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Copper Fox Metals: Arizona ISR with Large Scale BC Porphyry Optionality

DISCLAIMER: Any written content contained herein should be viewed strictly as observation, analysis & opinion and not in any way as investment advice. No compensation was received for this report. Visitors to this site are encouraged to conduct their own due diligence.

Copper Fox Metals (CUU) is a Canadian based copper developer/explorer with an asset base located exclusively in known copper districts in North America. The two key assets include the wholly-owned Van Dyke ISR copper project located in Arizona along with the Schaft Creek JV (25% CUU, 75% TECK) which hosts a multi-billion lb copper resource project located in northern British Columbia. Both of these assets have been shown to illustrate strong economics via PEA Technical Reports. Playing the energy transition theme coupled with our optimistic view on the soft landing thesis and overall resiliency of the world economy, copper remains as one of our favored base metals. Moreover, we remain focused on the North American projects and are somewhat biased towards developments in the ISR field. That said, while the assets and development profile from the Copper Fox portfolio look enticing as is – the current 0.07x NAV multiple makes things that much more compelling. Using a $4.35/lb LT copper price (+15% from the current spot), we currently value the Van Dyke Project at an after-tax NPV8% of C$2.38 per share. Factoring in all other mining assets and adjusting for current financials, we target a 0.2x NAV multiple for Copper Fox shares, equating to upside of +190% from the most recent close. With Copper Fox, we see an enviable portfolio spanning safe north American jurisdictions and varied in terms of deposit type (in-situ recovery and large scale copper porphyry). Given a catalyst heavy 18 months ahead, we feel that shares currently trade at an unjustifiably discounted entry point. Moreover, we feel that exposure to Copper Fox offers not only compelling upside to continued project development and de-risking but also as a serves as a leveraged proxy to any potential copper pricing upside.

As part of our long standing investment thesis, we remain bullish on copper given structural catalysts which will remain market prevalent for years to come, thus exacerbating a coming copper supply crunch. Backstopped by over $1.30T in infrastructure spending (in the United States alone), themes such as the green transition, infrastructure investment and electrification will remain as massive drivers for years to come, driving copper prices higher. Though the coming supply crunch will somewhat be filled by scrap and substitution, the largest supply response will come via increased production from new projects, incentivized by higher prices. We prefer to position ourselves in the jurisdictions which are both amenable to mining and which also have a historic track record of production. Simply put, we favor jurisdictions in the Americas while having a particular bias towards U.S. production. Why so ? Though Chile leads the world in terms of current production (23.8% of global output) and potential for future production (projects - 26.3%), the U.S ranks #4 in terms of current global production (5.5%) but jumps to #2 in terms of potential production when looking at all potential projects (12.2%).

Additionally, we maintain an upward bias towards new-age, low-capex production projects which have minimal environmental footprint - case in point In-Situ Recovery (ISR) operations. Surrounded by numerous large-scale copper porphyry projects (among others - Pinto Valley, Carlota and Miami), ISR copper projects are predominantly found in Arizona. Some of the more notable projects include Taseko Mines' (TGB) Florence Project, Arizona Sonoran's (ASCU) Cactus Project and Excelsior Mining's (MIN) Gunnison Project. Often missed in this small peer group is Copper Fox's Van Dyke ISR Project which deserves much more consideration.

Using a production techniques which involves a series of spaced-out wells encompassing both injection wells and corresponding recovery wells, surface disruption is almost minimal while almost the entirety of the solution used in recycled back to clean water. Though the annual production profile for a typical ISR project is on a much smaller scale than more traditional large-scale open pit mines, the much lower capex has proven itself as the various ISR projects have demonstrated strong estimated economics. We stress that ISR projects such as Van Dyke, Florence and Cactus have PEAs/PFS' which boast after-tax IRRs above 30%. Compared to conventional copper mining peers located throughout the Americas (projects yet do be developed) the ISR peer group can be seen in the top-left quadrant in the graph below which depicts average annual production vs estimated after-tax IRR%:

Lastly, we highlight that earlier in August the U.S. Department of Energy (DoE) officially added copper to its list of critical raw materials in a historic move which highlights the importance of the energy transition. This move follows that of the EU, China, India, Japan and Canada who also previously added copper to their domestically defined list of critical materials. In the U.S., being defined as a critical material speaks to the eligibility for government subsidies under the Inflation Reduction Act (IRA). Along with copper, the list includes lithium, cobalt, nickel and a multitude of much more exotic rare metals.

