Rob McEwen says newly minted McEwen Copper will provide shareholders with exceptional copper price leverage

With the copper price trending in record territory after nearly doubling over the past 12 months, mining veteran and industry luminary Rob McEwen tells The Northern Miner the time had finally come to unlock the inherent value of its large-scale, advanced Los Azules copper project in Argentina.

McEwen Mining (TSX: MUX; NYSE: MUX) announced this week it would spin out the Los Azules copper project in San Juan, Argentina, and the Elder Creek exploration property in Nevada into newly created McEwen Copper, subject to a 1.25% net smelter return royalty on both assets payable to McEwen Mining.

McEwen Copper will, in turn, raise US$80 million through a private placement and become a public company within 12 months of its closing.

McEwen says the asset has been in the McEwen Mining fold for longer than the namesake gold business has carried his name. The broad resource bear market of the past decade did not help spur investment in new copper development projects. Thus, management has been weighing several options ranging from an outright sale, a joint venture partnership with a deep-pocketed mid-tier or major or developing the asset itself.

“With copper running up over US$4.00 per lb., Los Azules starts to take on a new life,” says McEwen. “It is very sensitive to the price of copper.”

McEwen explains that in the current copper price environment, the net present value of the project, as calculated in a 2017 preliminary economic assessment using US$3 per lb., goes from just about US$2.2 billion to over US$5 billion. And that’s using an 8% discount on the property.

“So, we said okay, copper is hot, and we’re not getting value in McEwen Mining for the project. I think it was largely because the operations of our gold mines were not performing very well for the last two years. And that overshadowed our exploration success on our other properties and the value of Los Azules,” he says.

McEwen Mining has about half a billion shares outstanding, at about US$2.00 each. Suppose one looks at the NPV for Los Azules post a production decision (eight to ten years into the future). In that case, hypothetically, the NPV becomes US$5 billion, translating to $10.00 a share, according to McEwen.

The Los Azules copper resource contains 10.2 billion pounds copper in the indicated category, in 962 million tonnes grading 0.48% copper, and 19.3 billion pounds inferred in 2.67 billion tonnes grading 0.33%. It also hosts substantial gold and silver by-product.

The preliminary economic assessment pegged pre-production development costs at US$2.6 billion.

According to the PEA, Los Azules will have a 36-year mine life, with the first 13 years scheduled to produce 115 million lb. per annum at the cost of US$1.14 per lb.

“Since I’ve always been in the gold industry, I look at it, and I’ll say, well, let’s convert this to a gold equivalent. What does that look like? I mean, that’s better than a 70-million-oz. gold deposit, producing just under about a million ounces of gold a year, at the cost of under US$500 per oz.,” says McEwen.

“At a copper price of US$4.20 per lb., at those production rates, you’re talking US$1.7 billion a year in revenue. And two-thirds of that is your gross profit margin,” says McEwen.

“I’ll have just over US$200 million invested in this company. And I’m looking for what I believe is the best way to increase its value. And it’s not too dissimilar to what I looked at when I was building Goldcorp.”

McEwen says management is acutely aware of the enormous amounts of dilution a self-development strategy would entail, despite there not being many large copper deposits in the hands of a junior company.

“So, the market seems to prefer a pure copper play or a pure precious metal play, but not an amalgam in a small, precious metal company,” says McEwen. “I think McEwen Copper will compare very favourably to a lot of the public vehicles that are out there, and with single asset development stories.”

McEwen says McEwen Copper essentially has two shots at making it big, given the two projects in its stable. Still, it’s fair to consider the company a single asset concern for all purposes, given the large size and development-stage differences between the two assets.

McEwen says there is a strong analogue between how he initially built Goldcorp, based on a single asset, and the prospects ahead of McEwen Copper.

“This is a rare creature. I happen to believe we’re at an early stage of a copper bull market, looking at the continuing growth of Southeast Asia with the electrification of transportation and renewable energies. And the deficit that’s looming in the copper production supply chain.

“We are now better positioned to add value to Los Azules once more, move it further up the value curve by de-risking it. I got the ball rolling by putting up US$40 million in the hopes of attracting another US$40 million to move the project forward to a pre-feasibility study in the next three years. That’s how we will unlock the most value for owners,” says McEwen.

The first step for McEwen Copper in the value creation process is to prepare a pre-feasibility study, followed by a bankable feasibility study. “Probably by the time we reach that, we will have had discussions with a senior producer and say: ‘You have the expertise, you have funding and a desire to run a large copper project. We’d be happy to cut a deal with you and continue with an interest in the property and go forward from there’.”

Upon creating the copper-focused subsidiary, a private placement has been arranged for up to eight million common shares of McEwen Copper priced at $10.00 each. McEwen Copper currently has 17.5 million common shares outstanding.

McEwen has committed to a lead order to purchase 50% of the offering. His investment corporation, Evanachan Ltd., would buy four million shares and is prepared to close on this portion of the offering immediately.

Subscription for the remaining four million shares is available to qualified accredited investors, subject to a $2 million minimum investment and certain other conditions.

Assuming completion of the total amount of the offering, McEwen Mining would become the controlling shareholder and own 68.6% of McEwen Copper. The new investors, including Rob McEwen, would own 31.4%.

The offering proceeds will be used exclusively by McEwen Copper to advance the Los Azules project to a pre-feasibility study and a bankable feasibility after that.

Proceeds will also be allocated for the construction of a new year-round access road to the project, exploration drilling at both Los Azules and Elder Creek, environmental permitting and community relations, as well as general corporate purposes.

McEwen Mining has transformed over the past 12 months.

A year ago, it was in a much different financial position than today. McEwen Mining was not delivering on its production guidance. It had a going concern qualification given by its auditors. Its revenue had dropped substantially because the company wasn’t making guidance.

“So, we were getting close to breaching our debt covenants. We had debt coming due this August. Not that we had a lot of debt, but it forced us to go out and do a couple of I’ll call inopportune financings, or at least I didn’t like the price.

“And so today, the debts have been extended by two years to August of 2023. There’s no going concern qualification on our financials. Today we’re nowhere near breaching or risking a breach of our debt covenants. Our treasury is growing because of the improved copper and silver prices. We’re exceeding guidance by a small margin. And we’ve come up with some feasibilities on some of our other properties that have advanced further. These are no longer overshadowing our exploration success,” says McEwen.

McEwen suggested McEwen Mining was also looking at formalizing the silver-focused assets in its portfolio.

“We have sort of a silver company within McEwen Mining. If you take the silver component out of our 49% Argentinian joint venture at the San José mine and include it with El Gallo, in Mexico, there are about 5.6 million silver-equivalent ounces, and the two phases of development for the Phoenix project (El Gallo’s redevelopment) you could get up to close to 10 million ounces of silver equivalent per annum.

“So, we’ve been looking to execute a possible joint venture of that, just to rationalize some of our operations more,” says McEwen.