Western Copper and Gold (WRN.TO) is a buy. WRN’s 100% owned Casino Project is close to a sure bet to be acquired at a hefty premium to the current share price within the next 12 – 18 months.
Sunday, September 18, 2022
The Casino Project is the 5th largest copper project not controlled by a major mining company. It is in Canada’s Yukon Territory, a stable, mining friendly jurisdiction, and is at an advanced stage of development. Rio Tinto owns approximately 8% of the company and is conducting advanced due diligence with an eye towards a potential acquisition.
The global economy needs to build many more projects like Casino to electrify the power grid.
Fifth largest Undeveloped Copper Project Not Owned by a Major
The Casino Project has a resource of 10.7 billion pounds of copper (of which 7.6b is measured and indicated). It also has 21.1 million ounces of gold (14.8M in the M&I category).
46% of its resource is copper, 34% gold and 4% silver and 17% molybdenum.
Massive Demand for Copper
Copper is a key metal to electrify the power grid.
The long-term prospects of copper are strong. There simply is not enough copper being produced for the global economy to meaningfully decrease its reliance on fossil fuels.
The global economy needs over 100 new mines the size of the Casino Project to be constructed.
It is projected that more than 700 million tons of copper will need to be produced over the next 22 years to maintain 3.5% GDP growth, without even accounting for the electrification of the global economy. Robert Friedland said that projected copper demand equals all the copper that has ever been mined in human history.
Global copper supplies are low.
Deficits are projected due to chronic underinvestment in the mining industry. BMO Capital has projected a 9-million-ton copper deficit by 2030.
It is projected that annual copper supply will need to increase by 12 million tons per year for the next ten years just to meet expected demand.
(Electric vehicles use approximately 109 kilograms of copper, while ICE and hybrid vehicles use 20 and 40 kg, respectively. In 2040, Friedland projects that electric vehicles alone will require 3.7 million tons of copper per year.)
The price of copper is down around 33% since its red hot high of $4.95/lb while the US Federal Reserve is aggressively raising rates. When the Fed pivots - and it will, its just a matter of time - the price of copper should rebound into the $4.50/lb range.
Robust Economics at an Advanced Stage of Development
In June 2022, WRN published its Feasibility Study with an after-tax NPV of $2.33 Billion CAD at US $3.60/lb copper and $1,700/oz gold. This equals a solid 18.1% internal rate of return, with approximately $10 Billion CAD in life of mine after-tax cash flow.
Photograph of the Casino Project, by C. Archbould
Once it is built, Casino will generate after tax cash flow of $950M CAD for the first four years and over $500M for the life of the mine. While its initial capital expenditure is significant ($3.6 Billion CAD), Casino would earn back this amount in 3 years. This is remarkable for such a large project.
The Feasibility Study is based on a 27-year mine life, but there are significant resources that are not included in the FS, as well as exploration potential. The Casino Project should generate cashflow for its eventual owner for a long time.
The company has $38M CAD in cash, which should last it for two to three years.
It has no need to do further drilling. WRN has now turned its sights to permitting and has sufficient cash to significantly advance the permitting process.
The Canadian federal and provincial government has committed to spend C$130 million to build a road from Carmacks to the Casino Project after reaching an agreement with First Nations stakeholders. Construction on the road has already begun.
The road is not only important for Casino. It could also provide access to Newmont’s fully-permitted Coffee Project, which boasts reserves and resources of approximately 5M ounces of gold.
A buy-out on the horizon?
A buy-out could be on the horizon. For the moment Rio Tinto looks like the likely buyer.
In May 2021, Rio Tinto made a strategic investment of C$25.6 million in WRN. The investment included 8% of the shares outstanding and an agreement of a scope of work to be performed in partnership between Rio and WRN over 18 months.
The agreement has enabled Rio to do advanced due diligence on the project to study the technical, regulatory and community aspects of the Casino Project. As part of the agreement, Rio has appointed a member to the project’s technical committee, has a non-voting observer at WRN board meeting and has 3 employees seconded to Western Copper and Gold. At the end of the 18-month period, all rights are extinguished, but Rio has the right to extend the agreement for one further year.
The agreement concludes at the end of November 2022
Rio Tinto therefore has a choice to make: (1) walk away from the Casino Project; (2) acquire the project or propose a joint venture with WRN; or (3) extend the agreement for a further year to study further.
During the last 18 months, Rio Tinto has extensively studied the project, completed metallurgical and geotechnical/confirmatory drilling, and done soil sampling and exploration drilling. Further metallurgical studies, community engagement initiatives and regulatory reviews are ongoing.
Rio could walk away from its investment and the time it has spent studying the project, but there is presently no indication that it will do so. WRN management is in regular weekly meetings with Rio and has received positive feedback on the project.
It is therefore quite possible that Rio Tinto will exercise its right to extend the agreement for another 12 months. However, now would seem to be a great time to acquire the Casino Project. WRN has a market cap of 260M CAD, with 151M shares outstanding. The market capitalization is down nearly 40% from its high of C$ 430M in April 2022.
Rio Tinto also could bid to acquire WRN for C$375 million (or around $2.50/sh). This would represent a 50% premium to its current price, but would still be significantly lower than the highest price for WRN shares in 2022.
Rio has close to 14B in cash and issued an interim dividend of US $4.3 billion at the end of June 2022.
By acting sooner rather than later, Rio Tinto acquires a top 5 undeveloped copper project for essentially table scraps.
Alternatively, it could wait but face the risk that the mining sector and the WRN share price recovers.
If Rio Tinto walks away, WRN has signed confidentiality agreements with other parties and it is also possible that Newmont renews its interest in Casino, given its proximity to the Coffee Project.
To be clear, WRN is not a ten bagger, and we think it is likely that some new shareholders won’t be ecstatic with the final buyout price unless management increases the competitive tension among interested parties or the copper price appreciates considerably. However, a 50% return in 12 – 18 months seems well within reach.
SGL believes that WRN can be bought around current prices (possibly with a stop loss immediately under the recent low of $1.56).
Disclaimer: SGL does not provide investment advice and is not a registered investment advisor. Always do your own due diligence before making an investment. Investing in securities, especially junior miners, can be risky and never invest money you cannot afford to lose. SGL cannot guarantee the accuracy of the information in this post. SGL has attempted to present the information fairly, but it may own shares of WRN.TO so bias cannot be excluded. SGL may buy or sell shares at any time.
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