Western Copper & Gold (WRN) - Technical Analysis & Due Diligence
Merlin Marr-Johnson recently caught up with Paul West-Sells, President and CEO of Western Copper and Gold. His company is developing the Casino copper and gold project. He shared with us the bringing on of Rio Tinto as a major strategic partner at Casino in May of 2021, as well as the recent PEA and exciting new drilling results.
Western Copper and Gold Corporation is a Canadian exploration company engaged in the development of the Casino deposit, which it hopes to develop into a world-class copper and gold mine. The company is based in Vancouver, BC, and trades on the NYSE American exchange and the Toronto Stock Exchange.
Leadership at Western Copper and Gold
In addition to West-Sells, the company is led by Varun Prasad, CFO; Cameron Brown, VP Engineering; Shena Shaw, VP Environmental and Community Affairs; Elena Spivak, Corporate Secretary; Sandy Noyes, Director of Investor Relations; Julie Pelly, Communications and Human Resources Manager; Mary Mioska, Sr. Environmental Manager; and F. Jay Corman, Manager of Special Projects. A five-person board provides direction to management.
The Casino Gold Project
The Casino Project is a very large porphyry-hosted copper and gold deposit with associated molybdenum and silver. It is located in west-central Yukon, in the northwest-trending Dawson Range, 300 km northwest of Whitehorse.
Casino is part of the Whitehorse Mining District and consists of 1,191 full and partial claims covering 21.62 Ha. The current resource estimate at Casino consists of:
Gold: 14.5 M oz. measured and indicated plus 6.6 M oz. inferred
Copper: 7,601 M lbs. measures and indicated plus 3,258 M lbs. inferred
Casino is proposing a conventional open-pit operation to make the project economically viable. The ore will be processed by a combination of conventional milling and heap leaching. The current resource estimate includes both of these processing methods. The mill is expected to process about 120,000 t of ore per day and the heap leach 25,000 t per day over a long mine lifespan.
The anatomy of the deposit reveals a two-fold aspect. There is a breccia core containing higher-grade ore overlain by a capping supergene unit of lower-grade ore-bearing rock. An already completed PEA indicates that the core will be developed first. The PEA lists an IRR of 19.5 percent, and a net present value of $2.3 Bn, using a discount rate of 8 percent and prices of $US3.35 for copper and $US1,600 for gold.
Rio Tinto, Recent Drilling, and Ore Quality
When Rio Tinto came on board, it signed an investor rights agreement as part of a private placement of $25.6 M. Part of that agreement was a drilling program. With the first nine holes, about half of the program has been completed. This is in addition to the scanning of over 50,000 m of historical core as well.
These holes targeted what is referred to as ‘the core’ of the deposit, which is an 800 m by 500 m cylindrical zone in the middle of the deposit. It comprises 200 to 300 M t and contains about 0.7 percent copper equivalent, which is quite a bit higher grade than the rest of the deposit. One of the drill holes that Western announced recently intercepted 65.8 m of 2.53 percent copper equivalent from 10.6 m depth.
The core of the deposit represents the initial focus of the development plan and is where mine will start. As indicated in the company’s PEA, for the first four years of mine life, the core alone, grading at 0.72 percent copper equivalent, will be processed as feedstock for the mill. After that, the first 1Bn t runs around 0.5 percent copper equivalent. Then, the next 1Bn t comes in at 0.4 percent copper equivalent.
Casino's CAPEX Requirement
Casino is anticipated to be a hugely long-lived asset. The CAPEX for Phase 1 is CAD $3.25 Bn, or US $2.6 Bn. These numbers do not include any production during phase 2. When Phase 2 commences, the capital is already sunk cost, so the copper, gold and molybdenum production then is simply adding additional cash flow.
Casino is expected to produce close to 400,000 oz. of gold per year initially, and then that drops down to 260,000 oz. Copper production averages about 80,000 to 90,000 t of copper per year. These numbers come for both the milling and heap-leaching production processes.
In detail, the upper capping unit is stripped off and goes directly into the heap leach. The heap leach throws off around 80,000 oz. of gold.
