Western Copper and Gold is a steal
Gold streaming deals have potential to fund the Casino project
Copper prices have risen above $10,000 a tonne and are likely to keep rising as demand for electric vehicles (EV’s) expands and countries build greater grid capacity to support the added draw on generating capacity. Every EV on average uses 185 pounds of copper, versus about 35 pounds in each internal combusion engine (ICE) vehicle. The world fleet of over 1 billion vehicles may well contain hundreds of millions of EV’s within a few decades since EV technology produces quieter, faster vehicles with less maintenance. EV’s are promoted as “climate friendly” which is nonsensical since the claim that CO2 causes “climate change” is specious and the lithium, cobalt, and rare earths needed to build EV’s leave a trail of toxic waste in underdeveloped countries like the Democratic Republic of the Congo and China where most of these commodities are found.
Copper is another matter. As I pointed out in a recent article on the investment merits of Copper Mountain (CMMC.TO), world copper mine capacity will fall short of copper demand and higher prices will result and are needed to motivate construction of new mines to meet the demand pull. Western Copper and Gold (WRN.TO) is a one-project development stage mining company with a massive ore body called the Casino Project located in Canada’s Yukon. The Casino orebody contains an estimated 7.6 billion pounds (measured and indicated) of copper and an estimated 4.6 million ounces of gold. With copper at $4.50 a pounds today and gold over $2,000 an ounce, the value of the measured and indicated ore content of the Casino orebody is a staggering $43 billion and the estimate capital cost to build and operate the mine is $4 billion over a 25 year life (planned life is 22 years but there is exploration upside so I have used 25 years in my analysis).
Operating costs estimates are salutory. Net Smelter Return (NSR) at today’s commodity prices are an estimated $28 per tonne while operating costs are estimated to be less than $10 per tonne of ore processed, with a higher NSR in the first four years of operation. The estimate of NSR is based on a copper price of $2.75 and a gold price of $1,500, both well below today’s prices (note: all data are U.S. dollars unless stated otherwise).
Development stage project are usefully compared based on enterprise value (at today’s market price for the shares) per pound of copper resources, and the Casino project is among the most attractive in the world.
Valuation of undeveloped ore bodies has advanced materially since the Black-Scholes model was developed by the late Fischer Black, Myron Scholes and James Merton, winning a Nobel prize in economics for Scholes and Merton (Black having predeceased the award). An undeveloped or body has all the characteristics of a “real option” on future commodity prices, which while both unknown are the major determinant of the success or failure of a mine. Valuations based on forecasts of commodity prices are less valid than those using a stochastic process like Black-Scholes since the commodity price forecast is certain to be wrong while Black-Scholes is based on a log-normal distribution of future prices based on measured volatility in global commodity markets for the related ores.
I prepared a Black-Scholes valuation of WRN shares based on the NI 43-101 data discosed in the company’s Preliminary Economic Assessment (PEA) and came up with an estimated per share value of over US$18.00 per share. An updated set of economics will be released in 2022 when the formal Feasibility Study now underway is complete.
Rio Tinto has purchased 8% of the shares of WRN bringing the interest of a global major mining company to bear.
Western Copper and Gold can potentially raise a substantial portion of the US$4 billion capital cost of the mine through the sale of the gold stream to one of the major streaming companies like Wheaton Precious Metals. Wheaton has a large portfolio of such streams and in 2021 Wheaton paid $3 billion for a 75% gold stream on the Salobo mine owned by Vale in Brazil, which is somewhat comparable in size and scale to Casino. The Salobo stream was contracted based on a gold price of $1,290 an ounce. It has clearly worked out well for Wheaton. Sale of a gold stream by WRN to one of the larger streaming companies would reduce the potential share dilution to fund the mine and make it a focused bet on future copper prices.
With demand for copper growing and the presence of a significant amount of by-product gold, Casino has a decent chance of being funded without material share dilution. With Rio Tinto as a shareholder, the project has a link to a global major with a high degree of mining expertise. I like the odds. I own 15,000 shares.