The Next New Copper Producer in the United States : Excelsior Mining

Paladin Energy
  • ASX:PDN
  • Share price AUD$0.085* (23.10.2019)
  • Shares outstanding 2.02B
  • Market Cap AUD$172M* ($117M)*All the numbers used are USD$ denominated, if not, marked otherwise.

Why invest in Copper?

Copper demand is growing. Its main use is electric wires and as we consume more electricity we will need more and more Copper. Total electricity consumption in projected to grow by 60% in the next 20 years.(1) Besides growing energy consumption, we need more Copper because renewables (solar & wind) are extremely Copper intensive. EV’s also require more copper than traditional combustion engine vehicles.

But the main story in Copper is the supply side. In the last commodity cycle the Copper industry spent over USD$100Bn exploring and has almost nothing to show for it. Permitting is becoming more and more challenging and the average time to get from discovery to production is now +15 years (2). The average grade has also been falling steadily from c. 1.65% in 90’s to c. 0.9% today (3). The Project pipeline is even worse. Way worse. For the pipeline to become economical, Copper prices have to rise. With current prices, supply will drop by 3%-4% pa.

Short-term recession will change things and push the crunch further, but according to Wood MacKenzie we will see a 10Mt deficit before 2030 (3). Advances in Technology will make it more economical to mine low grades, but 10 years is a short time. I don’t think we will see peak Copper, but I feel confident enough to predict a bull market in Copper in 20’s. And I want to position myself for that bull market.

The Asset: Gunnison Arizona

Gunnison is a wonderful asset. It’s not a Tier 1 asset size-wise (4,500 Mlbs proven Reserves & 5,000Mlbs Measured & Indicated Resources), but it has ridiculously low production costs and low capital intensity. Based on Excelsior’s Feasibility Study (FS) it has AISC of USD$1.23$/lb making it one of the lowest cost Copper producers globally. Gunnison has a unique geology that allows in-situ leaching (ISR/ ISL) as the mining method. ISR uses leach solution to extract Copper directly from the ground via wells. It’s basically pumping Copper solution from the ground using wells. ISR mines tend to have extremely low operational costs combined with low initial CAPEX. Those familiar with Uranium know that the cheapest production in the world is ISR production (4). ISR has also been successfully used to “mine” Copper in Arizona.

Excelsior [is] extremely cheap on paper.

The mine will be built in 3 Stages. In Stage 1, 2 and 3, Gunnison will produce 25Mlbs, 75Mlbs and 125Mlbs of Copper pa respectively. Stage 1 is fully funded and on schedule. Production starts at Q4/19.

Funding was a combination of new shares, a Royalty and a Copper Stream (majority). Excelsior didn’t need to raise any debt. CAPEX for Stage 2 will be $146M and for Stage 3 $230M. Gunnison has an NVP of USD$807M with an IRR of 40% and a life-of-mine (LOM) of +20 years. Copper companies often prefer to use $3/lbs sand 5% discount rate in their assumptions. Excelsior uses a way more reasonable $2.75/lbs as Copper price and a 7.5% discount rate.

For a company with a market cap of US$195M these are robust numbers and make Excelsior extremely cheap on paper. In fact, looking at the corporate presentation (5) you will notice that at full production the project will be generating more EBITDA pa. than Excelsior’s market cap.

From Stage 1 to Stage 3

Back in the real-world, project level feasibility numbers do not necessarily equate to company economics. Gunnison also has two Royalties and an off-take agreement that are not taken fully into account in the Feasibility Study (FS).

I think that Stage 1 will look like this:

Stage 1
Low CaseMid CaseHigh Case
Production (Mlbs)252525
Copper (Cu) Price @ $2,75$2,00$2,50$3,00
Cu Price to Triple Flag$0,50$0,63$0,75
Tripple Flag Stream16,5%16,5%16,5%
Revenue (USD / M)$43,81$54,77$65,72
Greenstone Royalty %3%3%3%
Altius Royalty %1,625%1,625%1,625%
AIS Costs ($1,23/lb LOM) Stage1$1,45$1,45$1,45
SG&A Total$8,7$8,7$8,7
Other Costs$2,0$2,0$2,0
Depreciation$7,0$7,0$7,0
EBIT-$12,2-$1,7$8,7
Taxes under Trump @ 20%$0,0$0,0$1,7
Taxes under Democrats @ 40%$0,0$0,0$3,5
Net Income (Trump)-$12,2-$1,7$7,0
Net Income (Democrats)-$12,2-$1,7$5,2
OCF under Trump-$2,2$8,3$17,0
OCF under Democrats-$2,2$8,3$15,2

LOM AISC is $1.23/lbs but in Stage 1 AISC will be higher even though they would use high-grading. Numbers might not look great but for me the key is that even with extremely depressed Copper prices Gunnison will be generating positive operating cash flows (OCF) in Stage 1.

