NGEX Resources Could Be The Next Copper Giant

Introduction

In this article I'll have a closer look at NGEX Resources (NGQRF.PK), a member of the Lunding Group which owns the extremely large Los Helados copper project in Chile, the Josemaria project in Argentina and the Filo del Sol project exactly on the border of Chile and Argentina. As these three properties are within 11 miles from each other, one can easily say NGEX is a potential district play.

I'll look at the Los Helados project and Josemaria project and try to determine a potential take-out price as I don't think NGEX wants to develop the project itself. Thereafter I'll move over to the balance sheet to see if there's a short-term funding risk. This will result in my investment thesis at the end of this article.

As trading is quite illiquid on the US-listing of NGEX Resources, I'd recommend to trade through the facilities of the Toronto Stock Exchange where NGEX is listed on the main board with ticker symbol NGQ.

Executive Summary

I will prove in this article that NGEX Resources is an attractive play to gain exposure to copper and gold, as the company currently has three gigantic projects in the Chilean-Argentinean copper-gold belt and two of them are joint ventured to Pan Pacific Copper, one of the largest Japanese industrial conglomerates.

According to my calculations, Los Helados alone is worth in excess of $400M which is more than the current market capitalization of NGEX Resources. As its joint venture partner has deep pockets, local experience and a lot of technical expertise, I'm expecting Pan Pacific Copper to make an offer to acquire Los Helados as it already operates a large 100,000 tpd copper mine just six miles north of NGEX' project. During the further de-risking process, Pan Pacific Copper could (and will) be a great help for NGEX resources to continue its exploration and permitting efforts.

The upcoming catalysts for Los Helados are an updated resource estimate which is expected any week now and will be the base for a Preliminary Ec! onomic Assessment next year which should prove the viability of the project.

Long story short, NGEX is a de-risked exploration company with a very high possibility to get bought out by its Japanese joint venture partner for approximately $3/share, which is a 65% premium over the current share price.

I currently don't have a position in NGEX yet, but might initiate one in the near future.

Exploration project 1: Los Helados

The Los Helados project was discovered about 5 years ago, and the company has continued drilling on the project ever since.

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Los Helados could be one of the most important copper finds of this decade as the project seems to extremely large as the company released drill intercepts including 1,147 meters (yes, meters and not feet) of 0.46% copper equivalent and 1,345 meters (!) of 0.39% copper-equivalent. This continuous drilling resulted in a resource estimate containing almost 19 billion pounds of copper, in excess of 11 million ounces of gold and approximately 95 million ounces of silver.

(click to enlarge)

The average grade is approximately 0.4% copper which is relatively low, but definitely viable as on such large project the economies of scale will be extremely important. A 100,000 tonnes per day production facility would result in an annual output of approximately 270 million pounds of copper per annum, using a 90% recovery rate for the copper. Using a very conservative 60% recovery rate for the gold and silver, Los Helados would also produce 120,000 ounces of gold and 850,000 ounces of silver as by-products which would obviously have a positive impact on the copper cash cost.

It's also extremely important to note NGEX owns 60% of the Los Helados project with the balance owned by Pan Pacific Copper, which is a major integrated copper mining and smelting company that is jointly owned by JX Nippon Mining & Metals Corporation and Mitsui Mining & Smelting Company, two Japanese heavyweights.

I think the partnership with Pan Pacific Copper will be extremely important to NGEX, as PPC already operates a gigantic $3B copper project just six miles north of Los Helados (see image), so PPC knows the region very well and has very probably built excellent relationships with local officials.

(click to enlarge)

As Caserones will produce approximately 225-400 million pounds of copper per year, Pan Pacific Copper definitely knows how to handle large-scale projects. As PPC is familiar with the region and mineralization, I would not be surprised if PPC would make an offer to acquire the Los Helados project a little bit further down the road. In a later paragraph I'll make a calculation how much this project would be worth to NGEX Resources.

