Bottom-Fish Comment - December 19, 2008: Lack of cash forces Copper Fox to suspend feasibility work on Shaft Creek
When I talked to Gui Salazar last September at the Las Vegas Hard Assets show I discovered that there might be a solution to the problem of what happens if Copper Fox Metals Inc submits a feasibility study to Teck Cominco before the deadline December 31, 2011. The problem, which Salazar with some irritation concedes I have been hung up about since day one, was that the terms of the agreement Salazar had struck with Teck during the pit of the bear market at the start of the decade allowed Teck Cominco to back into the Shaft Creek copper project upon submission of a positive bankable feasibility study by electing within 120 days to spend 4 times Copper Fox's expenditures and arrange production financing, but without any deadline for spending the money or putting the deposit into production. This problem has troubled me for a long time because it allowed Teck Cominco to recover nominal control of Shaft Creek for nothing. The major could inventory the project, leaving Copper Fox with no near term exit strategy other than a capitulation deal from Copper Fox that restores 100% to Teck Cominco at minimal cost. Salazar's legal team, however, had studied the agreement and concluded that if the feasibility study was bankable and positive, Teck Cominco would have only 4 years to put Shaft Creek into production if it elected to back in for 75%. Importantly, the feasibility study had to be written by an independent engineering firm, and more importantly, an independent engineering firm was entitled to use 3 year trailing averages for the metal prices in its base case. This surprised me, because I was under the impression that no numbers where allowable for feasibility studies other than worst case scenarios, which included ignoring recent history if it was favorable. On September 15, 2008 Copper Fox released a prefeasibility study by Samuel Engineering Inc of Denver which envisioned a 23 year 100,000 tpd open pit mining operation for Shaft Creek that would generate an 18.6% internal rate of return and which had a pre-tax net present value of $2.76 billion discounted at 8%. These robust numbers, however, were based on the 3 year trailing avarege prices of $3.12/lb copper, $33/lb molybdenum, $693 /oz gold and $13.09/oz silver. Since then copper has collapsed below $1.30 per lb and molybdenum below $10/lb, and, while in the long run higher prices will prevail, the 3 year trailing average will probably not be very impressive when Copper Fox is in a position to complete and submit a feasibility study some time during the next 2 years. To be blunt, Copper Fox is an outright victim of the Midnight Massacre Don Coxe alleges that Henry Paulson unleashed on the commodity sector on July 13, 2008 in order to protect his toxin manufacturing buddies on Wall Street from the incineration they deserved. So the risk now exists that when Copper Fox does submit a feasibility study to Teck Cominco, it will not be positive and bankable to the extent that Teck Cominco has to put Shaft Creek into production within 4 years of electing to claw back a 75% interest, reducing Copper Fox to 23.3%, but at least giving the junior a hard asset with an exit strategy. Thanks to the market crash Copper Fox is now in a difficult financial position. Back in September the company had about $4 million working capital left and was engaged in a major geotechnical drilling program which Salazar expected to consume the rest of the money by the end of the year. On November 7 Copper Fox announced a private placement of 25 million units at $0.12 with an undisclosed "related party". On December 16 Copper Fox announced that the financing had been cancelled, presumably at the related party's choice based on management's comment that the company was "investigating the situation with its legal counsel". On December 18 long time backer David Mullen, owner of various industrial businesses including a drilling company, resigned from the board. Management is not discussing the issue, but it is clear that there has been a significant falling out between management and a key financial supporter. Copper Fox has shut down all operations, including metallurgical studies aimed at boosting flotation recoveries above 88.4% for copper, 71.3% for molybdenum, and 81.3% for gold. Copper Fox has invested about $35 million in Shaft Creek, and estimates that it would need to spend another $5-$10 million to deliver a full feasibility study. Teck Cominco itself has run into serious problems and is probably not in a mood to grant any concessions to Copper Fox which would allow the junior to claim title to an active project. Novagold Resources Inc, which traded as low as $0.53 on December 5, recently announced that it would not meet a $1.8 million cash call from Teck Cominco for its Galore Creek project in northwestern British Columbia not far from Shaft Creek. The stock has since traded as high as $3.05 even while Novagold renegotiated the terms of a $20 million bridge loan due December 29, 2008 from a $12 per share conversion price to a new one of $1.53 which gives the New Jersey based merchant bank Auramet Trading LLC the ability to recover its capital by converting and tendering its position to any reasonable bidder. The most plausible explanation for the market runup is speculation that Barrick Gold will make a takeover bid for the financially strapped Novagold to wrap up control of Donlin Creek. Such a bid would be a far cry from the US $16 per share Barrick offered in mid 2006 which Novagold vociferously rejected before handing half of Galore Creek to Teck Cominco which literally studied both the deposit and Novagold to death. Novagold's decision in late November not to make a Galore Creek cash call in order to make a Donlin Creek cash call will dilute its stake in Galore Creek below 50% to 48.9%, which might be construed as a poison pill to ward off a bid from Barrick whom one might assume would want to be on a equal footing with Teck Cominco on Galore Creek. But I suspect Barrick would probably prefer to let Teck Cominco impale itself on its own upon Galore Creek, which might be good news in the long run for Copper Fox and its lower grade but better located Shaft Creek copper-gold deposit. My immediate concern, however, is the bottom-fish buy recommendation at $0.20-$0.29 that has been open since April 15, 2005. Although Copper Fox is out of money and suffering a management split, the stock has not yet suffered a washout from tax loss selling. I don't see a quick solution to the Teck Cominco back-in problem, nor any reason in the short term for the stock to attract at higher prices the $5 million or so the company needs to complete its feasibility study. So I am closing out the Copper Fox bottom-fish buy recommendation at $0.065 for a 78% loss from the bottom-fish buy limit, while keeping the company on watch to see if it can emerge with ownership terms that give it permanent control over the direction of Shaft Creek, a development which would justify treating Copper Fox as a world class call on future copper prices.