After four years of drilling, designing, consulting and number crunching, Copper Fox Metals (CUU-V) has produced a feasibility study for its planned Schaft Creek mine in B.C. that increases throughput by 30% compared to earlier plans, while only boosting capital costs by 20%.
Investors, however, were not impressed — perhaps because the expected cost to develop the copper-gold-silver-molybdenum mine sits at a sizeable $3.3 billion. The feasibility study news sparked a four-day sell off that left Copper Fox shares down 24% at 81¢. Before the fall, shares had dropped below $1 only a handful of times since early 2011, and were worth as much as $1.35 a few months earlier.
Schaft Creek is home to a substantial reserve: 940.8 million proven and probable tonnes grading 0.27% copper, 0.0176% molybdenum, 0.19 gram gold per tonne and 1.72 grams silver per tonne. Plans for the project envision an open-pit mine and conventional mill churning through 130,000 tonnes per day.
The reserve established to date would feed such a mine for 21 years. If Copper Fox can upgrade the additional 171.2 million tonnes of inferred resource within the deposit, which are classed as “waste,” the mine might last even longer.
But first the mine has to exist, which requires road access and connection to the power grid. The problem is that Schaft Creek lies 80 km south of the town of Telegraph Creek in northwest B.C. It is rugged and wet alpine terrain, with neither a road nor a power line passing within 80 km.
The closest road is Highway 37. There is another road that covers part of the distance from the highway towards the project, but it is incomplete because the project it was supposed to serve — another massive, but remote, copper-gold porphyry — was shelved after capital costs ballooned to more than $5 billion.
It is the road to Galore Creek. Joint partners NovaGold Resources (NG-T, NG-X) and Teck Resources (TCK-T, TCK-N) started building a mine at Galore Creek, but suspended the project when capital costs more than doubled. Now Copper Fox hopes to negotiate a deal to use what already exists of the Galore Creek road. Copper Fox would extend the road by 25 km, a stretch that includes one major bridge, so that it extends 65 km west from the highway. From there the road would split, with one branch envisioned for Galore Creek and a second 40 km extension reaching the rest of the way to Schaft Creek.
Power is also a challenge in developing Schaft Creek. BC Hydro is building the Northwest Transmission Line, a 344 km line that follows Highway 37 north from Terrace to Bob Quinn Lake. To power a mine at Schaft Creek, Copper Fox would have to build an 81 km power line from the Bob Quinn substation north along the highway, and west along the Galore-Schaft Creek road.
Electrical power is one thing, but mines also burn through a lot of fuel. To that, the Schaft Creek plan also includes a 105-km fuel pipeline from a depot at Highway 37 to the mine. And even with a road, the project is too remote to sensibly drive personnel to and from site, so the mine plan also incorporates an airport capable of receiving aircraft of up to 78 passengers.
Once a mine is built, the deposit itself is fairly straightforward. The waste-to-ore strip ratio averages 2 to 1 for the life of the operation. The porphyry ore enables recoveries of 86.6% for copper, 73% for gold, 48.3% for silver and 58.8% for moly.
A conventional ore-grinding and flotation circuit would produce a copper concentrate with gold and silver credits and a separate moly concentrate. Concentrates would be transported by truck, with the copper concentrate going to the port in the town of Stewart while the moly concentrate headed to Prince Rupert. Copper Fox has already inked a deal with Stewart Bulk Terminals for storing and shipping up to 600,000 tonnes of concentrate a year.
Schaft Creek would produce 4.9 billion lb. copper, 4.21 million oz. gold, 215 million lb. moly and 25.1 million oz. silver over its lifespan. The mine would produce a pound of copper for $2.09, or $1.15 including by-product credits.
Based on a copper price of US$3.25 per lb., gold at US$1,445 per oz., silver at US$27.74 per oz. and a moly price of US$14.64 per lb., the Schaft Creek operation would generate a 10.13% internal rate of return. At that rate, it would take 6.5 years to pay back the initial outlay of $3.2 billion. The project holds a net present value of $513 million, using an 8% discount rate.
Looking ahead, the feasibility plan includes a generous timeline to development that does not see mine construction get underway until 2016. The first 65,000-tonne-per-day mill would start commercial production in late 2019, and a second would follow within a year.
Copper Fox’s president and CEO Elmer Stewart says the timeline could be shortened, but there are a few good reasons to stretch it out for now. The first is that project economics will improve if Copper Fox can upgrade the deposit’s inferred resources to reserve status. Second, there remains considerable exploration potential at Schaft Creek, including extension of the main deposit to the east as well as additional zones to the north. Third, the study recommended additional metallurgical test work to improve metal recoveries, if possible.
But Copper Fox is not rushing to develop the project because development is not their goal — the company has always aimed to prep the deposit for development, and then sell it.
“Since 2000, every activity that we have done at Schaft Creek has been directed towards setting this project up for a sale,” Stewart said in a conference call. Later he explained that the design allows for an expansion to 180,000 tonnes per day, primarily because “it is financially advantageous to do that today rather than down the road, and as I mentioned, we wanted to do everything we could to attract the attention of a buyer.”
Stewart and his team will soon find out whether their efforts attracted Teck, which has an earn-back option on Schaft Creek. Copper Fox expects to deliver the feasibility study to Teck in mid-January, at which point Teck will have 120 days to decide what it wants to do. The major can elect to acquire a 20% stake by spending an amount equal to Copper Fox’s expenditures to date, a 40% stake by spending three times Copper Fox’s investment, or a 75% stake by spending four times the junior’s output. As of mid-2012, Copper Fox had spent $84.9 million on the project.
There is another twist to the Schaft Creek ownership tale. Copper Fox holds a 100% working interest in the site, but Liard Copper Mines holds a 30% carried net proceeds interest. The feasibility study means that Copper Fox owns Teck’s 78% stake in Liard, and adding in the 2% of Liard that Copper Fox bought on the open market, the company owns 80% Liard, which means it indirectly owns 80% of the junior’s 30% net proceeds interest.
Royal Gold also holds a 3.5% net profits interest in Schaft Creek.
Stewart and his team will push ahead with permitting, because with every permit they acquire for Schaft Creek, “the risk profile for the project drops considerably” — yet another way to make the megaproject attractive to potential buyers. Copper Fox hopes to submit its B.C. environmental assessment application and its federal environmental impact statement within the next nine months. The company is also seeking permission to build the access road.
When can one expect an update on a decision on the road access, electrical power line and a pipeline for fuel. It seems to me that this project, as it stands, is not moving forward. The above considerations, an airport/airstrip, if necessary, camp site accommodations or transportation to the nearest town all account for the slowdown.
Keeping this project and the Galore Creek mine as individual projects does not prevent pooling resources and energy towards the above, thereby reducing related costs for investors in each project. Maybe, both projects jointly need to find other investors, i.e., Stewart Bulk Terminals, the Town of Stewart, Prince George, Prince Rupert, the Province of British Columbia to make this happen. The surrounding communities all stand to gain from the development and operation of these two projects. By joining efforts and sharing the cost for the initial stages of preparation, it would make a feasability study much more appealing. It could drastically push up the discounted cash flow internal rate of return and improve the net present value, at the going discount rate. Other considerations may also be scrutinized to dress up that feasability study for both projects.
Have the required environmental studies been performed for the various components of the Project?