Framework for Analyzing Copper Exploration Investments: Enthusiasm v Diligence

This mining sector analyst provides expert insights into recent developments in the copper market and drilling results from three junior copper exploration companies. With over 30 years of experience spanning capital markets and the industry, the analyst conducts an informed evaluation of the investment case for each company based on critical factors such as resource potential, operational plans, location risk and management strength. For investors, the discussion offers an invaluable framework for analyzing junior copper vehicles' upside and downside risks amid shifting supply and demand dynamics in the copper market.

Copper Market Dynamics

Prices have risen moderately in recent weeks due to protests in Panama disrupting output from First Quantum's Cobre Panama mine. As one of the world's largest newly constructed copper operations, this major supply disruption has impacted sentiment. Such incidents could quickly tilt the finely balanced market into deficit given the constrained mine supply growth and steady demand expansion expected with the global energy transition.

Diversified miners such as BHP and Rio Tinto have been guiding for flat to marginally declining copper production in the coming years as ore grades decline at aging mines. The lack of new large-scale projects in the pipeline means the industry will struggle to significantly bolster supply in the medium term. With few new deposits being discovered and those that are found tend to be lower grade, remote or jurisdictionally challenging, underlying market tightness persists despite headline numbers

This scarcity lends greater weight to projections from agencies such as the International Copper Study Group of a 460,000-tonne global copper surplus in 2023 and 930,000 tonnes in 2024. These may overstate the likelihood of oversupply as they do not factor in ongoing pandemic impacts or additional supply curtailments. It is worth noting that miners frequently fall short of optimistic production guidance.

Ultimately, with major mines taking 15-17 years on average to move from discovery to production, supply cannot rapidly respond to shortfalls emerging due to temporary disruptions. This dynamic means copper prices exhibit asymmetry to the upside for investors, especially as the metal remains indispensable to economic activity and the global energy transition. While volatility is inevitable, copper's long-term secular outlook remains bullish.

Filo Mining

Filo Mining is a Lundin Group copper-gold exploration company focused on the Filo del Sol project straddling the Argentina-Chile border. Filo's sizeable $2.3 billion valuation instantly distinguishes it from the other juniors examined, giving it incumbent miner status despite no production. This removes direct comparability but offers a useful perspective on market expectations for a more advanced exploration play.

Filo del Sol lies within the renowned Maricunga mineral belt, home to multiple major mines over the past decades including the Vicuña, San Jose and El Indio deposits. The Lundin Group's renowned project generation and exploration expertise, honed by decades in the region, provides Filo a competitive edge. Filo is advancing Filo del Sol in Argentina's remote San Juan province where mining-friendly policies and Lundin's productive track record securing permits underpin the jurisdictional advantages.

In October, Filo reported an exceptional intersection of 136m grading 1.15% copper equivalent from a newly discovered zone near the surface at the project's Bonita target. This expands the extensive area of known mineralization, already drilled across a 4km trend. Such results confirm the immense untapped potential of the system. With fieldwork ramping up to encompass 40,000 metres of drilling in 2023, further major discoveries appear in reach to propel Filo towards its objective of defining one of the world's largest copper-gold deposits.

However, there is a note of caution regarding Filo's current mineral resource and the substantial additional work required to boost confidence and size. While impressed by the scale of the mineral system and Filo's experienced team, the Indicated resource estimate totals just 430 million tonnes grading 0.33% copper and 0.33 g/t gold. Though demonstrating sound economics, this resource is modest relative to peers and Filo's towering market capitalization is pregnant with anticipation of exponential growth.

With the upcoming drill campaign comparable in size to the program that generated the maiden resource, expect significant resource expansion. But realizing the world-class potential intimated by its valuation may remain a multi-year endeavour requiring hundreds of thousands of metres of additional drilling and extensive metallurgical testing. While Filo offers leverage to further exploration success, expectations should remain realistic.

The Investment Thesis for Filo Mining

• Large prospective land package in a proven copper-gold district being systematically explored by an experienced Lundin Group technical team.
• Early drilling has successfully delineated an initial resource demonstrating sound preliminary economics, with exceptional upside potential.
• Substantial valuation limits near-term upside, but strong long-term optionality on defining an exceptionally large-scale deposit.
• Critical investment risks center on deposit size and continuity, plus extended development timeline to production due to remote location.
• Prospective as a long-duration call option on copper, with resources to continue extensive exploration until major discovery is made.

Lion Copper & Gold

Let's now look at Lion Copper & Gold recent drill results from the company's Bear deposit located on its MacArthur copper project in Nevada. Lion Copper & Gold reported strong grades of up to 5% copper but starting at depths of 700-900 metres. While encouraged by the tenor, we must question whether continuity and size appear sufficient thus far to support an economic underground mining scenario.

