Transcript: Kutcho Copper (KC) - Copper Market Sleep Walking into Supply Crunch

Morgan Leighton
November 16, 2021

Kutcho Copper is a Canadian resource development company focused on expanding and developing the Kutcho high grade copper-zinc project in northern British Columbia. Committed to social responsibility and the highest environmental standards, the company intends to advance the Kutcho Project through permitting to a positive construction decision.

Kutcho Copper has just released its feasibility study and the subsequent market reaction to these numbers has not been as good as was anticipated but the company believes this will improve as the market digests the news as there is significant upside in the Kutch Copper share price to come.The feasibility study is an instrumental achievement for this project life cycle which has been around for nearly 20 years.

This feasibility study is a very robust study and the company is now focusing on the upside and the exploration potential of the project. The feasibility study will show investors in the market that this is a ‘new’ old story.

Kutcho Copper will drive the project through permitting to a production decision and in parallel, the market needs to be educated to increase the company value to where it should be. The project also has fantastic exploration potential and the company will focus on drilling and exploration going forward.

Kutcho Copper has plenty of retail investors but is aiming to attract institutional investors and will build awareness, get the story out to build the institutional investor audience and when the time is right do an institutional financing. The copper market is likely to enter a supply crunch as the copper thematic is tied into so many industries going forward including renewables, EV and infrastructure which all have a huge copper demand.

We Discuss:

00:00 – Company Overview

00:07 – Market Reaction, Near Term Plans & Feasibility Study  

07:22 –  Future With Copper, New Deals & Current Plan  

11:59 – Educating The Market, Exploration Potential & Game Changers

14:44 – Cash Allocation, Exploration Timeline & Low-Cost Copper

20:13 – Capital Release, Copper Thematic Piece & Oil Market

25:57 – Outro

Vince Sorace: Hi, I'm Vince Sorace, here to talk about the Kutcho Copper project feasibility study.

Matthew Gordon: Vince, it's good to see you. We saw you in the middle of September and we had a great conversation. This was a moment that the market was looking forward to, I was looking forward to speaking to you about: the feasibility study numbers are out. How do you think the market's reacted? 

Vince Sorace: The market's reacted not as well as I think it should have, to be honest with you. I think that will come as the market is digesting this news. The way I look at this is: we are trading probably one of the cheapest market caps and cheapest price, on a P-NAV basis in our peer group by far right now. People will be digesting this over the next period, and I think we're going to see that on a value basis alone, we've got significant upside in our share price. 

Matthew Gordon: You've had a good run of it this year. You were at USD$0.85c when we last spoke and you are up over USD$1 now. The momentum seems to be there, but like you say, you are still only USD$100 million market cap company. 

Vince Sorace: I'm tough to please. We've had a great run over the year and it's been the build-up to getting this feasibility study out, which is an instrumental achievement in the lifecycle of this project of forget. This has been around for the better part of 20 years, and it's had a lot of false starts to it. It never really came to this point of completion, this point of confidence, in over 20 years. I think we're there now. What we put out, with a very trusted engineering group like CSA Global, a very robust feasibility study. 

Our objective was to build this robustly. I didn't want people poking holes in this such as the analysts, the bankers, etc. This was built as solid. From what we did in the use of our metal prices in the feasibility study to how we designed and constructed the mine plan around this, to how we proposed the capital around this, there's a lot of things we could have done, but this is the most robust study because I want this thing to lend itself to credibility from a number of stand points, including M&A. If I'm looking at guys up there wanting to take a strategic investment in, or buy the company, I want this to be real. And this is real.  

Matthew Gordon: But here's the thing: the initial capital cost was USD$483M. You are a USD$100M company - there's a problem with that, so it really depends on what you're going to tell the market about what you're going to do with this feasibility study. Is this a precursor to you trying to go out and raise funds, in which case that's going to be an interesting conversation, or is it a case of: at least we know what we've got. That's a really good foundation from which to build, because the other thing we talked about last time was exploration. So what's the plan? 

Vince Sorace: I don't need to raise USD$483M right now. That's down the path as far as I'm concerned. Right now I'm trading around 1 point to or less 0.2 to NAV. The peers in the group right now, and if you want to see it, we put this together in our presentation. It's on the website, go take a look. The average in our peer group right now is trading at about 0.56. to 0.6P-NAV, meaning I am upside of 3x from here.  

Matthew Gordon: How do you get from 0.2 to 0.6? You've put out this feasibility study and you're way ahead of some of your peers, so there's a disconnect. 