Van Dyke - As highlighted above, Copper Fox's flagship asset, Van Dyke is located in Arizona's Globe-Miami mining district. The history of the project dates back to 1916 as Van Dyke Copper Company. Specifically, the project is located in Gila County, approximately 110km east of Phoenix. Covering an area of 532 hectares, the project consists of 26 patented parcels of mineral estate lands and 35 unpatented lode mining claims. Following several stop/go iterations with development work orchestrated by Occidental, Kocide Chemical and Bell Copper Corp., Copper Fox became exclusively involved with the project after signing a purchase agreement with Bell in July 2012. A PEA was completed in 2015, conclusions were that Van Dyke is a technically sound ISR copper project. Using conventional SX-EW recovery methods and a $ copper price, an 11-year LOM project was envisioned with project amounting to 60M lbs annually for year 1-6, then declining thereafter. Since the first PEA, additional drilling coupled with re-assaying and re-assessing the metallurgy led to an updated mineral resource estimate (MRE), with an effective date of January 9, 2020.

On back of the updated MRE, a revised PEA was issued in January 2021. A 17-year LOM project was envisioned (previously 11 years) averaging nearly 80M lbs of copper production (AISC $1.14 per lb) annually. Assuming a $3.15/lb LT copper price and given an estimated capex of $290.5M, the 2020 PEA estimated an after-tax NPV8% was estimated at $645M with an after-tax IRR of 43.4%. This was a marked improvement form the previous 2015 PEA conducted with a LT copper price of $3.00/lb and estimating an after-tax NPV8% of $150M and an after-tax IRR of 27.9%. A key difference from the 2015 PEA was that a more cost-effective ISR wellfield has been envisioned from underground development, rather than from surface. The proposed access to the mineralized zone contemplates an access ramp from surface to the mineralized zone. Nearly 6,000m of underground development (contracted conventional drill and blast tunneling techniques) is estimated for over LOM. As per recoveries, the more recent PEA suggest 76%. Leaching is carried out using a weak (5.0g/liter) solution of sulphuric acid over a five-year period. Acid consumption is estimated to be approximately 1.5lb acid/lb copper produced based on recent testing and historical leach test results. Ultimately, the PEA recommended the project to advance to the Pre-Feasibility (PFS) stage. As such, drill hole rehabilitation, sampling and testing activities have been undertaken. Specifically, located within Phase 1 of the mine plan, leach panels 1-5 have been selected for mineralogical composition, bottle roll tests, and both whole rock and trace element geochemical analyses.

As per our estimates, we model a 17-year LOM averaging 64.7M lbs of copper annually (with a steady state of just under 85.0M per year between 2028-2038). Over LOM, we see the C1$ cash cost averaging $1.09/lb with the AISC averaging $1.27/lb.

As part of the 2023 program, work has concentrated on mineral solubility and geotechnical studies in order to better understand the solution chemistry and mineral changes resulting from the leaching process and data to determine the amount of ground support required (if at all needed) for the proposed underground development. Once completed, a multi-purpose drill hole program will commence to increase the number of hydrogeological monitoring sites and expand/upgrade the resource. This would then be followed up with additional metallurgical and geotechnical studies. Ultimately, a full Pre-Feasibility Study (PFS) is expected in early 2025.

Schaft Creek - Located in Tahltan Territory in northwestern British Columbia, the Schaft Creek project covers 56,180 hectares of mineral concessions near existing seaport, transportation and clean hydroelectric energy infrastructure. The project is managed through the Schaft Creek Joint Venture (SCJV – formed in 2013) between Teck Resources Limited (75%) and Copper Fox (25%), with Teck acting as operator. The resource itself is one of the larger polymetallic deposits in British Columbia with significant amounts of copper-gold-silver-molybdenum as highlighted in a 2021 NI43-101 Technical report.

