Balance sheet and economic updates take our target price up
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’s “outgoing council which will turn over in the months ahead” 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 of its deposit that is under municipal lands. Curis has been carrying out metallurgical tests on samples from the Florence deposit. Although it is a little of an appley-and orangey situation (see our February 24 2012 Metals Morning Note): “on balance we find the results as supportive of the view that our assumptions in modelling the Florence project are conservative assumptions”. Valuation and Recommendation: We have updated our valuation of the company based on its balance sheet as reported for December 31, 2011 and on our current forecasts of commodity prices and economic statistics. Here are the results of that valuation:
Net Asset Valuation
Curis Resources Ltd.
based on Curis' December 31, 2011 balance sheet
US $million US $/share
ASSETS
Current assets 3.90
.07
Restricted cash 1.07
.02
NPV of the Florence, AZ project 389.31 $6.91
- total assets 394.27 $7.00
LIABILITIES
Current liabilities 1.21
.02
Other liabilities 1.07
.02
- total liabilities 2.28
.04
Cdn$
SHAREHOLDERS' EQUITY IMPLIED BY THE ABOVE 391.99 $6.96 $6.97
discount rate used in calculating NPV of Free Cash Flows 10.28%
number of Curis shares outstanding 56.31 million
Cdn$ in US$ in 12 months' time
.9985 (U.S. dollars per Canadian dollar)
Thus, we now estimate the company’s Net Asset Value at Cdn$6.97 per share. Our previous estimate was Cdn$5.75 per share. The increase is due largely to our more optimistic economic forecasts, notably of higher inflation rates yet a lower discount rate (the latter, for Curis, is the yield-to-maturity on long Canadas plus 775 bps). Because we believe an appropriate price for Curis’ shares to be 100% of NAV, we take our 12-month target price from Cdn $5.75 to, rounding up, Cdn$7.00 per share. Accordingly, our recommendation on Curis remains BUY. 750% upside! A cheap stock indeed.
Which brings to mind a March 17, 2012 story in The Economist: “Walter Schloss was never a face on financial television programmes… His death last month, at the age of 95, garnered little public comment but among a certain crowd it meant the loss of a mind that was courageous, independent and utterly distinct from much of modern finance. Mr. Schloss was part of a small group who worked with Benjamin Graham … He favoured discarded ‘cigar butt’ stocks that could be swept off the floor. Often, they weren’t worth much but they sold for far less…. his returns were reported to have averaged 16% annually, six percentage points higher than the market. He had other tactics, too. In 1999, when his portfolio was composed of everything no one wanted… he said: ‘Never tell a client what they own.’”
What’s next: Curis says that “the remaining … [metallurgical] tests are on-going with completion expected in Q2 of 2012.”Curis says that it believes that, although it may not yet develop the municipally-controlled land, that it has “enough room on the state land to develop a commercial scale mining operation. Plans for all of this are being developed now. We anticipate an operation of some 50 million pounds per annum on state land and will move over to the private lands as soon as the zoning approvals are received and then scale up to full commercial production.”
Assuming final State permitting is granted in time, Curis expects to begin construction of its 50 million pounds per annum operation before the end of July this year