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Kodiak Copper: Why Scarcity and Size Matter Most

Marc Davis Marc Davis,
2 Comments| July 7, 2021

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Location, location, location!

So goes the time-honoured adage about the three golden rules of buying real estate as an investment. Now that same rationale is becoming particularly apt for developing new copper discoveries.

Finding the biggest copper deposits in the world – wherever they may be – used to be all that mattered. And yes, size still matters. But what matters much more these days is being in the right jurisdiction.

This is great news for Kodiak Copper Corp. (TSX.V: KDK, OTC: KDKCF). Let me explain.

Last year, the company has made what appears to be a world-class discovery at its expansive MPD Project at the heart of a rich copper-gold belt in mining-friendly southern British Columbia.

To this point, Kodiak just released its latest round of much-anticipated drill results from the Gate Zone discovery, which offer considerable validation of the theory that the find has the potential to become a monster deposit.

These recent assay results demonstrate that the strike length (lateral parameters) of the Gate Zone to be at least six times larger than past drill results had indicated to date. In other words, the strike length of the Gate Zone discovery has been increased from 125 metres to at least 800 metres.

Plus, the mineralization remains open in multiple directions, meaning that the discovery could get even bigger. Keep in mind the fact that some of the world’s biggest and best porphyry deposits host over a billion tonnes of copper ore. Drilling highlights announced this week include a big step-out drill hole, 575 metres south of all other Gate Zone drill collars, and intersected 87 metres of 0.51% copper (Cu) and 0.43 g/t gold (Au). Other intercepts just south of the discovery hole featured 87 metres of 0.58% Cu and 0.32 g/t Au; and 51 metres of 0.54% Cu and 0.36 g/t Au, all grades that are much higher than the average mining grades in the region.

Why Location Trumps All Else

What makes this discovery special is the fact that the expansive MPD Project is located at the heart of one of North America’s most prolific copper belts near several big-league copper and gold mines, namely Highland Valley, Copper Mountain and New Afton.

Being in a well-established mining camp is proving to be an increasingly valuable competitive advantage for Kodiak. This is because it is becoming increasingly difficult to develop new mines in other copper-rich nations, especially in copper-rich Latin America.

The investment industry is taking notice, which is why it is starting to put a scarcity premium on copper-gold projects in favourable mining environments.

Cormack Securities mining analyst Stefan Ioannou recently wrote in a research report on copper’s future that the industry’s biggest value drivers have all changed in recent years.

No longer can big mining companies mostly focus on developing deposits that can deliver on key dynamics: large tonnage (ideally in excess of one billion tonnes), bigger margins thanks to economies of scale, and a high IRR (internal rate of return).

All of these attributes are still very desirable. But they are no longer the determining factors in deciding whether a mining project gets the regulatory green light to get built.

Instead, the mining industry and investors, alike, are focussed on two key drivers, Ioannou says.

The first is “location trumps grade,” he states. In other words, companies are more likely to succeed in politically stable mining jurisdictions where there is a reliable, well-established regulatory framework for extracting minerals. Especially if these companies go about their business in an environmentally sustainable manner and with minimal impact on surrounding communities.

The MPD Project benefits from being situated in one of these very stable mining jurisdictions. Notably, southern BC is where the industry has thrived for many decades and continues to play an important role in the regional and national economy.

Hence, this favourable mining environment also offers excellent infrastructure. This includes a network of highways and roads that offer easy access to the MPD Project area. Also, this very active mining camp provides the assurance of plenty of robust regional infrastructure, a skilled labour force, and mining-friendly communities. All of this offers the likelihood of cost-cutting synergies for any new mine in the area.

In stark contrast, the world’s most prolific region for producing copper, Latin America, is fast losing its allure. Which is because the socialist governments in both Chile and Peru want to take a much bigger share of the mining industry’s profits by way of imposing punitively high taxes.

This promises to be a major deterrent to the development of new copper discoveries and the expansion of existing large-scale mines in this part of the world.

Plus, the situation is not likely to get any better any time soon. This is because of the rise of resource nationalism. As nation states try to grapple with their treasuries being depleted after dealing with the COVID-19 pandemic, some are trying to get the mining industry to help make up the shortfall with the threat of corporate taxes being jacked as high as 80%.

The second key dynamic that Ioannou highlights is the new reality that a “low carbon footprint trumps cost.” This means that mining companies have to earn social licence by doing all they can to mitigate risks to the environment and to the communities in which they operate.

Indeed, the mammoth copper deposits in Chile and Peru are falling out of favour due to their huge carbon footprints, especially their over-reliance on increasingly scarce water supplies.

In contrast, the relatively smaller deposits in southern BC can run at a much smaller scale while relying on a bountiful supply of hydro power, thereby limiting their carbon footprint.

A World-Class Discovery Begins to Take Shape

To recap, Kodiak enjoyed the breakthrough success of making a high-grade discovery at the Gate Zone via its inaugural drill program last year.

The discovery at the Gate Zone revealed a central high-grade copper-gold zone within a significantly enriched, much wider mineralized envelope. In fact, significant mineralization was encountered over substantial widths in all 2020 holes, and to depths of 800 metres.