Using metal prices of Cu US$3.25/lb, Au US$1,500/oz, Mo US$10/lb, Ag US$20/oz, a September 2021 PEA highlighted production of 5.0B lbs of copper, 3.70M ounces of gold, 16.40M ounces of silver and 226.0M lbs of moly over a 21-year LOM. That said, the after-tax NPV8% was seen at $842.1M with the after-tax IRR at 12.9%. This is a large scale project which would necessitate an owner/operator such as Teck Resources, given the estimated $2.65B initial capital cost. As such, the Copper Fox strategy for it’s 25% ownership stake is realistically to continue with development work and de-risking efforts. The SCJV agreement provides that Teck and Copper Fox are each responsible for their pro-rata share of project costs except that Teck is solely responsible for the first $60M in pre-production costs. Afterwards, there will be an additional $20M payment to Copper Fox based on certain milestones - an initial $20M was already received on execution of the SCJVA. The financing conditions between both parties have been further defined based on contingent milestones and outcomes. Ultimately the arrangement with Teck mitigatres Copper Fox's risk. Given that the limits of the deposit have yet to be defined, an aggressive drilling program will continue to test the extent of what already considered a large porphyry style copper deposit. Recall that the FY/2023 program consisted of a budget for C$17.2M encompassing a 9,000m geotechnical and metallurgical drill program. Results from metallurgical work will be expected in 1H/2024. The company will ultimately monetize it's minority interest in due time.

Other Assets:

Eaglehead - Located in BC’s Liard Mining district, the wholly-owned Eaglehead project, is an advanced exploration polymetallic project encompassing 16,492 hectares. The project hosts four open-ended porphyry copper deposits. Exploration completed prior to 2023 include 126 diamond drill holes (36,605 m), preliminary metallurgical testwork, airborne and ground geophysical surveys, soil, stream sediment and water quality geochemical surveys and prospecting and mapping. An updated NI-43-101 compliant resource was announced on August 30, 2023. Using a base case C$5.50/tonne NSR cutoff, the pit-constrained resource was as follows:

Mineral Mountain - Located in the Mineral Mountain Mining District, 20 miles east of Florence, Arizona, the wholly-owned Mineral Mountain project lies within a 200km long northeast trending zone of porphyry copper deposits. The project is located between the Florence copper deposit to the west and the Resolution copper deposit to the east. During 2023, whole rock geochemical and petrographic studies have indicated a suite of Sericite-Chlorite and Potassic altered granodioritic and quartz monzonite rocks consistent with porphyry copper deposits in Arizona. Targets are currently being identified in order to better inform the drill selection process. Exploration completed prior to 2023 include mapping, prospecting, sampling, ground and airborne geophysical surveys, petrographic and age dating studies.

Sombrero Butte - The wholly-owned Sombrero Butte project is located in the Bunker Hill Mining district, 44 miles northeast of Tucson, Arizona. In 2022, Copper Fox completed a combined high sensitivity, airborne magnetic and radiometric survey to better define the location and depth of late stage felsic intrusives related to a buried porphyry system. The 2022 survey identified several NNW trending interpreted regional scale fault systems. The Sombrero Butte project hosts a Laramide age porphyry copper system located approximately 3km south of the Copper Creek porphyry copper deposit (355.1Mtonnes grading 0.50% copper (3.90B lbs), 0.008% molybdenum and 1.3 ppm silver.

Valuation - In a best case scenario contingent on financing post a Q1/2025 positive PFS for Van Dyke, we see ISR production commencing in 2027 and reaching a steady state of just under 85.0M per year between 2028-2038. Given our cost assumptions (outlined above) over 17 year LOM and using a LT 4.35/lb copper price, our after-tax NPV8% for Van Dyke equates to C$2.38 per share. For Schaft Creek, owing to the fact that Teck Resources is the 75% owner and project operator, we use a pro-rata valuation based on ownership and 2021 PEA after-tax NPV8%. We give minimal valuation (C$15M) for Eaglehead, Sombrero Butte and Mineral Mountain, acknowledging that the market currently ascribes nearly zero value to these high potential yet currently peripheral assets. Adjusting for financials, we see that given the most recent market close, Copper Fox is trading at a 0.07x discount to NAV. This steep discount is not atypical for exploration/development juniors however we see an overly steep (and unwarranted) disconnect due to asset quality and development plans coupled with the very under-owned nature of the company itself. Given the most recent close, our 12-month target is predicated on a 0.2x NAV multiple which equates to 190% upside. The project specific sensitivities (in C$) and NAV values are below:

Since last December, we've seen the close of several large-scale M&A copper transactions, most notably highlighted by Rio Tinto/Turquoise Hill and BHP/OZ Minerals. We expect more transactions to come. Further consolidation will likely be the route for additional value creation as an increasing copper price ($4.00/lb+) will shift the focus to smaller companies within the exploration/development phase. Quality shovel ready projects (let alone large scale deposits) are becoming scarce and difficult to find and/or build. Though currently very under-owned, we would expect the Copper Fox portfolio to garner increasing amounts of attention going forward.


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