Teck and Copper Fox partner up on Schaft Creek

VANCOUVER — Teck Resources (TSX: TCK.B; NYSE: TCK) has a thing for Schaft Creek.

Thirty years ago Teck advanced the project to prefeasibility, before metal prices and other opportunities forced the copper-molybdenum-gold-silver porphyry to the back burner. Teck was not the first to see potential in the northwest B.C. property — at least seven other companies worked the project prior to Teck.

In 2002 Copper Fox Metals (TSXV: CUU; US-OTC: CPFXF) inked a deal for Schaft Creek, dusty after two decades on Teck’s shelf, and started looking at the project with a modern eye.

The large land package 80 km south of Telegraph Creek soon became Copper Fox’s raison d’être, and over the next 10 years the company spent more than $80 million growing the resource, investigating road and power options, consulting the Tahltan Nation, developing a mine plan, securing concentrate storage and shipping routes, and generally prepping the project to become a mine. 

That journey culminated with a feasibility study, released in January, that outlined an open-pit mine producing 232 million lb. copper, 200,000 oz. gold, 1.2 million oz. silver and 10.2 million lb. molybdenum annually for 21 years. The plan gave Schaft Creek a pre-tax net present value of $1.7 billion and predicted the mine would generate a 10% internal rate of return, using a 5% discount rate and based on metal prices of US$3.25 per lb. copper, US$1,445 per oz. gold, US$27.74 per oz. silver and US$14.64 per lb. moly.

Copper Fox delivered the 11,000-page feasibility study to Teck on February, starting the clock on Teck’s opportunity to back in for a stake in Schaft Creek. The 2002 agreement between Teck and Copper Fox gave the major 120 days following receipt of a feasibility study to acquire 20% by spending an amount equal to Copper Fox’s expenditures to date, 40% by spending three times Copper Fox’s investment or 75% by spending four times Copper Fox’s outlay at the project. Or Teck could just walk away.

According to Elmer Stewart, president and CEO of Copper Fox, walking away did not seem to be an option for Teck. The day Stewart strode into Teck’s offices with the Schaft Creek feasibility study, Teck wanted to talk. 

“A lot of people were probably saying that we would never get it done, but we got it done,” Stewart said in an interview on the day news broke that the pair had signed a new Schaft Creek joint-venture agreement.

The new deal will see Teck take a 75% stake in Schaft Creek and act as operator, with Copper Fox holding the other 25%. For its stake Teck will pay Copper Fox $60 million in installments: $20 million on signing, $20 million upon a production decision and $20 million when the mine is built. Teck will also spend up to $60 million preparing the project for a production decision. 

If pre-production costs climb above $60 million, Teck will fund Copper Fox’s share of the costs by dipping into its remaining payments owed to the junior, and, if necessary, by providing Copper Fox with a loan. 

Finally, Teck is responsible for securing the equity and debt financing required to build a mine if a development decision is made. And Teck has committed to a 10,000-metre drill program at the project in the coming weeks to test for an eastward extension of the main deposit, and collect geotechnical information.

Copper Fox has spent more than $80 million at Schaft Creek to date. The old deal would have required Teck to spend four times that much — or $320 million — on the property to earn 75% ownership. As such the new deal could be a steal for Teck, which would get 75% of the property for $120 million (or less, if the partners make a production decision before Teck has spent $60 million at the site). 

That matters not to Stewart and his Copper Fox management team, because the mining world changes, and deals done 10 years ago have to be amended to suit today’s investment climate.

“Clearly we’re in a market right now that’s not great for junior companies,” Stewart says. “The thing is: there was an option agreement and we maintained the spirit of the option agreement. We had to make some changes, which we did and which we think are in the best interests of Copper Fox shareholders, and Teck still has an obligation to arrange project financing if and when a production decision is made. So that’s pretty good for a junior these days.”

It seems investors agreed. On news of the Schaft Creek deal Copper Fox’s share price jumped 21¢, or 36%, to close at 80¢. 

The details of the deal were likely less important to investors than Copper Fox managing a deal at all. Schaft Creek is huge, with a measured and indicated resource of 1.23 billion tonnes grading 0.26% copper, 0.017% molybdenum, 0.19 gram gold per tonne and 1.69 grams silver per tonne. But the project is also in rugged northwest B.C. — 45 km from the Stewart-Cassiar Highway — and building a mine is expected to cost $3.3 billion.

“The reality is simply this: Copper Fox had taken the project as far as we could,” Stewart says. “We can drill holes, we can update the feasibility study, but the next thing Schaft Creek needed was a serious operator. 

“Since 2010 we have been grooming the project for that transition: we secured the bulk terminal outlet at Stewart for the concentrate, we worked hard with BC Hydro, we stepped out from the deposit to test geophysical features and got some holes with really good mineralization that clearly indicates there’s another large mineralization zone to the north, and some serious district potential. But all along the idea was to groom this thing so that a larger company with operating and financial and development expertise would feel comfortable stepping in.

“Today, we like to think it’s a job well done.”