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Last week the Arizona Sonoran Copper Company (ASCU) released its much anticipated Cactus Pre-Feasibility Study (PFS). The comprehensive PFS highlighted a potential top-10 copper project located in the USA producing LMA Grade A copper cathode onsite via heap leach and a solvent extraction/electrowinning (SXSW) plant. Though certain marked improvements since the 2021 Preliminary Economic Assessment (PEA) - higher LOM, throughput and a nearly doubling of average annual production, due to corresponding cost escalation, the underlying economics have been somewhat underwhelming. In reaction to the PFS release, the negative market reception was somewhat justified in our view, however well overdone. Using the PFS metrics as a benchmark, we have updated our model and establish a 0.50x NAV8% derived C$2.80 per share (rounded) 12-month price objective. This equates to upside of +140% from the most recent close. ASCU shares currently trade at a 0.21x discount to NAV multiple, compared to development peers trading nearer to the 0.50x-0.60x level.
Incorporating a massive resource increase as announced last October (note here), the Cactus project is per PFS now envisioned to have a 21 year LOM with average annual production of 55,000 tons or 110M lbs of copper on an annual basis. Given expected recoveries between 85%-92% over full LOM, 1.15M tons or 2.31B lbs of Grade A copper cathode is expected to be recovered via heap leach facility and SXEW plant. The average C1 and AISC over LOM was estimated to be $1.84/lb and $2.34/lb respectively. Note that given the large annual production increase relative to the PEA, the initial construction capex has also increased markedly, going from $124M in the PEA to the current $515M in the PFS. Moreover, note that the average opex over LOM also increased from the PEA's $9.06/t to the current estimate of $10.34/t. The highlight PEA / PFS changes are below:
Of specific note is that the LT copper price used in the PEA was $3.35/lb whereas the PFS uses a $3.90 LT price forecast. As such, given the estimated cost inflation over LOM, the corresponding NAVs and IRRs decline between the two studies, despite a near doubling of production output over LOM. We do highlight that there are multiple future opportunities for further project improvement stemming from continued drilling of the Inferred resource which would thus bring it into the mine plan. Additionally, a maiden resource at MainSpring may serve to be a potential open-pit which can conceivably provide for operating flexibility and lead to lower cost access to the Parks/Salyer deposit. MainSpring would very likely improve the economics at Cactus. We also stress that further upside can be gained via Nuton LLC's leaching technology for sulphide optionality which is currently also excluded from the main mine plan. Future key dates are envisioned as follows:
As seen above, the near term drivers are many. Highlighted by a PFS including MainSpring in Q3/2024 and an expected DFS in 2025, project financing is expected to commence then, once a construction decision is taken. On-going drilling at MainSpring will remain a focus this year. Recall that assay highlights such as 159m grading 1.78% CuT and 244m grading 1.01% cuT were drilled in late 2023. Since 2019, the company drilled 141 new holes at the Cactus West and East deposits in order to support verification, metallurgical testing, and resource extension for the Cactus mineral resource estimate. The Parks/Salyer resource database is composed primarily of 74 new holes drilled by ASCU between late 2020 and 2023.
With only eight USA based copper projects slated to begin production by the end of 2026, Arizona Sonoran has the potential to become among the top-10 domestic producers (let alone one of very few ISR copper projects located in Arizona). As per the various development stage projects located in the Americas, the comparisons are as follows:
Using the PFS specifics as a benchmark, we somewhat more conservatively envision a 21-year LOM operation with C1 and AISC costs averaging $2.07/lb and $2.65/lb respectively. Production is likely to begin with material from stockpile and from Cactus West, followed by intake from Parks/Salyer and finally Cactus East.
Though a construction decision is expected sometime in 2025 (and then followed by a project finance decision), we expect some smaller-scale financing (in the magnitude of ~$40M-$50M) later this year. Our NAV8% valuation methodology is underpinned by a $4.35/lb LT copper price. The Cactus Project corresponding sensitivities are below:
Using the PFS metrics as a benchmark, we have update our model and establish a 0.50x NAV8% derived C$2.80 per share (rounded) 12-month price objective. This equates to upside of +140% from the most recent close. ASCU shares currently trade at a 0.21x discount to NAV multiple, compared to development peers in the Americas trading nearer to the 0.50x level.