Some of the best intercepts encountered so far consisted of 535 m of 0.49 % Cu and 0.29 g/t Au including 282 m of 0.70% Cu and 0.49 g/t Au, including 45.7 m of 1.41% Cu and 1.46 g/t Au.

Notably, the grades drilled in the high-grade porphyry centre are almost triple those that are mined at other copper giants in Canada. Keep this in mind: most porphyries have high grade centres surrounded by a larger envelope of lower grades. It is the combination of these two dynamics that typically makes for a viable deposit.

The best grades encountered so far suggest MPD could be on par with the other big mines in the region. They include Copper Mountain, currently mining with reserve grades at 0.24% Cu, as well as Mount Milligan at 0.23% Cu, Highland Valley at 0.31% Cu, Mt Polley at 0.34% Cu, and Red Chris 0.36% Cu.

Collectively, these Canadian copper-gold mines average 0.35% Cu, while copper mines in the USA average a very comparable grade of 0.33% Cu. In spite of their relatively modest grades, some of BC’s copper mines rank as world-class operations due to their large tonnage and operational efficiencies.

Now it is beginning to look like the Gate Zone discovery is shaping up to be a large tonnage discovery with a large strike length (lateral footprint) and rich mineralization that runs deep (at least 800 metres). In which case Kodiak may end up with the best of both worlds – a massive discovery in one of the world’s best mining jurisdictions.

Why A New Copper Super-Cycle Benefits Kodiak

Thanks to its recently earned status as a green metal that’s used in electric vehicles and other green energy applications, copper has become an especially hot commodity. For instance, its price has more than doubled since 2016.

In fact, copper output needs to more than triple if the world is going to meet its Paris Accord climate change goals in the coming couple of decades. In spite of this imperative to replenish dwindling global copper inventories, it is worth noting that new porphyry discoveries are few and far between these days.

High-grade deposits are especially rare. In fact, only four world-class copper deposits – consisting of over one billion tonnes grading 1% copper or better – have been found since the turn of the new millennium.

Ironically, the green energy revolution is already being hampered by the diminishing average grade of the world’s copper-gold mines. It has fallen by around 60% from around 1% copper to less than 0.4% copper over the past couple of decades.

This means that Kodiak’s MPD discovery now stands out as an extraordinary prospect as the mining industry scrambles to replenish the planet’s dwindling copper supplies with new world-class discoveries. Again, the discovery’s location alone trumps most other discoveries in jurisdictions outside of North America.

Investment summary

The world risks “running out of copper” amid widening supply and demand deficits, according to Bank of America. Hence, a new copper bull market is fast emerging.

The previous copper bull market took place between 2001 and 2011 and saw prices rise seven-fold: from $0.60 to $4.62 per pound. Using copper’s low of $1.95 in 2016 as a starting point, copper prices will surpass $15 per pound if this new copper super-cycle has the same upside appreciation as was the case during the last bull market. The likelihood is that it will be an even bigger rally due to the heightened need for copper in green energy applications, such as electric vehicles.

From a miner’s perspective, the added appeal of MPD is the revelation of high-grade drill results over wide intercepts within what appears to be a large porphyry system. This speaks to the prospect of a world-class discovery taking shape.

This is why Teck Corp. decided to buy a 9.99% stake in Kodiak’s bright future at MPD last year. It is no coincidence that Teck owns the nearby Highland Valley mine and no doubt sees considerable potential in MPD to emulate the kind of success that this flagship asset has enjoyed.

On a technical note, the company maintains a tight share structure consisting of 46.9 million shares outstanding (53.2 million fully diluted). When matched with a steady flow of upbeat news, such a scenario typically acts as a powerful catalyst to higher share price valuations. Accordingly, Kodiak is fully funded (with $13 million in the treasury) for up to 30,000 metres of drilling throughout 2021.

Hence, the stage appears set for Kodiak’s share price to enjoy a sustained upward trajectory during the balance of 2021 and beyond. It bears repeating that the scarcity value of a major copper discovery in one of the world’s most desirable mining jurisdictions makes this an increasingly lustrous investment opportunity.

ABOUT THE AUTHOR: Marc Davis has a deep background in the capital markets spanning 30 years, having mostly worked as an analyst and stock market commentator. He is also a longstanding financial journalist. Over the years, his articles have appeared in dozens of digital publications worldwide. They include USA Today, CBS Money Watch, The Times (UK), Investors’ Business Daily, the Financial Post, Reuters, National Post, Google News, Barron’s, China Daily, Huffington Post, AOL, City A.M. (London), Bloomberg, (Germany) and the Independent (UK). He has also appeared in business interviews on the BBC, CBC, and SKY TV.

An enthusiastic shareholder of Kodiak Copper, his opinions are therefore biased and should not be relied upon for making investment decisions.

FULL DISCLOSURE: Kodiak Copper Corp. is a client of Stockhouse Publishing.

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kdk add sm !!! you have three strikes Mr. Davis.. time for retirement..
October 21, 2021

I agree - location is everything going forward. Copper has gotten infinitely more difficult with it becoming almost impossible to permit a new mine in the US under the Biden administration.
July 7, 2021

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