Vince Sorace: I think now it's about making the market aware of what we have. Again, this project has had a 22-year life. It hasn't really had the level of confidence that it can get now. Now it's on us to get out there and tell the world what this is. Primarily it's been a 98% retail story for the last couple of years. I don't have an institutional audience, that's what I'm hoping to build right now and that's what we will strive for and build up in the coming months. We don't need to go out and raise USD$483M right now. That's years down the road. There's a lot that we can accomplish to increase the value of this project and of the asset: 1, through hoping to achieve metrics closer to our peer group, and that would reflect directly to our share price. 2 is upside: now what we're going to be focusing on is upside of the project. I'll put up a quick slide here for you and let's talk about exploration potential. 

Matthew Gordon: Before you do, I have 1 question for you: there's a kind of disconnect which you do need, and that's to do with the legacy history of this thing. You said it yourself: this is 20 years in the making. People are making assumptions and connections with the past, which is the big problem that you're having to overcome here. Hence, there's a disconnect that you do you want to try and achieve in the marketplace. So how do you help people go: this feasibility study tells us that there's a good project here. Whatever you thought of it in the past, forget it. It's time to look forward. The IRR is are good. I'm not saying they are good, you need to tell me if they're good. Tell me your sales pitch to say to people: this is a new old story.

Vince Sorace: It is. Look at the margin - it's a good IRR. It's a USD$460M after-tax NPV. But let's not stop there: this is based on USD$1.15 zinc and USD$3.50 copper. The sensitivity and the leverage to copper on this is amazing. If you look at what we said in the press release, and we did 2 sensitivity analyses here: we did 1 to spot prices across the board, and it's amazing. There's USD$900M+ NPV on spot prices on this project as it sits today, and that's USD$4,50 copper, and zinc prices up where they are. In case there are naysayers out there saying that zinc's never going to maintain itself at $1.50, okay, let's put all those prices back down to base: zinc, silver, and gold, and let's just focus on copper because a lot of people believe that copper will go up. If I focus on that metric, and that's 1 of the sensitivity tables, at $4 copper today, which is the long-term analyst consensus right now, leaving all the other metal prices at base case, now I'm talking about a USD$630M post-tax NPV and a 30% IRR.

For those of you who are bullish, and I go to $4.50 copper, now I'm talking about a USD$664M dollar post-tax NPV and a 35% IRR. That's the universe we're playing in. Don't forget that my capital numbers, and I would challenge this with previous reports out there, that's 2021 inflationary built-in numbers. We didn't cut any cards there. In this environment where there are inflated prices with steel, concrete, etc, that's built in there, but I'm not using inflationary copper prices at $3.50. I should be using $4-$4.50, so that I think is even more of the picture, which is very compelling, 

Matthew Gordon: You just stated: we don't need to raise USD$483M - does that mean you will do an equity-debt split? Or do you mean you bring in a partner, and if so, when? What would that deal look like? 

Vince Sorace: I've got opportunities: there's always a debt-equity split. I don't need to raise all that money, that's the first point. The second point is: we've got Wheaton. Wheaton still needs to contribute, and there are 2 important points to this: I have about USD$58M sitting there in the bank for the stream I did with Wheaton, which is about CAD$75M. Secondly, if you notice in the Wheaton deal, we were talking about a USD$20M bonus payment if I hit 4,500t/day throughput, that's what this study is based on. Thus, there's another USD$20M. Suddenly, I'm over USD$100M funded on this project with no dilution. That's just coming from Wheaton against the stream. So yes, you have a big debt component to this. 

The other opportunity, and this came with me announcing about 6 weeks ago the royalty buy-back with Sumitomo. What I was keyed up on there was getting rid of the rofer on the off-take; I am now freed up to do a strategic deal on the off-take side, and there's been no lack of conversations with multiple parties for the past number of months. We are a very sought-after concentrate. We have a clean-con. We are in the upper percentile of concentrates. Everybody knows what's happening in the concentrate market these days - it's tight, and it's going to remain tight for a very long time. So there's another way there against their off-take, where I can raise strategic capital to to go towards the build and the CapEx of this project without necessarily having to raise that money. There are a lot of moving parts. Again, let me also emphasize: you'll see in the final reports that we file that there are opportunities. We can't say that in this press release, but as far as capital goes, you're always out there looking for used equipment, which can be a fraction of the cost to build this, which drops your capital number significantly. We've got other opportunities, low-hanging fruit that we're investigating right now. We're talking to groups right now about things like taking the access road, which is a USD$30M budget in the capital, and actually assigning that to a third party, who would finance it. we would then lease it back, put that into OpEx, which takes USD$30M off that $480M number right off the bat.  

Matthew Gordon: You have some optimization components that you can do, but as a base case, we know what your costs are. The question for me comes back to that; I gave you some options myself: here's your feasibility study - so what do you do with it? What's the plan?  

