Copper Fox Metals Inc V.CUU

Article from 2005

[Shaunsaw]

Title: Tip of the Day: Betting on Structural Bulls and Common Sense Publisher: Kaiser Bottom-Fishing Report Author: Copyright 2005 John A Kaiser

Tip of the DayApril 15, 2005

Copper Fox: a bet on the structural bulls and common sense Here is a new bottom-fish buy recommendation in the
.20-
.29 range perfectly suited for a bet on the structural bulls and common sense. Copper Fox Metals Inc (COF.P-V:
.28) is a capital pool that went public on September 9, 2004 with a plan to acquire from insiders an option on a major copper deposit in northwestern British Columbia. Copper Fox presently has 6 million shares issued and 7 million fully diluted, but Copper Fox will have 25,402,700 shares issued and 30,606,240 fully diluted if the major transaction and associated private placements are completed. The special meeting will be held on May 25, 2005, a week after the BC election. There is some risk that if the NDP wins the British Columbia election, Copper Fox may reject the major transaction, but my impression is that major shareholders are inclined to take the optimistic view that a victorious NDP government would operate with common sense. Details of the Shaft Creek option Copper Fox will acquire an option to earn 100% of Teck Cominco's stake in the Shaft Creek copper-gold-molybdenum-silver deposit by spending $5 million by December 31, 2006 and another $10 million by December 31, 2011. Copper Fox can also vest for 100% by delivering a positive bankable feasibility study after spending at least $5 million. The catch is that Teck Cominco retains back-in rights it can exercise any time. The right consists of one choice from among three options: 20%, 40% and 75%. The maximum back-in requires Teck Cominco to arrange Copper Fox's share of project financing. Upon Copper Fox delivering a feasibility notice Teck Cominco will have 120 days to decide which of the three back-in options it wishes to exercise. Alternatively it can choose to retain a 1% NSR or receive $1 million in Copper Fox stock. Because there is an underlying minority interest, Copper Fox will either end up with a "carried" 23.3% net interest at worst, or a 93.4% net interest at best. One can assume that if the project's numbers are weak, which would be the case if historical metal prices prevail during the decision period, Teck Cominco will let Copper Fox keep 100%. And if the project economics are robust with the structural bulls having won the argument, Teck Cominco will back-in for the maximum interest. The option being transferred to Copper Fox was secured by Guillermo Salazar on January 1, 2002. The price of copper then was
.65 per lb and the price of gold was $278 per ounce. At the time there was little, if any, talk about structural bulls and a new mega cycle.

Shaft Creek is a world class but marginal deposit Shaft Creek is a giant low grade copper porphyry deposit with an indicated resource of 1.7 billion tonnes of 0.192% copper, 0.012% molybdenum, 0.16 g/t gold and 1.67 g/t silver, plus an inferred resource of 1.8 billion tonnes of 0.121% copper, 0.0078% molybdenum, 0.12 g/t gold and 1.56 g/t silver at a zero cutoff grade. Shaft Creek is a world class 3.5 billion tonne copper-molybdenum-gold-silver deposit located 70 km from the nearest road in an area lacking power. At current metal prices ($10/lb moly) this giant system has a gross in situ value of US $42 billion with an average rock value of about US $11 per tonne. It was discovered in 1957, explored by Hecla during the sixties and seventies, and then by Teck which has done no work since 1981. Over 67,000 metres of drilling has been done. Tackling Shaft Creek with a Small is Beautiful approach The global resource, however, is not the story. Copper Fox's goal is to demonstrate the feasibility of open-pit mining a high grade core of 465 million tonnes identified through a 0.35% copper-equivalent cutoff. The gross value of this "starter pit" is $10 billion with US $21 per tonne rock value at prevailing metal prices and grades of 0.359% copper, 0.024% molybdenum, 0.25 g/t gold and 1.99 g/t silver. At $21 per tonne rock the high grade Shaft Creek core has significant economic potential. However, at the metal prices that prevailed in January 2002 when Teck did the deal, the rock value shrivels to $9 per tonne at which value even the high grade core of Shaft Creek is worthless. The Shaft Creek story thus hinges on the structural bulls winning the debate about future metal prices. Treat Copper Fox as a bet on the Structural Bulls During 2005 Copper Fox plans to spend $1.3 million on 5,000 metres of metallurgical drilling and 1,500 metres of exploratory drilling. The project is at the metallurgical stage in the exploration cycle where the goal is to establish metal recoveries and the best recovery process. The drilling will also confirm metal grades, in particular that of molybdenum which may hold the swing vote in the feasibility of this deposit. The implied project value based on 30.6 million shares fully diluted is $8 million if Teck Cominco does not back-in, and $33 million if Teck Cominco does the maximum back-in. These values are very cheap if the prevailing metal prices turn into a long term reality, and offer tenfold upside potential for either a $500 million dream target (the scenario under which Teck Cominco would back-in), or a $100 million dream target (the scenario where Teck Cominco would take an NSR). Copper Fox and its Shaft Creek project are thus a clear cut bet on the argument between the cyclical bears and the structural bulls. *John Kaiser does not own shares in any of the securities mentioned herein