1. Introduction
Although Kutcho
Copper Corp. (KC:TSX.V) remains under the radar of most it seems, it
doesn't seem to lose a lot of time, and continues doing the heavy lifting in
order to advance its flagship project, the Kutcho high-grade copper-zinc
project in British Columbia, Canada. Backed by a financial package arranged
with Wheaton
Precious Metals Corp. (WPM:TSX; WPM:NYSE), Kutcho completed its 2018
drilling and exploration campaign at the end of October as planned (winter
break), and is processing all data now. A Feasibility Study (FS) is planned
for the end of Q2, 2019. The company's blockchain initiative MineHub isn't
shelved either, and management intends to publish a news release with current
developments and partner names within a few weeks from now.
All presented tables are my own material, unless stated otherwise.
All pictures are company material, unless stated otherwise.
All currencies are in US dollars, unless stated otherwise.
Please note: the views, opinions, estimates or forecasts regarding
Kutcho's performance are those of the author alone and do not represent
opinions, forecasts or predictions of Kutcho or Kutcho's management. Kutcho
has not in any way endorsed the information, conclusions or recommendations
provided by the author.
2. Update
The Kutcho Copper project appears to be managed very timely and
professionally, but the markets fail to recognize what exactly is being done
here. With a profitable (post-tax IRR of 28% @$2.75/lb copper, @$1.10/lb
zinc) project that has a post-tax 2017 PFS NPV8 of C$265M, which is 18 times
bigger than its current market cap, Kutcho deserves better instead of this
chart in my view:
Share price over 1 year period
As mentioned in former analysis, the share price indeed went down last
week at the peak of tax loss selling, as expected, and one seller even
brought down the stock to C$0.20 by then, which was a golden buying
opportunity in my view. CEO Sorace didn't like the cheap pricing of the last
few months at all, and had a shareholder rights plan adopted by the Board of
Directors (BoD), shareholders and the TSX Venture. According to the
accompanying news release, this is what it was about:
"The SRP has been adopted to ensure, to the extent possible, that
all shareholders of the Company are treated fairly and equally in connection
with any unsolicited take-over bid or other acquisition of control of the
Company, and that the Board is provided with adequate time to consider and
evaluate such a take-over bid or other acquisition and, if appropriate,
identify, develop and negotiate any value-enhancing alternatives.
Furthermore, the SRP will allow the Board to pursue, if appropriate, other
alternatives to maximize shareholder value and to allow additional time for
competing bids to emerge."
In short, it gives management and BoD time and options to fight a hostile
takeover attempt. Such an attempt isn't unrealistic, as there are very few
economic copper deposits around, and the outlook for the metal is still very
robust.
The copper price remains side-ranging at US$2.68/lb Cu, as trade war
concerns seem to dominate commodity demand, and zinc trades at US$1.16/lb Zn.
The fundamentals for copper are still very strong for the next three years,
with a 5-10Mt deficit expected by 2021. Zinc is developing/behaving
differently, as it is less fragmented as a market, warehouse inventories have
impact, smelters have even more impact on pricing and basically control the
zinc market anyway.
Whereas competing base metal prices are falling left and right as far as
profitability of their projects is concerned, the Kutcho project isn't losing
any profitability at the moment as the base case metal prices were almost set
at today's prices. It is very rare to see this happening for a base metal
project these days, and shows the strength of its economics. Updating of
tonnage is on its way and will likely be a significant improvement regarding
the current 10.4Mt. Improving recoveries of copper and zinc, higher metal
prices and further optimization of, for example, mine plan and opex could
help economics even more. As the Canadian dollar loses strength toward the US
dollar as the Canadian economy is dependent on the dropping oil price, FX
effects might help as well in the future.
In the meantime, Kutcho has been busy on all fronts.
3. Exploration results
Kutcho's 2018 drill program involving nearly 11,000m (7,000m of
geotechnical drilling and 3,850m of infill/expansion, both at the Main Zone
and Esso) has been completed at the end of October of this year, and the FS
data collection has been completed mid October, all according to plan.
Metallurgical results are expected in February 2019.
I would like to highlight a number of assays and sections from a series of
news releases involving the 2018 drill program. For a better understanding,
here is a 3D model of the three deposits: Main, Sumac and Esso:
Looking at the orebodies in a bit more detail, the plan and 3D section
including drill holes are represented like this (taken from the 2017 PFS):
And as a reminder, here is a table that indicates the increased tonnage at
Main by lowering the cut-off grade from 1.5% Cu to 1.0% Cu:
The 2017 Main Zone Reserves figure shows 8.1Mt @ 2.59% CuEq, but in my
view this is likely to increase towards a pretty conservatively estimated
11Mt figure after using the lowered cut-off. The Esso resource figures stand
at 2.3Mt @4.05% CuEq Probable Reserve, the Esso M&I resource stands at
2.4Mt @ 4%, so there was hardly any dilution when converting from resources
to reserves at Esso so far. Therefore, total Probable Reserves are likely
going to 13.4Mt just based on this data.
