Low Cost Maximum Leverage on Copper at Quaterra
Those investors who believe the price of a commodity is going to go much higher should be looking for companies with marginal projects. If a company has a property that needs, say, $15 silver and silver is only $14, they can’t make money going into production and will be valued appropriately. But if silver goes up 10% the project moves from being uneconomical to being marginal and should silver move up 20% the property goes into profit. So investors will revalue the company. It’s called leverage and marginal properties will gain a lot more value from an increase in the price of a commodity than properties solidly in profit today.
Quaterra Resources (QTA-V) has two such projects in copper. One at the site of the Anaconda Copper Mine formerly operated by Anaconda Copper in Nevada in the Yerington Copper District. Quaterra bought the 52 square mile property out of bankruptcy in 2011. In a 2012 PEA on MacArthur, an oxide deposit in the north of the property, Quaterra showed a NPV of $201 million USD using a base price for copper of $3.48. The NPV rises to $377 million with a 20% rise in the price of copper to $4.18 but drops to $9.8 million at a copper price of $2.78. As luck would have it, the current price for copper is only $2.74.
That gives a market cap of only $8.76 USD million based on today’s share price, in line with the PEA from 2012. But there are a few factors investors need to throw into the pot before stirring.
They have a lot of copper in a mining friendly state on the site of a prior existing mine operated by Anaconda Copper. The entire Yerington District contains over 17 billion pounds of copper in the M&I categories. Just one of Quaterra’s three copper projects, the MacArthur deposit, contains over 1.6 billion pounds of inexpensive and easy to process oxide copper. The MacArthur project could be put into production for a tiny $233 million. The 2012 PEA suggested a cash cost of $1.89 a pound with a mine life of eighteen years.
Quaterra is in progress with a Pre-Feasibility Study with the intention of lowering capital costs with the elimination of a $65 million acid plant, using a more timely base cost of $3 a pound for copper and using higher copper grades. They expect to complete the PFS within eighteen months with an updated resource model and an optimized mine plan.
There is no shortage of marginal copper projects at below $3 copper; Quaterra’s MacArthur deposit is hardly unique in that aspect. But there is a valuable asset for which the market is giving Quaterra little credit. On September 17th, 2018 Quaterra announced the sale of surplus water rights to an agricultural company for $6.26 million USD. Quaterra needs only 5,690 acre-feet of water to operate both the MacArthur copper heap-leach mine and a 50,000 TPD sulfide mill. After the $6.26 million sale, the company still retains 6,700 acre-feet of water rights.
At today’s price, the market only values Quaterra at $8.76 million USD yet sometime between now and the end of March they will be closing on the water sale and will bring in $6 million USD. For all practical purposes, valuation of the water rights sets a floor under the price of the shares. Selling the surplus water rights gives an implied value of about $20 million USD for the remaining 6,700 acre-feet of water.
When the $6 million hits the financial books projected to be before the end of Q1, the company could sell the remaining rights, walk away from the projects with billions of pounds of copper and distribute about $20 million USD to shareholders. Literally the company is worth more dead than alive right now. And who knows, maybe copper will go up someday and there could be some value in owning a giant copper asset.
Generally the market accepts that copper is relatively cheap today. All commodities are at historic lows as valued by the CRB. Copper demand should be going up in the future as countries go green. A single wind farm might use as much as 15 million pounds of copper. Today’s automobiles with a standard gasoline engine would use about 50 pounds of copper in total. An electric vehicle should use almost four times more at 180 pounds of copper.
Within the Yerington Copper District Quaterra also has two more major copper projects to call on at higher copper prices. The Yerington Pit Deposit contains over 1.4 billion pounds of copper between a 1.2 billion pound sulfide resource and 236 million pounds in oxide material. The Bear Deposit has a historic resource of more than 500 million tons at a 0.40% copper grade from only 25% of the project being drilled. Quaterra plans on drilling both the Yerington Pit and the Bear Deposit in the future as funds allow.
Every company needs a Plan B and Quaterra is no exception. Quaterra has signed an option with the Chuchuna Minerals Company for an option to purchase a 90% interest in a 40,000 acre project they call the Groundhog property in Alaska near the Pebble Deposit. Quaterra has funded exploration of $1.6 million at Groundhog with an additional minimum commitment of $500,000 required a year for three more years. Once they have spent a total of $5 million over five years, they can get title to 90% of the project for a lump sum of $3 million paid to the partner.
Pebble is one of those projects whose value goes up and down like a bride’s nightie. Major companies and investors run hot and cold with the giant project valued in the billions one day; in pennies the next. I’m not a big fan of Pebble. I think that it might never go into production because of where it is located. But I’ve been wrong before and I have little doubt I will be wrong now and again in the future.
Personally I wouldn’t put a great value on Quaterra for the Groundhog property unless and until a major stepped in and did some kind of a deal with them. That of course is going to be after Quaterra has spent over $8 million to get their 90%.
The Yerington Copper District is ripe for consolidation. Nearby Nevada Copper is going into production at their Pumpkin Hollow deposit at the end of 2019. Hudbay Minerals only recently announced completion of a purchase of Mason Resources and their Ann Mason copper property in Yerington for about $31 million CAD. Other companies than Quaterra put value in the Yerington Copper District.
Quaterra is an advertiser. I have bought shares in the open market and participated in a private placement. I am naturally biased. Do your own due diligence.
Quaterra Resources Inc