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Arizona is the largest copper producing state in the US, responsible for 68% of total national output in 2019. Many of the global base metal producers have significant operations in the state whether it be Freeport McMoRan (FCX), KGHM (KGH-W), Grupo Mexico, BHP Group (BHP), South 32 (S32-AX), or the likes of Hudbay (HBM), Capstone (CS-T), Ivanhoe Electric (IE-T) and Excelsior Mining (MIN-T). In conjunction with a strengthening copper price (currently at $4.09/lb, representing an increase of +7% YTD) much attention has been focused on newer copper projects boasting near ~$1.50/lb C1 costs and having a much cleaner environmental footprint seeing as the mining method is in-situ recovery (ISR). Given that the ISR mining method relies on underground injection and recovery wells, the energy needed to recover the ore is estimated to be 3x lower when compared to a conventional open-pit mine, when measured on a kWh/lb of copper recovered. Moreover, the fresh water usage is estimated to be 10x-15x lower while the carbon emissions are estimated to be 4x-6x lower (when measured on a kg CO2/lb of copper recovered). Additionally, given the header house structure of the injection/recovery wells, much less environmental remediation is needed at end of LOM production, when compared to the massive environmental impact of open pit mining. There is a lot of ISR copper mining currently taking place or being developed in Arizona – one such company which we view as particularly attractive is Arizona Sonoran Mining (ASCU-T). Using a 0.85x NAV multiple we establish a C$3.80 price objective equating to 106% upside from the current level.
Arizona Sonoran wholly owns the Cactus Mine which is located approximately 10 miles south of Phoenix. Cactus encompasses the old Sacaton East and Sacaton West deposits, which were previously owned and operated by ASARCO, between 1974-1984. During operation, the Sacaton mine consisted of the pit, crushing facilities, stockpile a tailings storage facility and a 9,000 tpd flotation mill. During these years of production, copper flotation mill concentrate was sent by rail to the ASARCO smelter located in El Paso, Texas. Over that timeframe, 38M tonnes of ore was mined and processed with ~400M lbs of copper recovered, along with 27,000 ounces of gold and 759,000 ounces of silver. Arizona Sonoran’s plan to re-develop the Cactus project is underpinned by 1.60B lbs of contained copper in the Indicated category, along with 1.90B lbs in the Inferred category. Moreover, just a few years ago, the Parks/Slayer deposit was acquired, with the company adding 2.90B lbs of Inferred copper optionality located adjacent to Cactus.
Following a maiden resource estimate for Cactus and the publication of a consolidated PEA in 2021, the company IPOed on the Toronto Stock Exchange on November 2021 while raising C$45M (19.066M shares issued at an IPO price of C$2.45/share). Since then, additional Infill and exploration drilling programs have continued at both Cactus and Parks/Slayer, culminating with a maiden P/S resource announced on September 28, 2022. Moreover, there have also been some significant financing rounds. Most notably, a C$35M financing (with Rio Tinto (RIO) participation for 6.4M common shares) closed on May 16, 2022. On February 16, 2023 a C$30M financing was closed. RIO currently owns ~7.2% of the issued & outstanding share capital of ASCU while Tembo Capital owns 33.52M common shares representing ~32.3% of the issued and outstanding common shares of the company.
Going forward, the near term timeframe expects the completion of a Pre-Feasibility Study in early 2024, followed by a full Feasibility Study come Q4/2024. Pending a positive study, construction is expected to start in late 2024 (18-month build), followed by initial copper production in 2026.
Specifically, note that the Cactus project is situated at the intersection of Arizona’s three porphyry belts and is also proximal to a number of large scale regional copper mines and processing facilities. As highlighted in a 2021 PEA (Cactus only), the project is expected to produce an average of ~56M lbs of grade A copper cathode (22 ktpa) per year spread over an 18 year LOM. With average LOM C1 cost equating to ~$1.55/lb and given an estimated initial construction capex for the project pegged at ~$124M, the total capital intensity per $/lb of CuEq is lowest when compared to peers as per respective economic estimates:
With more drilling, we see the incorporation of Parks/Slayer as an eventuality. Recall that on March 27, 2023, additional drilling results from Parks/Slayer have continued to indicate grades and thicknesses supportive of an underground operation. Recent highlights have included 166.6m grading 1.14% CuT, 166.2m grading 1.09% CuT and 27.4m grading 2.31% CuT. Note that an additional 9 drill holes were announced for resource conversion (Inferred to indicated). Drilling from 45 drill holes is now complete, the assay results are expected to be incorporated into an upcoming PFS, targeted for early 2024.
We have a high degree of confidence with the company given an experienced management team. Arizona Sonoran is lead by the capable hands of CEO George Ogilvie, who most recently lead a turnaround at Battle North, tripling the resource base to 1.2M gold ounces and selling the asset to Evolution Mining. Previously, George Ogilvie had a successful tenure as CEO of Kirkland Lake Mining (improving operations at Macassa and acquiring St. Andrews Goldfields) and before that was CEO of Rambler Metals.
We forecast initial production commencing towards the end of 2026 with a meaningful ~50M lbs produced in FY/2027. Moreover we forecast an average of ~56M lbs produced over 18 year LOM with C1 costs averaging $1.60/lb and total costs averaging $2.10/lb. Note that we are currently basing the production schedule on Cactus intake alone, given the resource specifics as outlined in the PEA. We note that the LOM operation can be extended greatly if incorporating Parks/Slayer- as such we see the risk remaining on the upside as we eagerly await the publication of the PFS. Below are our current forecasts along with corresponding sensitivity tables to changes in both the LT copper price and interest rates.
Though not yet in our estimates, given the drilling to date, we see the full incorporation of Parks/Slayer as an eventuality. Recall that on March 27, 2023, additional drilling results from Parks/Slayer have continued to indicate grades and thicknesses supportive of an underground operation. Recent highlights have included 166.6m grading 1.14% CuT, 166.2m grading 1.09% CuT and 27.4m grading 2.31% CuT. Note that an additional 9 drill holes were announced for resource conversion (Inferred to indicated). Drilling from 45 drill holes is now complete, the assay results are expected to be incorporated into an upcoming PFS, targeted for early 2024.
Using our LT copper price target of $3.85/lb (note the PEA was using $3.35/lb), we calculate a NAV8% of $4.47 per share, representing a current P/NAV valuation of 0.41x. Applying a 0.85x NAV multiple, our price objective is anchored to C$3.80 per share (rounded), equating to upside of 106% from the current level. The NAV multiple risk remains on the upside as the project progresses through the de-risking process on the road to a firm construction decision and eventual construction.