Chapter Ten: Hidden Gem - Western Copper and Gold
Largely ignored, plenty of value and no shortage of risk
Western Copper and Gold (WRN.TO) is a small capitalization copper company with a large deposit in Canada’s Yukon called the “Casino” project. Casino is one of the largest undeveloped copper deposits on the planet and has the added advantage of significant gold content.
The size and scale of the Casino project attracted Rio Tinto who purchased a 11% interest in Western Copper in 2021 for CAD$26 million.
Casino is host to an estimated 7.6 billion pounds of copper based on drilling results to date, and the economics of its development have been laid out in an August 28, 2022 NI 43-101 report on the project. Estimated initial capital costs are $3.6 billion (page 311 of the report). Extensive analyis of operating costs including a 2.75% Net Smelter Royalty (and assuming a long term copper price of US$3.50 (CAD$4.50) show a mine profit over its life of $10 billion and an internal rate of return of over 18% (page 330 of the NI 43-101 report).
Copper demand is expected to rise owing to the usage of about 185 pounds of copper in the average electric vehicle (EV) as opposed to about 35 pounds in an ICE vehicle. 7.6 billion pounds of copper is enough to support the copper requirements of about 41 million EV’s, or about 1 years production if EV’s reach a 50% penetration of global automotive markets. The shortage of copper for EV’s is likely to be a “pinch point” since there are few large scale copper mines on the drawing boards and current mine supply is insufficient. While the Trudeau government has been no friend to the Canadian mining industry, recent government statements suggesting development of materials needed for EV’s will receive a priority suggests the Casino project will be permitted in due course.
I have modeled the Casino deposit as a “call option” on future copper prices using a modified Black Scholes approach, shown below.
I have assumed 6.3 billion pounds of the 7.6 billion pound deposit can be economically recovered and that capital costs will approximate CAD$4 billion, adding a 10% contingency to the NI 43-101 estimate. Using a 20% hurdle rate for the ongoing capital needs I estimate the current value of the Casino deposit to be approximately $2.7 billion or about CAD$17.00 per Western Copper share.
The real risk to shareholders is dilution as Western Copper seeks to finance the project, or a bid by Rio Tinto to take over the company which, while it may be at a substantial premium to today’s CAD$2.40 per share price, is still likely to fall short of intrinsic value.
One option open to Western Copper is to raise a portion of its capital needs by selling all or a portion of the gold stream to a major streaming player like Franco Nevada or Wheaton Precious Metals. Casino contains an estimated 13 million ounces of gold and a streaming contract for the gold by-product could raise a significant portion of the capital needed to build the mine, possibly as much as half or more of the initial capital.
This is one of those “hidden gems” investors who dare to buy should put in a drawer and ignore for a decade expecting to wake up one day and find they have suffered a total loss or a gain many times what they have invested. I have 25,000 shares and will likely add more. I am happy to hold it for as many years as I have left on this Earth and pass those shares to my children when my time is up. There are few mining investments with as much potential as Casino not withstanding its very significant risks.
Thank you for the analysis, I purchased 5000 a year ago, and 5000 more a few weeks ago. I also purchased 30,000 shares of a real long shot North Island Copper.
With future demand for Copper increasing, copper prices are sure to double over the next decade
Thank you for sharing