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Message: NovaCopper: An Extremely Rare Opportunity With Minimal Risk
A long article but interesting read. Cheers Topaz
Apr 15 2013,

We've taken a long position in NovaCopper (NCQ). At current prices, NCQ is an exceptionally timely, high-impact long. The trade should deliver a 60-240% upside with significant catalysts - the first of which will occur any day now, starting next week.

NCQ is an exploration stage mining company that owns the Ambler and Ruby Creek districts in Alaska. In our analysis, we will focus on the Ambler Project only and value the Ruby Creek Project at $0 as it has not yet been evaluated for economic feasibility.

Mining samples from the Ambler deposit show an indicated 6 billion pounds in copper equivalent under the ground. Management's inferred mineral target is 10 billion pounds. This makes NCQ a sizeable opportunity, as we will later discuss in our valuation.

Spinning Away:

NovaGold (NG) purchased Kennecott's [1] entire land stake in 2010 and created NovaCopper, a wholly-owned subsidiary, to further evaluate the property. NovaGold completed the spin-off of NovaCopper in 2011.

Bright-eyed gold only investors rushed to sell off the much smaller copper exploration stock. Institutions, unwilling to own a position in the micro-cap stock, started dumping NCQ in droves. NCQ crashed from a high of $4.76 to an all-time-low of $1.70 by August 2012.

While many institutional investors are turning up their noses, savvy guns are smelling opportunity and clamoring to get in on the feast.

John Paulson (Paulson & Co.) and Seth Klarman (Baupost) are each large stakeholders, holding 11.2% and 8.7% respectively. Both are prominent value investors known to be exceptional small-cap pickers and investing with a significant margin of error. Stock charts show that Baupost initiated a large buy causing a price run up to $2.84. A timely investment at today's price of $1.9 has a nearly 60% upside to these levels.

Management seems to think NovaCopper is a better opportunity than NovaGold. Former CEO and Founder of NovaGold, Rick Van Nieuwenheyse is leading the charge as CEO of NovaCopper. The rest of his management team includes Elaine Sanders as CFO (formerly CFO at NG), and Joseph Piekenbrock as SVP of Exploration (formerly VP of Exploration at NG).

More importantly, management is unambiguously aligned with investor interests. A quick glance at the 10K/A SEC filing shows that management is loaded up on warrants, which are out of the money, at a minimum a strike price of $3.11. The officers themselves have over 70% of their compensation package in long term and annual incentives. The NEOs as a group hold a total of 2.7M stock options, or 5.7% of shares outstanding.


A Preliminary Economic Assessment (PEA) was done by an external consultant to evaluate the economic feasibility of the Ambler project [2]. The PEA assumes a pre-production period of four years. Assuming a $2.50 per pound price of copper (a 25% bargain to today's current price of $3.34) and an 8% discount rate, the consultant group places a post-tax mine NPV of $1bn.

However, based on conversations with IR we believe that a 2020 production is more reasonable. Applying the same conservative price of copper to the extended timeframe of 7 years yields an NPV of $778m, roughly $750m with a haircut.

The market's take on NCQ is comparatively paltry. Currently, the company sits on $22M in cash and no debt, for a TEV of $71M.

Based on a March 18th investor presentation, the company trades at a dramatic discount to its exploration stage mining peers on an EV/lb of copper basis [3]. Peers trade in the range of $.01 to $.04 per pound of copper, averaging about $.03 per pound. NCQ trades at $.01 per pound, despite a dramatically higher grade of copper and lower extraction costs than its peers.

If we take the 10bn pound inferred copper estimate instead of the conservative 6bn pound figure, and assume that NCQ attains a comparable valuation to its peers at $.03 per pound, we arrive at a present EV of $300M. This implies a market cap of $322M and upside of 242%.

Stocks are always discounted for a reason, and mining stocks have considerable risk. With NCQ in particular, the largest short-term risk is the access road. For the project to be undertaken (at all), Alaska Industrial Development and Export Authority (AIDEA) must approve a $300M access road to the property. NCQ would cover the cost of the road through royalties from the mining.

What many investors may not realize is that Alaska has an exceptionally favorable political climate towards mining. NCQ already has community buy-in through a profit share with Northwest Arctic Native Association (NANA), and political buy-in through the state of Alaska. Governor Parnell is the significant champion of Alaska's Road to Resources [4] program, and has already authorized $8.5M of the 2013 budget to permit the road this year. From our conversations with IR and assessment, the MOU is therefore more of a formality than a meaningful market risk.

Additional risks include environmental permits, operational risk, and copper market risk (note that all exploration-stage mining companies have such risks).

Risks aside, there are some very nice catalysts that could happen here:

MOU approval from AIDIA for Ambler deposit.

  • PEA for the Ruby Creek (Bornite) deposit.

  • Environmental permits for the Ambler project.

  • Growth in estimates to closer match the inferred vs. indicated copper content.


At KPC, we like to be on the same side as supply and demand. And both trends are looking overwhelmingly positive for NCQ:

China is the biggest consumer of copper, and continues to grow its copper demand annually. As its per-capita copper consumption is peanuts compared to western countries, there is significant growth potential still on the table. From NCQ's estimate, as urbanization continues China and India will compose half of world copper demand by 2020 [5].

Meanwhile, supply of worldwide copper has been held roughly constant. Current supply for copper is dwindling. Due to mine closures, supply of 1.5Mt of copper will be lost from 2013-2016 [5]. New deposits of copper are becoming both harder to find and drill for. To match world demand, copper mining companies should be investing in exploration now.

For savvy investors who want to capture as much of this positive trend as possible, NCQ provides very attractive amplification. As of today, we are placing a price target per share of $4.58, a 160% upside from here.


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