To the consternation of extant ‘growth’ bulls, the inflation thesis has been at the forefront of most financial discourse. As most will know, it goes:
If inflation rises, so too do interest rates, increasing the discount rate applicable to stocks’ future cash flows. This decreases their present values. With growth darlings having the bulk of their cash flows far, far into the future (more than 5 years away), they are high duration – and hence are highly impacted by such a change. Factors backing the argument include:
- trade tensions, and supply chain onshoring
- a newly freed population spending cash accumulated during their lockdown hibernation
- Central banks around the world artificially lowering the price of risk through monetary excess
If that wasn’t enough to tickle your fancy, consider this: Joe Biden is proposing a budget of $6 trillion for the 2022 fiscal year. Governments around the world are ‘building back better’, striking at the heart of climate change while the iron is hot. Even the most ardent deflation proponents can see the logic.
This however presents the long term, risk tolerant investor with a conundrum. If inflation is not transitory (i.e. a short burst upwards followed by a long calming), we must position our portfolios accordingly. Which asset class tends to rise with inflation (especially in our globalised climate?) Commodities. With electric vehicles the bellwether for the ‘green revolution’, metals like copper are in fierce demand, and will continue to be; predictions of price trebling or more abound. Economic arguments for gold as a hedge against inflation and uncertainty persist. Whatever your view on the details, inflation is a tide that lifts all boats. That’s without thinking of the secular green rebuild, and commodity prices relative to stocks:
I don’t claim to know what is going to happen from a macro perspective, and no one really does. Such is the nature of radical uncertainty. For that reason, a company that could offer capital appreciation, dividend payments down the line and a hedge against inflation was a highly attractive proposition.
Phoenix Copper, listed on the London Stock Exchange as PXC and on the US OTC markets as PXCLF, checked all these boxes. I thus entered into a long position at 33-35p a share.
To begin, I must state that – as a junior miner – the company is host to the standard risks faced. These include chiefly a decline in the price of precious metals, and operational risks faced through to production. Like any AIM investment, it is not a US government bond! That being said, the risk/reward is excellent with low downside relative to the ‘blue sky’ potential. This arises from many typical miner risks being mitigated, and equally from significant opportunities to expand.
Focusing on the former, Phoenix operates from the US state of Idaho According to Mining Journal, ‘Idaho has been a mining state for more than 100 years with mines which have been operating for decades and it continues to attract explorers and developers of precious metals and other minerals.‘ With a top tax rate of 6.5%, the state is ideal for reducing Phoenix’s pre/post tax income differential. More importantly, as a US state the company is not affected by the swathe of jurisdiction risks that many emerging markets-focused miners brave. For all its flaws, you can still rely on the USA’s strength of institutions and enforceability of law. ‘Unknown unknown risk’ thus stays reassuringly low.
As for Phoenix’s projects under consideration, I shall point to the work of Jeffrey Temple, an ex-chartered engineer familiar with mining:
‘1) Empire Open Pit. With an official Resource established the Empire open pit mine is now in development phase to make Phoenix a producer of copper, gold, silver and zinc by end 2022. This is a shallow open pit mine and forms the backbone to the company, from which all other projects will follow. The recent Economic Model indicates strong cashflow and rapid payback in less than a year. The project is now proceeding through the environmental permitting process. Most economic evaluations for the company are based on this mine alone. The value of metal in the ground at the Empire open pit alone, as a confirmed measured & indicated resource (that can be estimated with sufficient confidence to allow the appropriate application of technical, economic, marketing, legal factors etc), is approaching $2 billion.
2) Red Star. The high grade silver/lead mine at Red Star is next in the company’s sights. This was initially evaluated to be 320 metres long, and was reported in an RNS in January 2020: “The Red Star discovery is a primary high-grade silver/lead sulphide vein and has, after drilling only three holes, generated a maiden NI 43-101 compliant resource of 103,500 tonnes, containing half a million ounces of silver or a silver equivalent resource of 1.6 million ounces when gold, lead, copper and zinc values are included”. This has been substantially increased by the subsequent 2020 drilling programme, and Hardman estimate on page 22 of their 29 March 2021 Research document that a combined Empire Open pit, together with Red Star, could be worth a share price of 162p. More drilling is planned for summer 2021. It is thought that there are now multiple veins, and that the strike could continue for several kilometres.
3) Navarre Creek is a Carlin style gold strike located 5 kms from Empire. Results from surface sampling confirmed the presence of volcanic hosted, Carlin-type mineralisation along selected sections of the 6.1 kilometre strike length. These are consistent with historical early-stage exploration grades reported from volcanic hosted deposits in the Carlin trend (where the name came from), that host multimillion ounce deposits in Nevada. Carlin deposits can be very big gold strikes indeed. If the initial results are confirmed, this could be a major company on its own. More drilling is planned in Navarre Creek for summer 2021.
4) Whiteknob, which includes the Windy Devil and Bluebird mines, is a former mine area lying to the North of Empire, and according to Nigel Maund, their consultant geologist: “Finally, the foregoing reinforces the view, held in the writer’s previous report on the Empire Mine Project for PXC of last April 2019, that the potential mineralised system has been less than 1% exploited and explored. Indeed, for all intents and purposes, this northern part of the system remains unexplored with indications of substantial ore potential within medium to high grade polymetallic base & precious metal systems offering significant collective potential tonnage.”