Based on the ramp up plan, Excelsior wants to move to stage 2 in 3 years. This will require $146M. Out of this sum Excelsior might be able to fund ⅓ internally. This means they need another $100M. This would probably be debt.

With 7.5% interest rate they should be able to start generating a meaningful OCF in Stage 2. With $2.75$/lbs, I think USD$45-$54M could be in reached (USD$35-$40M with $2.5/lbs).

Stage 3 follows 3 years after stage 2 and requires USD$230M in CAPEX. If Excelsior can fund USD$100-$150M of this out of cash flow and pay the rest with debt, in 2025-2027 Excelsior would have a debt load of USD$200M and USD$106-$130M in OCF (USD$75-$100M in net profit) with $3/lbs of Copper.

Stage 1 Stage 2 Stage 3
Year 1 2 3 4 5 6 What If” Scenarios
Production (Mlbs)252525757575125125125125
Copper Price$2,50$2,50$2,50$2,50$2,75$2,75$2,50$3,00$4,00$5,00
Triple Flag Stream16,5%16,5%16,5%5,8%5,8%5,8%3,5%3,5%3,5%3,5%
Revenue (USD / M)$54,77$54,77$54,77$179,41$197,36$197,36$304,30$365,16$486,88$608,59
Greenstone Royalty %3%3%3%3%3%3%3%3%3%3%
Altius Royalty %1,625%1,625%1,625%1,50%1,50%1,50%1,50%1,50%1,50%1,50%
AIS Costs ($1,23/lbs LOM)$1,45$1,45$1,45$1,35$1,35$1,35$1,20$1,20$1,20$1,20
SG&A Total$8,7$8,7$8,7$16,0$16,0$16,0$25,5$25,5$25,5$25,5
Other Costs$2,0$2,0$2,0$5,0$5,0$5,0$6,0$6,0$6,0$6,0
Interest$7,5$7,5$7,5$15,0$15,0$15,0$15,0
Depreciation$7,0$7,0$7,0$15,0$15,0$15,0$25,0$25,0$25,0$25,0
EBIT-$1,7-$1,7-$1,7$26,6$43,7$43,7$69,1$127,2$243,5$359,7
Net Income (Trump)-$1,7-$1,7-$1,7$21,3$35,0$35,0$55,3$101,8$194,8$287,8
Net Income (Democrats)-$1,7-$1,7-$1,7$16,0$26,2$26,2$41,5$76,3$146,1$215,8
OCF under Trump$8,3$8,3$8,3$40,3$54,0$54,0$85,3$131,8$224,8$317,8
OCF under Democrats$8,3$8,3$8,3$35,0$45,2$45,2$71,5$106,3$176,1$245,8

What impresses me with this asset is that we don’t need to see a Copper bull market for Gunnison to make sense. But let’s say, just to amuse ourselves, that we will have a Copper rally and Copper goes to $5/lbs. Excelsior could be making close to USD$300M in profit.

And this is the thing with resource sector. There will be bull markets followed by long bear market. Mining is hyper-cyclical sector. I’m willing to say that we will see $4-$5/lbs of Copper in 20’s and when that happens I will be selling while the investing herd will be stampeding to buy the deficit story.

Management Strategy

Excelsior’s management has proven that they can build a mine.

I say “I don’t know” way too often to sound smart. But when evaluating management teams in mining “I don’t know” is more often than not the truth. There are terrible management teams, cheaters, liars and lifestyle companies. There are also good people who are just incompetent. There are also superstars like Ross Beaty. And then there are a lot of ordinary management teams.

Excelsior’s management has proven that they can build a mine. They also have operational experience (although not directly related to Copper ISR). I feel confident enough to say that they can run the operations at Gunnison successfully. The fact that Greenstone Resources, Altius Minerals and Triple Flag are also backing the project also leads me to believe this.

But to be able to know whether or not they are the right people in the right place, I’d need to know what happens next. They will ramp up the production to >100Mlbs in the next few years and that will be the main focus but then what? Thing is that after reading through MD&A’s, annuals, presentations and after listening to every interview the CEO Stephen Twyerould has given (and that I was able to find 2012-2019) I can’t tell you what their strategy is.

This is a rant in part but…if Excelsior pays 100% of its income in dividends, investors will think the management is competent. But if they are thinking of making themselves into a midcap Copper company with multiple producing assets then investors need to know what they are thinking and the roadmap to get there. M&A, exploration, no dividends, dividends as a fixed % of their profits, or maybe they are thinking of acquiring some nickel assets to make themselves a diversified miner. I get that this lack of strategy is the modus operandi in mining, but this lack of clarity makes it difficult for investors to make intelligent investment decisions.

