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 Sun Feb 26, 2006
Excerpt: Bottom-Fish Action Report - Copper Fox
    Publisher: Kaiser Research Online
    Author: Copyright 2006 John A Kaiser

 Excerpt from Bottom-Fish Action Report Week of Feb 11-18, 2006

Copper Fox signs up new marketing team
A medium priority bottom-fish buy in the $0.20-$0.29 range came alive on February 10 when Lawrence Roultson initiated coverage of Copper Fox Metals Inc (CUU-V) with a buy recommendation in an interim update of his Resource Opportunities newsletter. Roulston has done well with past recommendations of advanced copper-gold projects such as Novagold with its Galore Creek project in northwestern British Columbia and Northern Dynasty with its Pebble project in Alaska. So it was no surprise that his audience helped Copper Fox gap into the $0.40-$0.50 range where it has established a new trading base. On the following Monday February 13 Copper Fox announced that it had signed up Scott F. Gibson & Co Inc to design and run an investor relations program for the next 12 months. Gibson & Co will receive $5,000 per month plus 578,000 options for its efforts. One has to wonder what an independent newsletter writer like Roulston must think about such largesse when a promotional entity with which he shares office space jumps onto the coattails of his recommendation with such a lucrative deal.

Roulston must have been in a hurry to get his two page recommendation out because he neglects to mention that the company is in the process of completing a $3.5 million private placement that will boost fully diluted capitalization to 54.5 million shares, not the 37 million quoted by Roulston. The Copper Fox literature still lists 37 million, which is entirely appropriate until the financing has actually closed. Copper Fox engaged Leede Financial on December 9 to do the financing, but Leede has not proven to be very effective. Leede is supposed to raise a minimum $2.5 million to a maximum of $3.5 million, of which 60% can be in flow-through shares at $0.30 while the rest is in units at $0.23. Each unit includes a half warrant exercisable at $0.35 for 18 months. I have spent some time on Copper Fox and its Shaft Creek project which I like a lot, but the success of this story hinges on three key variables that Roulston does not address. One is the fact that Teck-Cominco has a 75% back-in right that would reduce Copper Fox to a 23% net interest, not the 93% Copper Fox would earn if it delivers a positive feasibility study by December 31, 2011. Upon delivery of the positive feasibility study Teck-Cominco would have 120 days to elect to back-in for 75% by spending four times what Copper Fox spent and arranging production financing. The more pressing milestone is a requirement to have spent $5 million by December 31, 2006 to keep the option alive. Copper Fox has spent about half that amount on infill drilling and metallurgical studies. The current financing is critical for putting into place the bucks Copper Fox needs to spend this summer. When I talked to Guillermo Salazar during the Cordilleran Roundup he indicated that sufficient interest had developed to get the financing done with or without Leede's help. When I talked to management on Friday afternoon February 24 I was told that cheques were coming in and that Copper Fox would soon be able to announce a closing of the financing.

That would be very good news because Shaft Creek is a world class copper-gold-molybdenum-silver deposit which Salazar scooped from Teck-Cominco in 2002 at the bottom of the copper bear market. Shaft Creek has a global resource of 3.65 billion tonnes of 0.155% copper, 0.0096% molybdenum, 0.14 g/t gold and 1.63 g/t silver, but the economic key is a higher grade core of 635.9 million tonnes of 0.329% copper, 0.025% molybdenum, 0.23 g/t gold and 1.89 g/t silver. At today's metal prices that represents a rock value of about US $35 per tonne for an in situ value of nearly $22 billion worth of metals before adjusting for recovery rates. The net present value adjusted for the minimum six years it would take to permit and develop Shaft Creek would be considerably lower, though $1 billion as a dream target would be reasonable. However, the metal prices assumed for such a valuation are regarded as peak values for the current boom, and to take them seriously one has to assume a massive victory for the Structural Bulls. Copper Fox is thus an ideal bet for speculators who think today's metal prices have long term staying power. The implied project value is only $25 million if Teck-Cominco does not back in, and $98 million if Teck-Cominco does back in for 75%. But there is another issue which Roulston forgets to mention and which management makes very plain when it presents the project: Copper Fox must secure a "social license" from the Tahltan native people in whose territory the project sits. A big task facing Salazar is the negotiation of a deal that brings the Tahltan people on side, and given the scale of the project, such a deal will likely involve giving up some equity in the project to bring the Tahltan people on board as partners. Given that Shaft Creek is unlikely to be economic unless the Asian super cycle is for real, and given its world class scale, I think it is prudent to assume that Teck-Cominco will eventually back in for a majority interest, which is why I think one should assume a net 23% interest even though Copper Fox is spending 100% of costs needed to produce a positive feasibility study. In this best case scenario, really the only one to consider, it is likely that Teck-Cominco would absorb Copper Fox and its minority interest. The best case end game would result in a buyout at 5-10 times the current price, provided Copper Fox can keep further dilution at a minimum. This target, however, is only valid if you assume that the Structural Bulls will win a massive victory over the Cyclical Bears.

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