Analyst update Ray Goldie, Senior Mining Analyst, Salman Partners – Comment August 27, 2012:
Curis Resources Ltd. (CUV - TSX -
.39; Target $6.40; BUY) - 56.3M Shares Outstanding
Hitches and delays make the market skittish and create excellent value in Curis’ shares
Background: Curis plans to use in situ recovery to extract copper from its deposit at Florence, Arizona.
In January, 2011, Curis reported that the Town of Florence had supported “a resolution put forward by the town staff to urge agencies to deny permit applications for the Florence Copper Project”.
However, about half of Curis’ project’s resources lie beneath lands administered by the State, and Curis’ project could likely operate economically – at least initially - under only the State lands. So Curis is able to be patient about permitting the portion – approximately half - of its deposit that is under municipal lands.
Event: (1) Earlier this month, Curis presented its financial position as of June 30, 2012. We have updated our modelling of
Curis to allow both for this information and for the updated economic and commodity price forecasts that we published
on July 24, 2012.
(2) Curis has characterized its activities in calendar Q2 2012 as follows: “the Company continued to work toward permitting for Phase 1 [of the Florence copper project] while progressing with feasibility-level optimization and design studies for the full production scenario. The Phase 1 development is scheduled to be constructed beginning in Q3 of 2012, following the receipt of amended operating permits currently under review by State and Federal agencies [emphasis ours]. This project ‘start-up’ phase will consist of an initial 24-well copper extraction field constructed to simulate full scale operations and a state-of-the-art SX-EW facility that will produce London Metal Exchange (LME) grade pure copper cathode. Curis is well advanced in discussions with the Arizona Department of Environmental Quality and the U.S. Environmental Protection Agency and expects to receive Phase 1 operating permit for the Florence Copper project in the coming months [emphasisours]. In parallel with Phase 1 operations, Curis will advance the completion of the amended Phase 2 commercial operating permits....
To February 2012, four of 16 laboratory scale [metallurgical] tests had been completed with copper extraction ranging from 45% to 81% as compared to a recovery of 49% reported in the [Preliminary Economic Assessment of the Florence copper project]... The remaining 12 [metallurgical] tests are ongoing with completion now expected in Q3 2012 [emphasis ours].” Back in February, Curis had said that “the remaining … [metallurgical] tests are on-going with completion expected in Q2 of 2012.”
Metallurgy: Were February 2012’s metallurgical results better than or worse than our expectations?
Well:
(a) the test materials all had grades considerably higher than that assumed by us. And, usually, the higher the grade, the higher the metallurgical recovery rate.
(b) BUT: the test results suggest an average rate of recovery of 58.4% , which is much higher than our assumption of 49%.
(c) AND: that 58.4% is recovered in only 6.4 months, whereas our 49% takes six years!
On balance, we found the results to be supportive of the view that our assumptions in modelling the Florence project are conservative assumptions.
However, as the completion dates given by Curis demonstrate, completion of this metallurgical program is behind schedule.
Community Relations: Curis reports that “The results of a survey of residents done independent[ly] of Curis by the Town of Florence that showed a majority of residents support the project and ... three series of polling by Curis’ independent consultants ... has further confirmed this support.”
As we noted above, Curis' project scheduling allows it to be patient about permitting the portion – approximately half – of its deposit that is under municipal lands.
Curis may have to be patient. Arizona’s Southeast Valley Register says that “at its regular meeting on Aug. 6, 2012, the Florence Town Council passed an ordinance banning in-situ mining and other operations that use large amounts of sulfuric acid. The ordinance classifies the use of sulfuric acid as a nuisance, arguing the chemical poses a danger to residents. The measure is in reaction to Curis Resources and its proposed Florence Copper Project. …
The ordinance is only the most recent move by the Town in opposition to the Florence Copper Project. The Council previously voted against a General Plan amendment proposed by Curis in Nov. 2011.”
Curis’ response? Well, says the company, “Curis has been the subject of a well-funded campaign opposing the development of the project by a group of out of state neighboring landowners and a local water utility company (Johnson Utilities). ... This campaign has resulted in a real harm to the Company’s reputation and ultimately to its share price. Curis …will continue to investigate any and all means available by which to address these matters.” (We observe, as demonstrated by the notice below, that Johnson Utilities is anxious to avoid any further concerns about the quality of water that it delivers to its customers.)
Source: Johnson Utilities
Curis has hired good help in its community relations efforts. For example, Arizona Business Gazette reported August 23, 2012 that “Rita Maguire joined Curis Resources Arizona Inc. in Florence as senior legal and government affairs adviser….She served as director of the Arizona Department of Water Resources from 1993 to 2001; [and] oversaw the operation of the Arizona Department of Environmental Quality and the State Land Department as deputy chief of staff for Gov. Fife Symington.”
Valuation: Here is our estimate of Curis’ pro forma balance sheet:
Net Asset Valuation
Curis Resources Ltd.
based on Curis' June 30, 2012 balance sheet
US $million US $/share
ASSETS
Current assets 12.55
.22
Restricted cash 1.07
.02
NPV of the Florence, AZ project 368.97 $6.55
- total assets 382.59 $6.79
LIABILITIES
Current liabilities 1.62
.03
Long-term loan 15.77
Other liabilities 1.07
.02
- total liabilities 18.45
.33
Cdn$
SHAREHOLDERS' EQUITY IMPLIED BY THE ABOVE 364.13 $6.47 $6.40
discount rate used in calculating NPV of Free Cash Flows 9.99%
number of Curis shares outstanding 56.31 million
Cdn$ in US$ in 12 months' time $1.0110 (U.S. dollars per Canadian dollar)
Our previous estimate of Curis’ NAV was US$6.97/share. The exhibit above shows that our new estimate of the company’s NAV is Cdn$6.40 per share. This decline is due mostly because of our assumption of lower future copper prices.
Recommendation: We believe that Curis’ share price has been weak both because of opposition, in Florence, to Curis’ proposed project and because the market has recognized that there has been a delay in reporting expected metallurgical results. We believe that an appropriate valuation for Curis’ shares is 100% of NAV. Accordingly, our current 12-month target price for Curis’ shares is Cdn$6.40, down from our previous target of $7.00 per share.
Sensitivities: (1) Our forecasts assume that copper prices drop to US$2.75/lb by 2016, then stay there, forever, in “real” terms. If, instead, future copper prices were to be as represented by forward strips on the London Metal Exchange, Curis’ Net Asset Value would be Cdn$8.99/share