Does Excelsior have a great management team that can successfully execute a growth plan from a single asset junior to a midcap? I don’t see any evidence for that. Besides a super-low-cost producer usually has to acquire higher-cost projects which will change the economics of the whole company.

I have reservations about the chairman of the Board Mark Moribato – namely whether his focus and contribution to Excelsior is sufficient. (6)

Besides being involved with Excelsior, he runs a merchant bank called King & Bay West Management Corp (K&B) and is also Director, CEO, chairman etc in multiple mining (and one jet) companies.

“King & Bay West provides administrative, management, regulatory, accounting, legal, corporate development and corporate communications services to the Company.”

In 2018 Excelsior paid $532K to K&B for: (7)

Alderon Iron Ore Corp. (Morabito is chairman) paid $532K to K&B for: (8)

Canada Jetlines Ltd. (Morabito is chairman) paid $887K to K&B for: (9)

Voleo (Morabito is chairman) paid to K&B for: (10)

There’s nothing wrong with these kinds of arrangements. Example in Excelsior’s case the Corporate Secretary works for K&B and K&B charges Excelsior for these and other services provided (the same person also works as a Secretary at K&B, Corporate Secretary at Xineoh Technologies Inc. and as an assistant Secretary Corporate in Canada Jetlines and Alderon Iron).

But I think that these kind of setups raise questions and make it hard for an owner to judge if they serve the company, especially when it seems that every company that Morabito is involved in buy services from his company.

Voleo (Morabito is the Chairman) is also an interesting story. Morabito was the CEO of Logan Resources, a gold explorer in 2017. According to his 20 Jan 2017 Proactive interview “the downside risk in Logan, at the current share price of 10 cents Canadian, is almost nothing and the upside is somewhat unlimited” (11).

Alas like with so many explorers’ things didn’t work out, so in 2019 Logan closed a business combination with Voleo (12) and is now “The first and best social stock trading app for investment clubs”, already with negative equity and a loss making business.

He also seems to have use his buddy Peter Grandich to promote his companies. This occurred at Silver Quest Resources, Alderon Resource, Crosshair Exploration, Excelsior Mining Corp and Santa Fe Metals Corp.

Example: Ridgemont Iron Ore Corp granted “monthly fee of US$2,000 and will grant 200,000 incentive stock options to Grandich”. Again, Morabito was the guy signing the papers. (13)

After listening to many of his interviews, he seems like a smart guy. But having reviewed Morabito’s track record, my concern is in making sure that the decisions he makes are in the interests of the shareholders. When it is not, he needs to be held accountable.

CEO Stephen Twyerould “moved Reliance Mining from junior explorer to producer in 3 years (Market cap $5M to $100M)” (14)

This refers to Beta Hunt, now owned by RNC. Based on what I gather (and if I’m wrong please correct me), Reliance bought the property in 2003 for AUS$11.7M. Reliance was acquired by Consolidated Minerals for AUS$76.5M in 2005.(15 & 16) Maybe the market cap went to $100M, but I have a problem in the way this is presented. I’m good with AUS$76.5M (which back then was USD$57.5M). Just keep it at that. By saying $100M I believe they purposefully gave the wrong impression, and I also feel it was misleading to using “USD$” instead of “AUS$”.

Ownership

This year is pivotal for the company and what I expect to see is heavy insider buying. This has not happened…

Top holders include Greenstone Resources (47.7%), Triple Flag (5.8%) and Altius Minerals (1.2%). I respect these companies and when they come in, they do heavy technical DD. The fact that these entities are involved is a vote of confidence.

Management owns 4.4% but from what I can see this is largely due to options. After going through the insider trades from 2011-today, it’s mainly just insiders exercising options and selling some shares in the open market (though I must give credit to Morabito for buying lots of stock during 2012-2014). This year is pivotal for the company and what I expect to see is heavy insider buying. That has not happened as you can see: (17)

In a 2012 interview, “A few minutes with the CEO” (18), Twyerould said, “I mean to get this project into production in 2015”. That didn’t happen. This is not a problem in and of itself. Mining is a tricky business.

