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 Wed Mar 22, 2006
Excerpt: Bottom-Fish Action Report - Copper Fox, Novagold, Eagle Plains
    Publisher: Kaiser Research Online
    Author: Copyright 2006 John A Kaiser

 Excerpt from Bottom-Fish Action Report for Weeks Feb 26 - Mar 18, 2006

Brien Lundin's Gold Newsletter endorses Copper Fox

First Copper Fox Metals Inc (CUU-V) received a recommendation from Lawrence Roulston that took the stock into the forties. Then came the next tier recommendation from Brien Lundin's Gold Newsletter which took the stock into the sixties. Then John Kaiser mentioned Copper Fox during a Saturday morning Money Talks CKNW radio interview and the stock did nothing. All we now need is Peter Grandich and Jay Taylor to weigh in with endorsements and Copper Fox will eerily resemble Luzon. Fortunately Copper Fox's Shaft Creek story has considerably more metallic substance than Luzon's Bolivian gold projects, and copper's record setting price trend is making headlines that should make Shaft Creek topical for a broad audience.

One of the intriguing rumours making the rounds is that Novagold Resources Inc (NG-T) might eventually consider a friendly takeover bid for Copper Fox. Novagold is developing the Galore Creek copper-gold deposit whose location is inconveniently wetter than Shaft Creek. It is unlikely any major would make a bid for Novagold, whose asset base includes a 30% carried interest in the Donlin Creek gold project in Alaska which is now under the control of Barrick following its takeover of Placer Dome. Novagold has already proven itself more than able to fund prefeasibility work for a major project, and recently raised US $176 million through a public offering at US $11.75. Novagold, which has just over 100 million shares fully diluted, has a market capitalization of about $1.5 billion, which makes it one of the more expensive non-producing resource sector juniors and probably represents a barrier for a takeover bid by a major. A company such as Novagold which lacks an obvious exit strategy has no choice but to go it alone, something it can do best if it bulks up its asset base through acquisitions involving the issue of its stock. Shaft Creek is a strategic base metal asset (copper & molybdenum with minor silver, gold and rhenium credits) which is less advanced in the development cycle than Galore Creek, and requires another $8 million in prefeasibility work before Copper Fox vests for a 93% interest. At that point, which Copper Fox could reach by the end of 2007 if it can raise the money on lucrative terms, Teck-Cominco will have the option to claw back a 70% interest, which would reduce Copper Fox to a 23% net interest. Assuming the recent financings close, Copper Fox will have about 54.5 million shares fully diluted, which represents a $36 million market cap at the current $0.66 price. If Teck-Cominco declined to claw back 70%, the current valuation would be dirt cheap in the eyes of anybody who thinks that the Structural Bulls will rule the metals market during the next couple decades. A back-in by Teck-Cominco, however, would convert the implied project value to $156 million. If Novagold made a paper offer for Copper Fox at 2 or 3 times the current price, it would risk paying the equivalent of $300-$450 million for a stake in Shaft Creek, though the actual outlay would only be $72-$108 million worth of Novagold stock. That would represent dilution of less than 10%. If Novagold owned Shaft Creek, it could easily accelerate the prefeasibility study and put Teck-Cominco on the spot sooner than the major would like to be. One assumes, of course, that Copper Fox management would favor an early exit strategy that delivers a fairly "hard" value in the range of $1.40-$2.00 per Copper Fox share. The alternative would be a higher stock price at a later date with exposure to a downturn in metal prices, a downturn that might be temporary in big picture terms, but no less painful during the interim.

One key obstacle that Copper Fox has not yet overcome is the acquisition of a "social license", but that key milestone is exactly what Novagold has already accomplished for the Galore Creek project. In mid-February Novagold reached an important "participation agreement" with the Tahltan Nation, the aboriginal group whose jurisdiction includes the Galore Creek and Shaft Creek deposit. The Tahltan agreement creates a framework for cooperating on the permitting process, providing employment for natives, giving the Tahltan preferential treatment for supply and services contracts throughout the mine life, and a 0.5%-1% net smelter royalty that will provide a minimum annual payment of $1 million to the Tahltan Heritage Trust Fund. This represents the "social license" a major mine needs in the Tahltan region to have any chance of being permitted. That such a deal is possible today and not yesterday was explained to me during PDAC by Brian Grant of the BC Geological Survey. Most of northern British Columbia has unsettled land claims whose resolution requires negotiation of a settlement at the federal level. No such settlement has been achieved, partly because various aboriginal groups have competing claims for the same territories. Native groups, although they favored economic development, were reluctant to negotiate any direct "social license" deals with mine developers because it was feared that this would set precedents for the federal settlement negotiations. But a couple years ago a court ruling established that such private deals would have no bearing on federal settlement negotiations. For mining projects in regions where there are no overlapping claims by different aboriginal groups, mine developers and native groups can now hammer out agreements that are satisfactory to both sides. Novagold has done that, and assuming it continues to deal in good faith with the Tahltan Nation, it would have a strong basis to negotiate a "social license" for Shaft Creek.

I do not know if this scenario is just wishful thinking by Scott Gibson's clutch of newsletter writers, some of whom have done well with past recommendations of Novagold, or if Novagold may have privately mused about such a strategy. But it certainly strikes me as a natural strategy for Novagold to consider down the road, and while I do not think Copper Fox would consider such an offer during the short term, it remains open as a longer term exit strategy. There is a general expectation that Novagold will during the next year or so make a paper offer to acquire the 20% of the Copper Canyon copper-gold deposit next door to Galore Creek still owned by Eagle Plains Resources Ltd (EPL-V). Eagle Plains was recommended as a top priority bottom-fish buy in the $0.10-$0.19 range on May 22, 2002 and was declared a Spec Cycle Hold 100% on December 23, 2003. In late September Eagle Plains announced it would spin off its 20% Copper Canyon stake in a separate company on the basis of one "Copper Canyon" share for each Eagle Plains share. This transaction is designed to make it easy for Novagold to acquire the 20% Copper Canyon stake and not have to worry about the proper value of the projects Eagle Plains accumulated during the bear market years. The spinoff is also intended to unlock the value of the Copper Canyon asset which gets lost amid all the other projects. Copper Fox is now well above its $0.20-$0.29 bottom-fish buy range, and because I think it is unlikely the stock will trade back to that level during the current bull market cycle, I am converting the recommendation to a Spec Cycle Hold 100%.

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