Faraday Copper Corp delivered a PEA for its Copper Creek project in Arizona on May 3 to which the market did not react positively. I watched the May 4 webcast and it was clear right from the start that this PEA is a steppingstone for Faraday. Paul Harbidge's opening remarks make it clear that this PEA is not going to be the basis for mine development. It "is a solid foundation which the team can build upon".
Copper Creek has a complex mining plan that starts with 7 open pits feeding a 30,000 tpd flotation plant that in year 9 transitions to underground mining. Low grade ore from the pits is stockpiled and processed in the final 3 years of the 32 year mine life. The resource and mining plan is based on 200,000 m of drilling. The market knew from the project's history that the mining plan would be complex but it was hoping for better economic numbers than the PEA delivered.
The PEA requires initial CapEx of USD $798 million. The headline after-tax NPV is $713 million, but it is calculated at a discount rate of 7%. In a separate table the NPV at 8% is $566 million. The rule of thumb is that CapEx should at a minimum match the NPV. The IRR, which is not linked to the discount rate, is 15.6%, just barely above the minimum IRR developers want to see.
The base case price is $3.80/lb copper, which is reasonable because that is roughly where copper is today. Faraday uses conservative prices for silver ($20/oz) and molybdenum ($13/lb). The silver byproduct is small, so there is little upside optionality from higher silver prices. But using $23/lb for moly does add $129 million to the 7% NPV calculation. The current price for molybdic oxide is $20.60/lb, though in late December it spiked almost to its $40 high in 2005.
Faraday provided NPV and IRR figures for $4.25/lb and $5/lb copper prices, and at these prices Copper Creek does clear the development hurdles. Copper Creek is thus a copper optionality play which benefits from future higher real copper prices. Are higher real copper prices possible? The IEA predicts that the 2030 goals for the energy transition require a 50% expansion in global copper production. Such an expansion is not in the pipeline, so to make it happen a higher real copper price is needed. But when will that happen?
The company is well financed and is completing a 10,000 m drill program whose results are not incorporated into the PEA and are expected by the end of Q2. The company will go into a lull during Q3, but plans to begin a 20,000 m drill program in Q4. I believe they have about $20-$25 million working capital after the $40 million financing earlier this year and the USD $12 million acquisition of the Mercer Ranch.
Faraday has completed a high resolution EM survey and also plans a spectral survey which will guide an exploration strategy whose goal is to see if the scale can be increased from the proposed 30,000 tpd operating rate. The block caving studies indicate that a 30,000-45,000 tpd rate is feasible for the UG Keel and American Eagle deposits. Since the flotation mill needs to be built up front, if it is to start with the 45,000 tpd rate, the resource needs to be expanded if mine life is not to be shortened. If this can be accomplished they can deplete the open pit resource more quickly and start on the higher grade underground resource sooner.
Toward the end of the webcast Harbidge provided a slide called "opportunities and next steps" which makes it clear that Copper Creek is shifting back into exploration mode. This is not a giant porphyry deposit like we hope Bell Copper will find at Big Sandy but rather a system of breccia bodies exploiting a couple of faults on the property called Western and Holy Joe, only a portion of which has seen drilling activity. Chalcopyrite and bornite are the main copper minerals with very little pyrite; below one of the pits the mineralization qualifies as massive sulphide with an interval of 15 m at 10.83% copper and 1.65 g/t gold. Gold was not historically assayed but FDY has observed the presence of gold in some zones. One goal of the next round of exploration will be to see if gold can be a recoverable metal.
I had hoped to upgrade Faraday Copper from a Fair Speculative Value rating to Good Speculative Value after the PEA, but because the numbers now fall short of a key development hurdle Faraday does not justify a Good Spec Value rating with a $1.50-$2.00 range as a Fair Spec Value target. The current $0.80-$1.00 price represents fair speculative value for copper price upside optionality and the exploration potential for scaling the mining plan bigger. The company meanwhile will continue with feasibility demonstration work that includes permitting, metallurgical studies, and seeing if they can get away with a coarser grind size.
The PEA has created the cost structure foundation for what ultimately is a higher grade underground mine relying on block-caving which does not always work. If you believe the predictions that the energy transition will require a 50% expansion in copper supply by 2030, and that American politics will not torpedo the energy transition, the world will need a higher real copper price. |