Vince Sorace: Now we drive this project through permitting to a production decision. That's the strategy. In the interim and in parallel to that, how do I get the value of this company up to where it should be? That's going to come through educating the market now, because as you said, it's been 20 years, it's been a little disjointed. So now we go and educate the market. The other important thing, and this is where I want to share my screen here is that the exploration upside potential with this project is amazing. This is value that we believe we can get into this company next year. This primarily came about as we shifted into this open-pit scenario for the main lens, and you can see that it's the main lens, Sumac lens, and the Esso lens that comprise our project right now.

The Main lens and the Esso lens are what made the feasibility, study. Sumac is all inferred. That's close to 10Mt at about 1.5% copper that hasn't made this feasibility study. There are 2 parts of low-hanging fruit here: what can we do to extend the open pit? That is low-cost production, and we're looking in 2 different directions. Do you see that gap between the Main and the Sumac lens, that has only ever had 1 drill hole put in. We believe that the mineralization does trend between Main and Sumac, with a much lower-cut-off grade now and much lower production costs, that is a huge opportunity where if that mineralization exists and potentially even the top portion of Sumac, which is near surface, if we can expand the pit in that direction. That's something we can do and you've seen other companies do, where we can drill that off quickly, we can get to a level of confidence, and we can do a side-part PEA or even a PFS around this, to show the value that can come into the company and into this mine plan very quickly. 

The other part of the low hanging fruit is Sumac: when we started on Main and we're driving development straight down to Essa in literally year 1. We passed 90m in front of Sumac. Sumac is something that we're going to put some money into, we're going to bring it up in confidence from inferred into M&I. That's mine life. That could potentially be another 4-6 years of mine life, and it's sitting there. It's low-hanging fruit. It is just drilling it off at this point and seeing how it gets into the model. 

Matthew Gordon: This is quite good actually, because at 10-11 years, that's good for a company. It's not necessary that attractive to major or a strategic partner. If you can extend the mine life, that could be a game changer for you because this becomes 15-20 more years it leads to a different set of conversations. Where does exploration fit in the mix here? You've got the feasibility study, the sidecar of whatever else you discover sitting in between Sumac and the main open pit is the plan. So what do you do with the feasibility study for now? Just park it up, focus on exploration for a bit because you think you can add to it? 

Vince Sorace: Yes. 

Matthew Gordon: Have you got money? How much money are you going to allocate to that? 

Vince Sorace: We've been working through 2 months because our exploration efforts and our strategy around exploration shifted when we went to the open pit on Main. We've been working vigorously with our engineering consultants, who did a lot of work into 18 to put together an exploration plan. We've got that plan in front of us. Now it's for us to choose how aggressive we want to get and how much we want to spend. I could probably, next season, drill up to 30,000-40,000m if I want to. That's the extent of the plan that we're talking about here, because it's not only in resource conversion, or call it pit expansion, there's also blue sky opportunity, and these are the blue-sky targets. This horizon that post the Esso, Sumac and Main deposit repeats and folds itself 3x through our claims license. It hasn't seen any exploration since 1990, and VMS districts tend to get bigger when you go at them.

How are we going to get money? The nice thing is that we're in Canada, in BC, and what were able to do here is raise money called flow through money. Right now, that capital which would directly go into exploration, I can raise money at a 1.45 factor or premium to market, to raise any money I need for exploration. I'm going to pick my spots. I'm cap table sensitive. I think we're worth more than we're trading at today significantly. I'm going to be doing a lot of work over the coming weeks to try to get that share price a lot higher to where I think it should be. If I can raise money at a significant premium with little dilution, to something that I think I can add a ton of value to, just by doing this work in 8 months, starting from today, sure; we're going to be going at that aggressively. 

Matthew Gordon: When will you make the decision about what that number is?

Vince Sorace: Probably in the coming month. 

Matthew Gordon: You're sitting there on 1.1Bnlbs of copper equivalent at the moment, in terms of the M&A. You've got around 460Mlbs on the inferred component, you need to bring as much of that through as possible, but the exploration bit, how quickly can you do this sidecar in terms of bringing some numbers into the M&I category? 

Vince Sorace: Quickly - we can we can drill this out next year. The exploration plan that we're looking at is that we can drill out this next field season, and considering we just finished a feasibility study and we've got all the updated metrics to everything else that would fit into a sidecar PEA or PFS, we can do this next year. All of it. 

Matthew Gordon: What it seems to me that you are working towards is building something and painting a picture for a mid-tier company to come in and either work with you, or at least certainly lend you their balance sheet to be able to get this thing financed, because copper is not cheap, generally. I know you're a low-cost version of copper, but it's still not cheap in terms of CapEx. In terms of the number of pounds of copper equivalent that you think you need to be able to present to someone like that, what is that number? It's not 1.1Bnlbs, what is it? 

