On December 29, Nevada Copper Corp. (TSX: NCU) announced that it had completed the materials handling system of the main shaft at the underground mine portion of its Pumpkin Hollow copper project in Nevada. Finishing construction of this system should allow commercial production at the underground mine to begin in 1Q 2021. In time, Nevada Copper hopes to develop other areas of Pumpkin Hollow, including an open pit mine.
A pre-feasibility study, which was updated in early 2019, projects that the underground mine should generate an average of US$80 million of free cash flow per year in its first five years of operation. According to this study, the underground mine alone has a net present value (based on a 5% discount rate) of just over $300 million.
We note these figures are based on a copper price of US$1.86 per pound. Current copper prices are about double that figure, due primarily to strong and building demand from China. Longer term, copper should be a significant beneficiary of consumers’ growing appetite for electric vehicles. A conventional car uses 18-49 pounds of copper; whereas a battery-powered electric vehicle contains about 183 pounds of copper.
A companion pre-feasibility study projects the open pit mine at Pumpkin Hollow has a net present value of $829 million, based on a 7.5% discount rate. It could generate an estimated $180 million of free cash annually over a 17-year period.
Nevada Copper shares have dramatically underperformed the stocks of a number of other pre-revenue junior copper miners in 2020. For example, shares of Surge Copper (TSXV: SURG; $73 million market cap) and Copper Fox Metals (TSXV: CUU; $225 million market cap) have soared more than 800% and 450%, respectively in 2020. Conversely, Nevada Copper’s ($208 million market cap) share price has lost about 60% of its value this year. If investors begin to target underperforming stocks in the mining sector, Nevada Copper shares could potentially benefit.
Substantial Debt on Balance Sheet
Nevada Copper has nearly US$160 million of net debt, noticeably more than many junior miners. Its operating cash flow deficit has averaged just over US$2 million per quarter over the last five quarters. As commercial production begins at the underground mine next quarter, cash flow should improve quite significantly. However, as the company begins to develop the open pit mine, the company will likely require additional debt or perhaps equity financing.
| (in thousands of US $, except for shares outstanding) | 3Q 2020 | 2Q 2020 | 1Q 2020 | 4Q 2019 | 3Q 2019 |
| Operating Income | ($922) | ($4,900) | ($2,032) | ($2,689) | ($794) |
| Operating Cash Flow | 491 | (4,686) | (2,282) | (1,328) | (1,930) |
| Cash, Including Restricted Cash | 7,867 | 7,492 | 12,378 | 3,096 | 16,254 |
| Debt – Period End | 166,170 | 207,128 | 190,138 | 170,963 | 130,617 |
| Shares Outstanding (Millions) | 761.9 | 761.9 | 761.9 | 761.9 | 761.9 |
Commercial production at the underground mine could of course be delayed beyond 1Q 2021. In the summer of 2019, the company had projected a start date before year-end 2019. Nevertheless, given that the company continues to project 1Q 2021 production just days before 1Q 2021 begins, as well as the constructive December 29 announcement regarding the completion of the materials handling system, that risk seems fairly small.
Nevada Copper looks poised to start commercial copper production and to begin generating operating cash flow sometime in the first quarter of 2021. Investors have paid little attention to this possibility, as the stock has ignored both the rising price of copper and the strong performance of the stocks of its junior copper mining peers in 2020. If the production does indeed begin as planned, investor sentiment on Nevada Copper seems likely to improve.
Nevada Copper is trading at $0.145 on the TSX Exchange.
Information for this briefing was found via Sedar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