5) The Cobalt Resources in Redcastle and Bighorn exploration properties in the Idaho Cobalt Belt located in the most prolific trend of cobalt mineralisation in the country. All samples taken in a surface sampling programme encountered cobalt mineralisation. Phoenix have recently agreed a deal with First Cobalt that entitles them to a percentage of the Redcastle cashflows, with First Cobalt covering most or all exploration and production costs.
6) Another type of geological formation is a porphyry which is essentially the reservoir, feeding flows to the surface. It used to lie deep under the surface, but plate movements have forced it up. Today, near the surface, we have many forms of metal deposits, but the one we are really interested in at Empire is a giant porphyry which now sits about 4-500 metres below the surface.
In recent times knowledge of geological structures and in particular large porphyries has advanced considerably, and these are now recognised to be of significant interest. As Hardman wrote in their research “Finding porphyry mineralisation could be highly significant, as most of the world’s largest copper mines are located on porphyry deposits. They are also the dominant source of molybdenum and a major source of gold production.”
Consultant geologists are now saying that Empire resembles Antamina – in the Andes, which is one of the world’s largest copper-zinc mines. It is worth adding another quote from Hardman: “The world’s largest molybdenum mines are located on porphyry molybdenum systems, and most of the world’s largest copper mines are copper-porphyry deposits – generally high-volume/low-grade in nature. While the major products from porphyry copper deposits are copper-gold and copper-molybdenum, they are often important sources of zinc, lead, silver and tungsten.”
Nigel Maund, PXC’s consultant geologist, believes that The Empire Mine is sat on a copper-tungsten-molybdenum porphyry. In his last visit on site in 2019 he wrote that he was convinced that we have a larger mineralised system underneath the Empire Mine. In Maund’s view, Empire is most likely a porphyry molybdenum-tungsten system.
We now believe that when the last shipments were coming out of the Empire mine before they closed it, they were heading down towards the tungsten zone. Further work this summer will start to confirm the extent of the copper-tungsten-molybdenum porphyry resources at depth.’
At a recent webinar I attended, the Chairman informally expounded on the potential size of the deep sulphides.
- The sulphide belt is 3 km long (we know it is 5-7 km long)
- It is 300m deep (we know it is at least 1000 feet/300m deep)
- It is 200m wide (we know it is at least 200m wide)
- The rock in question has a specific gravity of 2 (it is actually 3).
- The rock contains 0.5% copper (before the mine was closed for Pearl Harbour, it was producing copper at 6-8%).
- The rock contains no other metals than copper (very unlikely)!
We find an estimate of 180m m³/360m tonnes of rock, yielding 1.8m tonnes of copper, worth ~$11b/£7.8bn at a 60% recovery rate. This compares to a current market capitalisation of $77.4m/£54.7m. Of course there are a plethora of ifs and buts, but in terms of scale, the sulphides need no introduction.
What is a feasible (very) bearish scenario, though? Let us assume Phoenix has nothing apart from the Empire Open Pit. The below, from the aforementioned Hardman broker report, illustrates such a scenario. Broker reports are never to be trusted on their own, yet running through the assumptions (long-term copper, gold and silver prices of $3.60/lb, $1,825/oz and $27.00/oz, respectively and an 8% discount rate) confirms the below picture as generally realistic, if not slightly conservative, given that copper for instance has breached $4.00/lb already.
It yields a valuation of 60p a share, a 23.5% premium to the 48.55p closing price on Friday, 4 June 2021.
This clearly complements Phoenix’s potential to soar with significant downside protection, if they do crash and burn.
Further, the lack of signposted equity dilution adds to this lopsided risk/reward. A significant fund raise this year gives them cash runway till 2023. What’s more, the funds generated from the starter mines at Empire and Red Star would fund exploration and drilling at Phoenix’s other locations. Management emphasise that any further funds, if required, would be raised via debt as opposed to equity; dilution will be kept as minimal as possible. You can see why they’d say that – directors own ~6% of the company, and have clearly learnt from the mistakes of perpetual dilution ravaging other miners’ share prices. In the words of the Chairman, Phoenix management do not want to be left with ‘a similarly miniscule percentage’ so equity dilution shall very likely be low, enabling shareholders to capture a large percentage of value generated.
Whatever this value turns out to be, it is key that it can come from multiple sources. Phoenix is diversified across the array of potential mines above. They are also diversified across metals (despite the name!), diminishing the impact on valuation from the prices of any particular metal at this stage. Watch out for M&A in the mining space too; the lack of copper mines, a fraught geopolitical environment and the structural copper supply deficit can make Phoenix a prime acquisition candidate.
Finally (and perhaps most importantly), Phoenix is a rarity in the financial world: an honest and transparent management team. The day before this article was written, options were granted to members of the management team without vesting conditions related to financing or production targets. Shareholders rightly expressed their displeasure. An RNS was then within hours released amending the conditions to include these targets, generating significant investor goodwill. Webinars are frequently organised with senior management, allowing the watchful private investor unprecedented access into the thoughts and minds of management. Any shareholder fleeced by a dishonest board knows the value of such measures.
It is clear by now that Phoenix Copper couples potential for significant gain with lower, hedged downside. In a portfolio like mine, full of high duration, inflation dependent growth stocks, Phoenix Copper is crucial – both as an inflation hedge and as a curious blend of growth and value in its own right.
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