Phoenix Copper Ltd (LON: PXC) achieved a further milestone in its strategy for a staged development of the potentially world-class Empire copper mine in mining-friendly Idaho, US. The new economic model for an open pit “starter mine” is key to the Feasibility Study due by 2Q’20. Capital and cash operating costs have been cut by 25% and 7%, respectively, with minimal production impact. This mine will provide cashflow to explore far more extensive mineralisation in the deeper sulphide ore body and adjacent land package. While we evaluate PXC’s upside in more detail, our estimated DCF valuation for the first mine is 32p/share, and 49p/share using the company’s base-case assumptions.
- Strategy: PXC focuses on near-term cashflow and will maximise returns/minimise risk to shareholders by developing a potentially world-class copper-zinc-gold deposit in stages. Empire was formerly a (very) high-grade underground copper mine, which was shut down due to World War II. Access to historical workings will cut exploration costs significantly, e.g. drilling at depth.
- New model: Further mine planning has cut the capital cost of the open pit starter mine from $68m to $51m. The new plan sees 7,000 tons p.a. of copper and 1,600 tons p.a. of zinc production from late 2021-32. Cash costs of production have been cut from $1.85/lb of copper equivalent to $1.72/lb.
- Upside potential: Empire produced 694,000 tons of ore in 1901-42, recovering 3.64% copper, a very high grade vs. a current average of ca.0.5% for new mines. Only 1%-2% of PXC’s potential ore system has been explored, which includes three other former mines in addition to Empire, the adjacent Navarre Creek gold zone and the recent “Red Star” polymetallic discovery.
- Risks: Phoenix Copper Ltd is subject to the normal risks for a junior miner. These include volatility in copper and zinc prices, operational risks in executing the mining plan, running downstream processing facilities and funding risks. We believe that jurisdictional risk is significantly reduced in PXC’s case.
- Investment summary: Our DCF valuation is 32p/share ‒ based solely on the starter oxide mine and more conservative (vs. the company) assumptions of an 8% discount rate, and long-term copper and zinc prices of $3.10/lb and $1.25/lb, respectively. At this stage of development, PXC’s share price is highly geared to the “supply crunch” upside thesis for copper ($0.25/lb = ca.19p/share).
