to other assets in the global copper space,” Bonifacio countered when asked about economics.
“Therein lays the opportunity. I think it has to be looked at relative to size, magnitude, and upside. Unfortunately in a down market a lot of people lose sight of that upside because they’re looking at numbers they think are stagnant. The rocks don’t change and copper is going to trade at an established value because it costs a certain amount to get it out of the ground,” he continued.
Nevada Copper also has the luxury of optionality in how in proceeds at Pumpkin Hollow. The remaining capex on the stand-alone underground operation is US$125 million, and the company has US$21 million in cash and US$100 million outstanding on a debt facility with Red Kite Mine Finance. But Nevada Copper is in the midst of a 23,000-metre drill program, so some of the cash will be earmarked for exploration and delineation.
Bonifacio said the strategy will be to acquire the open-pit permits later this year, and use the updated feasibility study to shop around for project financing and large-scale development. If capital is hard to obtain on favourable terms, Nevada Copper can proceed with developing the underground.
With the production shaft complete, the underground development could achieve first production in 2017, while the integrated operation could get rolling by 2018. The smaller-scale mine would crank out 75 million lb. copper annually at life-of-mine cash costs of US$1.63 per lb.
“The company clearly has options here, and I’m saying it with a level of optimism that we can get the funding in place for the integrated project. I’d never make any guarantees, but I think we can get there. Failing that we’ll get there on the staged option, and along the way we have a document that allows people to point to that optionality and the leverage on copper,” he added.
There has been positive buzz around copper to start the year, though the timeline for a rebound, based on a perceived pending supply deficit, remains pretty cloudy. As mentioned, the pipeline of quality projects is relatively barren, and analysts have noted falling average grades amongst active copper operations.
“And looking at the demand side, assuming China’s demand slows, it still doesn’t disappear. If you look at some of the recent transactions the Chinese have participated in, I’d say they’re back in business, and I don’t think we need to tell Asia how important copper is as a commodity,” Bonifacio commented, noting Zijin Mining Group&rsquo
;s recent US$412-million arrangement with Robert Friedland’s Ivanhoe Mines (TSX: IVN; US-OTC: IVPAF), wherein the companies will co-develop the Kamoa high-grade copper project in the Democratic Republic of the Congo.
And aside from a potential copper recovery, there have been signs that Pumpkin Hollow may have more internal upside. Nevada Copper has completed 7,400 metres at the site to date and found intriguing open-pit grades. The company has been drilling the Connector zone, which lies between the proposed North and South pits.
Much of the area had previously been qualified as waste, but Nevada Copper announced on June 1 that it had hit mineralization in seven consecutive holes at the target. Results were highlighted by hole 15-13, which cut 64 metres true width of 1.6% copper equivalent from 174 metres down hole.
“I think the drill results to date have already shown that the top line is changing without a doubt,” Bonifacio continued. “Those were exceptional results in [Connector], with essentially every drill hole coming in with good grades above our cut-off level. And in terms of the underground deposit, we haven’t even drilled it since 2010, and that’s coming up later this year.”
Scotiabank analyst Mark Turner has a “sector outperform” rating on Nevada Copper with a one-year price target of $4 per share, and called Pumpkin Hollow “one of the best copper projects of feasibility-stage remaining, based on its location in northern Nevada.”
“[Merger and acquisition] activity for development-stage copper projects in the last year has shortened an already short list of late-stage development projects of scale in the hands of single asset public companies,” Turner wrote on May 29. He says Pumpkin Hollow’s “attractiveness as an acquisition target clearly increases, as the project is advanced and de-risked through receipt of final permits and project financing.”
Nevada Copper has traded within a 52-week window of $1.12 to $2.83, and has jumped 50% over the past six months en route to a $1.76-per-share close at press time. The company has 80.5 million shares outstanding for a $144-million market capitalization.