According to West-Sells, one of the geological aspects that distinguishes Casino from many lower-grade copper deposits in Northern British Columbia and Yukon is its superior ore grade. Once mining commences, a high cash flow comes in quickly, making it a very good project.
A feasibility study (FS) is underway and expected to be finished by the second quarter of 2022. Western started on it immediately after the PEA was finished. Western has actually had the Casino project for about twelve years. During that time, many engineering studies were run. There was even an historical FS done in 2013. There were two PFS’s before that.
When Western acquired Casino, it was fairly well defined. The company operates more as a team of engineers than anything else. So, from an engineering perspective, the project is reasonably close to being optimized and that’s what’s reflected in that first phase of the current PEA. The mill will be a large operation given the total size of the deposit. Milling will start off at 120,000 t a day. West-Sells believes that by the time the last rock is put through the mill, it will probably be twice that size. He reiterated again, that 3.6 Bn t over a 75-year mine lifespan.
With all the previous work, one could question why Western didn’t go directly into the FS. West-Sells indicated that with the PEA, the company wanted to take a good hard look at the second phase of production. Phase one only looked at measured and indicated copper and gold. The second phase accounts for the inferred resource.
The company considered two approaches to the preparation of the FS. One approach is to have an FS that addresses both phase one and phase two. The other is to build on the previous PEA and roll that into an FS. Western chose the latter approach. The company got the PEA out quickly, and then it essentially used that to roll right into an FS, focusing on that first 25-years of production.
The total cost of the FS is about $3 M. Much of the work is already done, including the metallurgical work, and some of the engineering work. What’s left to do is some detailed engineering work.
Additional Comments About the Rio Tinto Partnership
Rio Tinto is quite excited to add Casino to its portfolio. The deal, which was finalized in May, 2021, resulted in Rio Tinto acquiring an eight percent interest (11,808,490 common shares at a price of C $2.17 per share) for an aggregate cost of C $25.6 M.
Rio Tinto has quite a bit of experience in Canada. Once Casino is up and running, Rio Tinto will get 75 years of economic production in a stable jurisdiction. According to West-Sells, Rio Tinto is most attracted to the following aspects of Casino: the resource in the core, the quality of metallurgy, and the geotechnical aspects going forward. Indeed, Rio Tinto is very happy with the recent drilling results. Its geologic and technical team completely confirms what Western understands. Both companies share a common interpretation of the ore grades and the contacts between the high-grade core and the lower-grade country rock and how they combine to make the total resource.
The next step for Rio Tinto, according to West-Sells, is then probably owning the project. That action is “pretty darn close”, he suggested. Consider the situation if a deal isn’t made: Rio Tinto remains an 8% shareholder, which essentially does nothing for a company of its size. It’s just an annoyance to them.
Can Western Afford the CAPEX?
The ‘elephant in the room’ is the large CAPEX requirement, which is huge for a junior company such as Western Copper and Gold. The cost of capital for a junior is a lot higher than it is for a major or a super major like Rio Tinto.
There’s good trust and a good working relationship between the two companies. That can’t be put into a press release, at least at this stage, but that’s an important part of how the two companies mutually view the project to keep it moving forward.
Western does have a significant cash position on hand with around $50M cash in the bank. The company is well-positioned in the near-term to get this project shovel ready.
Permitting costs are expected to run some $20 to $30 M. Some of that cost is doing all the things that are required for an economic assessment (EA). There is quite a bit of fieldwork in remote areas, much of which requires helicopter transportation. There are various surveys of wildlife, additional engineering work, and lots of water-balance modeling. An EA application can be four times as long compared to FS of sheer length.
Furthermore, the EA work continues for years. Western expects that it will take about four years: A year to get the application in front of the regulators, and then three years to complete the process.
The tailings facility is a big thing in the EA process. Tailings facilities rightly get screened carefully in the modern regulatory environment, so the company has spent quite a bit of time on that. Just sorting that out, for example, costs about $1M for meetings and consultants.
The Next Six to Twelve Months
2022 looks to be an exciting year for Western Copper and Gold. The FS is expected by the second quarter of the year. The metallurgical work will be coming to a close. Most importantly, there may be an announcement coming out about Rio Tinto’s role going forward.