The Sumac Inferred Resource stands at 4.8Mt @1.7%CuEq.
Let us have a look at the results.
First of all there was a very strong infill intercept on Esso:
This intercept can be seen here:
Infill intercepts don't look spectacular but they are also adding tonnes
as they can fill in areas that are outside the existing circles of influence
of the current resource estimate. Such a hole is capable of adding 40–50kt,
for example.
Further drilling at Esso delivered an extension at depth, indicating a new
high-grade stringer zone, although of relatively limited size and grade. My
estimate about this is that it could add 300–500kt if it extends over a
length of 200–300m alongside the edge of the current deposit. A table with
highlights of Esso and Main drilling looks like this:
Drill hole KC18-225-W1 can be seen here in this section:
Together with these Esso results, numerous Main assays showed great
continuity of mineralization, as can be observed, for example, in this section,
and will undoubtedly add tonnage:
The next set of reported results indicated further confirmation of
continuity and high grade, as can be seen in the following table and section:
The confirmation of the high-grade parts of Main is nice to have, but not
very important, as most assays are spread out evenly for copper, with a
coefficient of variation (CV) of 0.9, which is very good. Usually, a CV of
2.0 is a base level, and values above 5 are seen as risky. The solid
distribution can be observed in this chart taken from the 2017 PFS:
It is good to see the Main Zone seems to hold up well for higher-grade
mineralization though. For illustration purposes, the distribution of
high-grade pods looks like this:
The next set of results on Main indicated an extension of mineralization
of 50m down dip, along strike over a 250m distance, represented by hole
KC18-282:
As can be seen in the next section, it is a thin extension and probably
the end of the mineralized orebody, but still capable of adding 250–500kt:
Further stepout drilling at Main at depth confirmed the earlier mentioned
250m wide extension of 40–50m along strike, for example by KC18-285, and
other holes like KC18-277 that didn't intercept economic mineralization at
25–30m further along strike from the last mineralized hole indicated the
boundary at depth for Main, in my view, limiting further potential at depth.
Here is the table:
Here are the sections, indicating KC18-277 and KC18-285:
Of course, it is never easy to guesstimate as a non-geologist what the
additional tonnage could be without all results and the necessary software at
my fingertips, but in my view an estimated 13.4Mt after lowering the cut-off
could be increased by a conservatively estimated 0.5–1Mt expansion, and
another 0.5–1Mt because of infill drilling. The upcoming resource update
could therefore show larger Reserves, to the tune of an estimated 15Mt, which
will result in an increased NPV8, of course.
4. DCF analysis, estimated economic potential
When I would use my estimated 15Mt scenario, for other assumptions an 80%
Zn recovery rate, a 1.25 exchange rate, a US$2.75 base case copper price and
a fixed US$1.10 Zn price, a 2,500tpd throughput scenario for a LOM of 18
years, and a 4,500tpd throughput scenario for a LOM of 9 years, this could be
the resulting, hypothetical sensitivity table:
I am curious if Kutcho can come close to my estimated 15Mt or even higher.
This is below my initial estimate of 20Mt, but it is already a deeply
undervalued play, as an after tax NPV8 of C$265 million based on just 10.4Mt
is 18 times current market cap as mentioned. C$314 million is 21 times market
cap, and C$361 million is 24 times market cap. You just don't see such
numbers involving solid projects around very often, if ever.
5. Conclusion
Kutcho Copper is priced as if there are serious issues, but there seems to
be none, as permitting is going smoothly with very good working relationships
with the First Nations, and drill results at the very least seem to confirm
PFS mineralization so far.
It puzzles me, it puzzles management, which felt it could do no else than
protecting the company with a shareholder rights plan, as Kutcho wasn't set
up to let it go early on the cheap. When mining sentiment turns, this company
should be one to benefit, as in my opinion its fundamentals are among the
strongest of all mining projects out there. As the stock seems to have
bottomed out during tax loss selling season in mid-December, I see Kutcho
Copper as a solid buying opportunity.
Kutcho project
I hope you will find this article interesting and useful, and will have
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The Critical Investor Disclaimer:
The author is not a registered investment advisor, currently has a long
position in this stock, and Kutcho Copper is a sponsoring company. All facts
are to be checked by the reader. For more information go to www.kutcho.ca and
read the company’s profile and official documents on www.sedar.com, also for
important risk disclosures. This article is provided for information purposes
only, and is not intended to be investment advice of any kind, and all
readers are encouraged to do their own due diligence, and talk to their own
licensed investment advisors prior to making any investment decisions.
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