My problem is that the management gave themselves a large amount of options during that time (2010-2012). These options had expiration dates from 18th December 2014 through 31st December 2015, with strike prices from CAD$0.5 to CAD$0.73. In 2013 Excelsior Mining announced that it “will re-price 5,147,333 incentive stock options issued to Directors, officers, employees and consultants of the Company. The options were originally granted between October 2010 and February 2012 at prices ranging from CAD$0.50 to CAD$0.73. The new exercise price for these options will be CAD$0.30 per share.”. (19) In 2014 Excelsior Mining “intends to extend the term of a total of 5,829,667 stock options (the “Options”), which are currently scheduled to expire on 18th December 2014, 5th May 2015, and 14th October 2015. The Options were issued with an original term of five years and the term will be extended such that their new expiry date is 31st December 2018.” (20)

In my opinion the management (CEO) sold a promise to their owners “mine in production in 2015” (18) and gave themselves options that basically payoff if they achieved the goal. They didn’t. For shareholders this means dilution and lower IRR. For the management this means 50% lower exercise price and four years extension for their options. I’d say their IRR stays the same.

Everything I have described above is way too common practice in mining and the things I have pointed out about Excelsior are mild compared to some, but no less excusable. Investors must pay attention to the detail and be vocal. If the Management Team acts to protect their own interests and not those of the shareholders, they must be called out. Or investors can vote the Board off, or vote with their feet and walk out.

Bottom line

I think there’s an extremely strong fundamental case for Copper. In 20’s we will see a much higher Copper price which should lead to rising equity prices for Copper companies. When in 20’s you ask? I don’t know. But I can position myself for the long-term. There might be a recession before we see a meaningful bull market in Copper and it might take time, but it will come.

 Excelsior Mining is a great way for investors to position themselves for the long wait.

Hence, I want to have a pure-play, low-cost, low-debt and long life-of-mine (LOM) asset which is located in a great jurisdiction. Gunnison, in my opinion, is an asset that meets my criteria and no matter how I play with Excel, it is on the cheap side. I’d also love to have a great top-notch management team. That is my current concern. So is the lack of vision and clear and understandable strategy for the future. But even though I have pointed out the short-comings of the management team, I don’t think that they are necessarily all bad either.

I’m concerned that they cannot articulate what they plan to do. An average Management team can ruin a great asset with a bad strategy and execution. Luckily it will only take the next 4-7 years for them to ramp up the production, and that is something I can wholeheartedly support.

All in all, I see Excelsior Mining as a great way for investors to position themselves for the long wait.

I own shares in Excelsior Mining.


  1. https://www.iea.org/weo2018/ IEA Energy, World Energy Outlook 2018
  2. http://documents.worldbank.org/curated/en/573121473944783883/pdf/WPS7823.pdf World Bank, From Commodity Discovery to Production 2016
  3. Wood Mackenzie, Global Copper long-term outlook Q1 2017
  4. https://www.world-nuclear.org/information-library/nuclear-fuel-cycle/mining-of-uranium/in-situ-leach-mining-of-uranium.aspx WNA, In Situ Leach Mining. https://www.kazatomprom.kz/storage/a1/investor_handout.pdf KazatomProm 1H19 hand out page 16 shows how the lowest quartile of production is ISR.
  5. https://www.excelsiormining.com/images/pdf/Presentation/2019/October_1_2019_PPT.pdf
  6. Excelsior Mining 2019 Annual General Meeting, Information Circular
  7. Excelsior Mining, Annual Report 2018
  8. Alderon Iron Ore Corp., Annual Report 2018
  9. Canada Jetlines Ltd., Annual Report 2018
  10. Voleo Trading Systems Inc., Consolidated Financial Statements YE March 31, 2019
  11. https://www.proactiveinvestors.co.uk/companies/news/306763/logan-resources-ltd-offers-low-downside-risk-and-unlimited-upside-potential-suggests-ceo-6763.html
  12. https://www.globenewswire.com/news-release/2019/05/28/1853673/0/en/Logan-Resources-and-Voleo-Announce-Closing-of-Business-Combination-Transaction.html
  13. https://incakolanews.blogspot.com/2011/03/peter-grandichs-clients-and-mark.html
  14. https://www.excelsiormining.com/images/pdf/Presentation/2019/October_1_2019_PPT.pdf, Excelsior Mining, Corporate Presentation
  15. https://www.azurecapital.com.au/capabilities/post/mergers-and-acquisitions/consolidated-minerals
  16. https://www.rncminerals.com/beta-hunt-mine
  17. https://stockhouse.com/companies/insiders?symbol=t.min
  18. https://www.youtube.com/watch?v=WtRieiltSLA “A Few Minutes with a CEO” interview, 19 april 2012
  19. https://www.excelsiormining.com/news/news-2013/excelsior-announces-stock-option-repricing, Excelsior Announces Stock Option Repricing October 31, 2013
  20. https://www.excelsiormining.com/news/news-2014/excelsior-provides-marketing-update-and-extends-stock-options, Excelsior Provides Marketing Update and Extends Stock Options August 7, 2014

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