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Western Copper Holdings: fundamentals

Bob Moriarty
August 26, 2002

Clive Maund just finished an interesting analysis on a major silver company, Western Copper. Clive trained in technical analysis and seems to be very good at it. I wanted to take a look at one company from both the TA and fundamental point of view to see how it might help our readers. So here is a view of Western Copper from a fundamental point of view which you can compare to Clive's TA piece.

It should hardly be a surprise but the low metals prices of the last few years have been devastating to most gold and silver companies. So a natural reaction for most of these companies has been to slash exploration and other variable costs and to hunker down until prices improve.

Most investors who seek an investment in silver mining stocks realize silver is a byproduct in most mining operations rather than a primary metal. So while the number of gold mining companies is in the hundreds, the number of actual silver mining companies can be counted on your fingers without using your thumbs.

A company named Western Copper Holdings Limited (WTC-T, WCOPF-OTCBB) was formed in 1984 to develop a copper property in the Yukon region of Canada. They completed a feasibility study in 1998 which indicated the property could be developed at a profit with a copper price of $.80 a pound. Wisely, Western Copper put the project on hold until higher copper prices arrive. The property remains on hold.

Western Copper then partnered with Teck Cominco in a massive zinc/copper property in Mexico at San Nicolas. While Western Copper only holds a 21% interest in the property, San Nicolas contains 2.1 billion pounds of zinc with 1.4 billion pounds of copper and much smaller values of both gold and silver. A bankable feasibility study was completed in late 2001 and again the property was put on hold awaiting higher metals values.

While the properties put on hold by Western Copper hold a substantial value over the long term, Western Copper found themselves in a situation where they had no properties which were profitable at current prices. They changed that situation for the better last year with their Penasquito Silver project.

At this point, I would expect most readers to be scratching their heads in wonder. How on earth could someone actually find a silver property worth developing at $4.50 silver? Well, Western Copper should have changed their name to Western Silver because they have come up trumps at Penasquito and it's about to get much better.

According to the numbers put out by our best and brightest silver analysts, silver has been in a supply deficit for the last 12 years. We have a pretty good handle on how much silver is used, it's fairly easy to predict. When it comes to predicting the supply of silver, the same guys can't quite make the numbers match. According to their figures, we should have run out of silver a couple of years ago and we know that isn't true. In any case, silver languishes at 5,000 year lows in constant dollar terms while it remains an important and valuable commodity which probably is headed for much higher prices in the near future.

But the future lies in the future and lots of companies have broken their pick waiting for higher prices.

Western Copper began exploration of Penasquito with Kennecott with the intention of developing the property as a copper mine starting in 1994. The copper proved to be too deep for Kennecott to be interested so Kennecott dropped their option in mid-1999. At that point Western entered into an agreement with Hochschild&Cia to develop the property but the property called for a large scale open pit design and Hochschild specializes in high grade underground deposits. So in 2001 Hochschild, like Kennecott before them, dropped their option.

Western Copper took another look at the numbers from their existing drill holes and realized while they were focusing on coming up with a copper mine and waiting for higher copper prices, actually they have enough silver, lead, and zinc to make a very profitable silver mine so they shelved the idea of the copper mine to focus on a high grade silver mine.

The first 19 holes drilled showed sufficient near surface, high grade silver and zinc that the resources would generate more than $7.60 per share for the life of the mine yet the resource remains open in all directions. In short, the profit from just this mine at the current numbers would be worth about five times what the stock is selling for today. And some of the analysts covering the mine believe the resources are dramatically understated and could triple with more drilling and the new resource calculation due any day now.

If the market valued Western Copper at the same comparisons as other major silver companies and they turned their existing resources into reserves, the market value would be about US$12-$13 a share. And if the current drill program holds up, the one property could account for more silver than either Pan American or Apex.

Western Copper Holdings remains off the radar screens of most investors and therein lies a management weakness we hope will be resolved and not necessarily because 321gold happens to be an internet company. GoldCorp showed the mining business two years ago how valuable an investment in internet marketing could be. And very few investors missed NovaGold's rocket shot to the moon a year ago and Silverado's blastoff where they doubled in a week just three months ago. Those three companies understand how important the internet is for communicating messages to investors.

Business is simple. If you have a product worth investing in, it's worth promoting. Western Copper is one of those companies at a stage where I would except them to be squeezing every bit of opportunity out of the ability of the internet to communicate value to investors. They do not and they are missing the boat. While the stock has almost tripled since the first of the year, it remains seriously undervalued at $1.70 a share. If I ran this company, I'd be screaming its virtues from every mountaintop until my voice turned hoarse. The company is worth 2-5 times more than it's selling for based on current prices (And $4.40 for silver is as close to stealing as you can do legally. Where do you really expect silver to go?) At more reasonable prices for silver, zinc and lead, the stock is a moon shot.

NovaGold belongs in every investor's portfolio. Based on their current scoping study, they have about 1/2 ounce of gold per share. They plan on releasing a new resource sometime in October which I believe will blow the roof off the stock. At $2.70 a share, it's a steal.

But for silver stocks I don't think you can possibly beat Western Copper Holdings selling for US$1.70 on Friday last. (39 million shares fully diluted). Clive believes it will correct more and then become a buy, I believe the imminent new resource will at least double the stock. If management would learn the ability of the internet to communicate value to investors, I'd be even more bullish.

Bob Moriarty
August 26, 2002

Nothing we write is intended to be anything more than our opinion about the merits of a stock. Before buying or selling any stock, the investor should do his own due diligence.

The number of mining companies is small and we are investors for our own benefit. At any one time we may own 25-30 different mining stocks. It follows that often we will own stocks which we have written about.

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