Ideally, Lion should provide complete depth details for all drill holes rather than highlights alone to allow proper interpretation. We also encourage switching to metric units as standard industry practice. Regarding Lion's total copper reporting, we urge caution as this convention typically indicates the presence of highly profitable supergene-enriched mineralization, which does not appear to be the case here based on the rocks intersected. More precise terminology would avoid misleading implications.

Overall, while the drilling proves mineralized systems are present at MacArthur, additional definition and vectoring are required to hone in on a potential high-grade core zone. But with a modest CAD $26 million market capitalization, Lion provides a relatively inexpensive leveraged play on new porphyry copper discoveries in Nevada, an increasingly attractive US mining jurisdiction.

However, meaningful risks exist given the early stage of the project, Lion's limited financial resources, and its extremely illiquid share price, which has barely traded for years. Therefore, Lion suits risk-tolerant investors with a longer time horizon, rather than those seeking liquidity. Proof of concept through the delineation of a substantial mineralized system is needed to broaden Lion's appeal.

The Investment Thesis for Lion Copper & Gold

• 100% owned project boasting geology conducive to hosting a major porphyry copper deposit in an increasingly mining-friendly Nevada jurisdiction.
• Relatively low valuation pricing in success potential balanced with significant risks due to the early stage of the exploration program.
• Additional drilling, continuity demonstration, and vectoring towards a core zone are required to validate upside potential and economic viability.
• Key downside risks include limited liquidity, early exploration stage, access to follow-on capital, and the need to delineate a sizeable mineralized system.
• Best suited to risk-tolerant investors with a longer time horizon given significant work ahead to prove commercial viability.

Meridian Mining

Recent drill results were reported by Meridian Mining at its Santa Helena target, located just 15km from its flagship Cabacal copper-gold project in Mato Grosso, Brazil where mine development is advancing. Meridian aims to leverage existing nearby infrastructure to fast-track Cabacal into production, with Santa Helena contributing supplemental mill feed to enhance project economics.

Note the long mineralized drill intercepts from near the surface at Santa Helena, such as 68m at 4.9% copper equivalent, appear encouraging. However, he questions Meridian's use of misleading copper equivalence reporting not supported by the completion of a compliant resource estimate. He points out that Santa Helena was previously mined for zinc, with penalties on zinc recovery and payability likely to reduce the true copper equivalent grade. Nonetheless, Santa Helena's shallow sulfide mineralization adds incremental value and Meridian's experienced team prudently seeks to exploit nearby deposits to augment Cabacal's production profile once commissioned.

Regarding Cabacal itself, there is a clear path to production supported by extensive existing infrastructure, a positive 2018 preliminary economic assessment and strong recent metallurgical results. With the project de-risked and financed, Meridian offers investors a compelling copper developer story with exploration upside led by a proven mine-building team.

However, Meridian must improve its marketing efforts and project transparency to enhance market awareness and properly communicate its opportunities. With targeted promotion and continuing positive news flow demonstrating resource growth potential, Meridian could gain greater investor recognition to help rerate towards peers, despite some discount warranted for Brazil jurisdiction risks relative to top mining districts.

The Investment Thesis for Meridian Mining

• mine-buildingStrong leadership team with mine-building experience rapidly advancing near-term production at the Cabacal copper-gold project in Brazil.
• Existing infrastructure and historic production provide advantages in refurbishing Cabacal into a low-cost operation with exploration upside.
• Santa Helena represents incremental production growth upside; however, potential synergies depend on exploration success.
• Key risks relate to ramp-up execution, metallurgy, geology contiguousness, and Brazil's high environmental licensing standards.
• Compelling risk-reward at a current valuation based on a de-risked path to copper production with upside optionality.

Conclusion

In conclusion, while all three firms show encouraging indications of exploration success, the rigorous examination of key project criteria is required for investors to separate promising opportunities from speculative long-shots in the high-risk junior mining universe. Factors such as geology, infrastructure, metallurgy, access, scale potential, mining method, permitting, capital intensity and jurisdictional considerations, as well as management pedigree, must be weighed equally alongside headline drilling results.

Maintaining realistic outlooks accounting for significant risks inherent in early-stage projects is essential to make prudent allocations to junior vehicles, while expectations of smooth value accretion are often misplaced. By targeting companies with concrete paths to demonstrate resource growth and add tangible value, investors can selectively leverage the upside in copper amid a decidedly bullish long-term supply/demand prognosis for this critical metal. While technical merits appear promising for the firms discussed, comprehensive due diligence is vital to determine which projects truly warrant capital allocation.

While the prospective potential exists, prudent investor analysis must go beyond enticing drill hole headlines to incorporate all factors determining if a mineral deposit can become an economic mining asset. By maintaining realistic outlooks and targeting companies with exploration results linked to clear value drivers, investors can selectively capitalize on the irreplaceable metal copper's structurally bullish long-term fundamentals.

If you want to improve your investing chances, subscribe with us to get access to Analysts Notes and macro expert commentary.