Western copper and gold: fundamentally stronger and undervalued (NYSE: WRN)
Just a few days ago, Western Copper and Gold (NYSE:WRN) published the long-awaited results of the feasibility study. The results confirmed the world-class nature of the Casino project. Unfortunately, as expected, it also presented increased costs. Estimated production costs increase. However, due to high gold credits, the AISC per pound of copper is expected to remain negative. A bigger issue is that CAPEX originally estimated at $2.6 billion has grown to nearly $2.9 billion.
Reserves, as well as resources, remained virtually unchanged. Casino currently contains reserves of 10.28 million toz of gold, 5.24 billion pounds of copper, 571.9 million pounds of molybdenum and 20 million toz of silver. However, the measured, indicated and inferred resources (including reserves) contain 21.1 million tonnes of gold, 10.7 billion pounds of copper and 169.5 million pounds of molybdenum. And the repository is always open for expansion.
According to the feasibility study, the mine should consist of a mill with a throughput of 120,000 tpd and a heap leach plant with a throughput of 25,000 tpd. These parameters remained unchanged from the PEAS prepared a year ago. The expected mine life has increased slightly from 25 to 27 years. However, expected average annual production volumes have declined. The mine should be able to produce 211,000 toz of gold (compared to 231,000 toz in the PEA), 163 million pounds of copper (compared to 178 million pounds of copper), 1.277 million toz of silver (compared to 1.36 million toz of silver) and 15.1 million pounds of molybdenum (compared to 16.6 million pounds of molybdenum). This equates to 329 million pounds of copper equivalent or 697,000 toz of gold equivalent per year (using base metal prices).
Copper cash costs on a by-product basis increased from -$1.19/lb to -$1/lb. Holding CAPEX is projected at $751m, which means AISC is expected to be around -0.8$/lb copper. That’s worse than -$1/lb presented by the PEA, but still a big number. Initial CAPEX increased from $2.6 billion to nearly $2.9 billion. However, the negative impacts of increased costs were offset by the positive impacts of increased reference prices. The price of gold went from $1,600/toz to $1,700/toz, the price of copper from $43.35/lb to $3.6/lb and the price of molybdenum from $12/lb to $14/lb. Only the silver reference price fell from $24/toz to $22/toz, and the CAD/USD exchange rate remained unchanged at 0.8. Consequently, the after-tax NPV increased slightly. At a 5% discount rate, the after-tax NPV is equivalent to $3.247 billion, and at an 8% discount rate, it is equivalent to $1.867 billion. The after-tax IRR is equal to 18.1%, which is slightly lower than the 19.5% projected by the PEA.
However, as can be seen in the tables above, rising metal prices can still boost the project economy. At the 8% discount rate, a $0.1 growth in copper prices adds about $90 million, and a $100 growth in gold prices adds about $156 million to after-tax NPV .
The feasibility study is an important step because it further reduces the risks of the project. Currently, Western Copper and Gold has to wait for permits. It will probably take several years. This means that there is enough time to further optimize the project and also to find a development partner, as the cost of building the mine is simply too high for a young explorer.
In terms of optimizing the project, Western Copper and Gold is trying to further expand the resources. The drilling campaign which is underway should contribute to this process. Its main target is a large anomaly identified under current resources. It is 1,300 meters long and 500 meters wide. Given its size, it has the potential to significantly increase current resources.
When talking about a potential partner, as I wrote in my previous article, there are several candidates. The main candidate is Rio Tinto, the largest shareholder in Western Copper and Gold, with a 7.8% stake. However, other heavyweights, including Newmont (NEM), Agnico Eagle Mines (AEM) and Kinross Gold (KGC), are active in the Casino project area.
Since April’s high of $2.4, Western Copper and Gold’s stock price has fallen 42%. But it looks like the bottom might be up. The stock price has encountered a long term support line which is holding for now. From a technical point of view, it will be important to cross the 10-day moving average, then also the downtrend line and the 50-day moving average. After that, the way to the next resistance in the $1.85 area should be clear. A return to recent highs at $2.4 would be nice, but copper and gold prices would need to recover first.
Following the publication of the feasibility study, the fundamentals of Western Copper and Gold have strengthened. However, the company’s current valuation does not reflect this. The market capitalization is only $201 million and the enterprise value is around $165 million. This is a very low value for a company with an advanced stage development project with an after-tax (8%) NPV of almost $1.9 billion. In addition, the reserves contain 27.56 million toz of gold equivalent at current metal prices. This means that the market values 1 toz of gold equivalent held in reserves at just $5.99. The resources even contain 44.7 million toz of gold equivalent, which means that the market assigns a value of only $3.69 to each toz of gold equivalent contained in the resources. Although there is a risk that, given the current market sentiment, the stock price will continue to decline further, Western and Copper Gold are priced very attractively at current price levels.