Vince Sorace: It's hard to say. I don't want to speculate too much on that but it depends on who my audience is. Let's be realistic; is this a project that First Quantum or Lundin will look at? Probably not. There are other producers in our universe that I think it's already attracted to. I think we're already there, and I think we're already there with respect to just the confidence in the potential upside in mine life as it's presented. I'm going to continue down that path and I'm going to prove it out, but I think we're already there. Now it's playing the game, it's moving down the path and continuing to move forward. You're right: the feasibility study shows confidence in the asset. It is what it is. Now everything we're doing in parallel is moving it down the path to permitting, because the more and more you get down that path to permitting, essentially, the higher the value your asset becomes, because you continue to de-risk it. Of note, my permitting budget isn't a lot of money and that could be part of a financing package that I do with the strategic. But it's also about moving this thing down the path. 

Now all I'm going to be talking to people about is: how much more valuable I can make it. I've got the confidence in the feasibility study out. People know what this project can look like at minimum today. Now I want to show them how big can it get? How much better can it get and all this potential that is there. 

Matthew Gordon: Let's come back to a point you made earlier, which is: you are so heavily skewed towards retail that it's probably damaging for you and restricting your opportunities. How do you go about telling institutions what it is that you've got? Because I'm looking at this thing going: okay, that's quite a nice company. It's kind of a company-maker in its own right. Nothing huge, just a good solid company. But if you get some institutional money in there, I think it helps you go and raise the capital that you need. It may improve your liquidity, depending on how they play that, but it makes your money cheaper when you do raise capital, so that's why it's important. It is important for the retail guys too, but it is the institutional money that will bring that comfort. So what are you going to do about that? 

Vince Sorace: I've been in the capital markets for 30 years. I have relationships with pretty much every bank on the street, so that's what we're doing now. We started doing that 2-3 weeks ago, but I take it back to: everybody was waiting to see this study. Now, through the traditional on-deal road shows with the bankers, I'm looking for analyst coverage. I got one at Red Cloud, that was actually prior to my feasibility study. I think we'll see an update to that come out soon. I'm going to be set up here for a number of different groups to provide analyst coverage on this, and we'll post those on the website when we get them. Now it's about hitting the street, doing these non-deal roadshows, getting awareness out there, talking up the story. That's how we start building the institutional investor audience, then ultimately, when the time is right, you can do things like an institutional financing. 

Matthew Gordon: You're going to need to do that to get them interested, both cover you and to get them to come in quickly, not just picking up scraps here and there. 

Vince Sorace: I've already been offered institutional capital. Right now I've said no. I think I'm too cheap so I've said no. I don't need the money right now, so I will take my time. I will go out there. I will do my best to market the story to try to get something as far as a valuation that I think we're more comfortable with. and at that point I will look at raising some money. But it will be at a more proper price point and so there's more upside for the shareholders. 

Matthew Gordon: With the institutional hat on, people talk about gold being an anti-inflationary investment, in the sense that in troubled times gold is a safe harbour. Do you think that some of these green metals like copper and nickel? can possibly get that status where they are seen as anti-inflationary measures, given the kind of electric thematic and the whole 'greening' of whatever we're doing? 

Vince Sorace: The thematic piece to copper right now is tied into so many things. We're tied into the battery metal movement, and that's never going to go away. But we're also tied into this entire infrastructure movement; look at what the US has just announced: they're throwing USD$500Bn at things that are copper intensive. That's not going to stop. In this world, especially post-covid, you're going to see many companies around the world doing this; throwing money at infrastructure. The infrastructure space these days is very different to how it was 20 years ago. 20 years ago it was very traditional: roads, bridges and yes, wires the sky. But today, look at what the US is spending on renewables. They're spending it on EV infrastructure. They're spending it on these things that are multitudes more copper intensive than any of the traditional infrastructure spends of the past. 

Matthew Gordon: Interestingly, I was reading something by Nick Snowden, the Commodity Strategist at Goldman Sachs, and he's saying that basically, the copper market is sleepwalking into a huge supply crunch, akin to what happened in the oil market back in the 2000. The signs are there.

Vince Sorace: The signs certainly are there. I alluded to the fact that I'm already in conversations with strategics on this, and with respect to broader financing objectives, these guys have their feet on the ground. These guys are the truth to what's happening out there in the copper market. Trust me - they're worried about supply side in the copper space in the years to come. It's a good sign. I like hearing that, obviously, but like I said, those are the guys with their feet on the ground and in the concentrates market and just generally speaking, the supply side of the copper market, they're not seeing this let up for many, many years.. 

Matthew Gordon: I wanted to check in with regards to the feasibility study. I'm glad we had the conversation about exploration; it paints a clear picture in my head about the way forward and some of the options available to you. We'll have you come back on to talk money at some point as well. I appreciate your time today. 

Vince Sorace: Thank you. Always a pleasure being here.

To find out more, go to the Kutcho Copper website.