Exploration Project 2: Josemaria

NGEX Resources also owns 60% of the Josemaria copper project in Argentina's San Juan province, with again Pan Pacific Copper holding the balance of 40%. The Josemaria project was discovered approximately 10 years ago, and NGEX has since then continued to expand the mineralized zones.

At this moment, the Josemaria project has a resource estimate containing 7.5 billion pounds of copper and 7.5 million ounces of gold at a weighted average grade of 0.35% Cu and 0.24g/t gold or 0.51% copper-equivalent.

The recovery rates at Jos! emaria ar! e decent as well with 85% for copper and almost 70% for the gold which bode very well for future studies to determine the economic viability of the project.

As the mineralized zone seems to be open to the north and the south, I personally expect this project to reach the threshold of 10 billion pounds of copper in the next resource update. The only negative thing is the fact the Josemaria project is located in Argentina, which isn't really a mining-friendly country. It will be an interesting case to see how NGEX and Pan Pacific Copper will be able to move this project forward after Pan American Silver (PAAS) ran into problems with its La Navidad Silver project last year. Fortunately for NGEX Resources, it's not the federal government but the local states who have the prerogative about mining permits and licenses, and the San Juan province is one of the most mining-friendly provinces.

What will be the next catalysts?

NGEX Resources expects to release a resource update on both the Los Helados and the Josemaria project shortly, and I think both projects could now hold in excess of 30 billion pounds of copper.

I expect NGEX to start a PEA study at Los Helados based on this new resource estimate, to run some numbers to get a first indication about the economic viability of the project. I don't think there will be big surprised in the PEA, as one could easily extrapolate the capex and opex (adjusted for inflation) from the Caserones project onto Los Helados as the average grade is approximately the same.

I'm personally expecting NGEX to use a 100,000 tpd base case scenario which should have an average annual output of 270 million pounds of copper, 120,000 ounces of gold and 850,000 ounces of silver. As the infrastructure is quite decent in the region, I would expect a total capex of $3.5B and operating costs of approximately $1.25/lbs of copper after deducting the gold and silver ounces as by-product credits.

A PEA could be ready by H1 2014 whereafter NGEX should move on to! the PFS-! stage if the PEA warrants this. As a large project like this will need a lot of planning and engineering, I don't think we will see any production before 2020.

We also shouldn't expect Pan Pacific Copper to make an offer any day now, as I think PPC's main focus is to get its own project through the commissioning phase. I think the PEA will be the most important catalyst as that will be the first time the both joint venture partners will have some 'hard' numbers to determine the real value of the project.

$3.5B is a lot of money, how will this get financed?

$3.5B is indeed a lot of money, and if we apply a 60/40 debt/equity ratio, the NGEX/PPC joint venture will have to cough up roughly $1.4B in equity to get the project funded.

Fortunately PPC has access to a lot of cash and might be able to provide all the debt and lend NGEX the equity part it needs to get the project built. This might be the most realistic option as Pan Pacific Copper can immediately reinvest the cash flow generated by its own project back in another copper project in Chile.

Another, less likely possibility to raise equity is through selling a part of the precious metals in a streaming deal. I can imagine Sandstorm Gold (SAND) and Silver Wheaton (SLW) would be very interested in a substantial precious metals streaming agreement. At the current gold and silver prices NGEX wouldn't even have to sell its entire precious metals production under a streaming arrangement.

Raising money through issuing new shares is also a possibility, but will likely be the plan of last resort.

My longer-term view

As NGEX has explored and then subsequently sold other mining projects, I think Los Helados and Josemaria will eventually be sold, with Pan Pacific Copper being the logical buyer as it already is a joint venture partner and has sufficient experience in the region. I think PPC will wait for a PEA before zeroing in on Los Helados. In this paragraph I'll make some basic calculations how much the Los Helad! os projec! t could be worth.

In the next columns I'll calculate the value of the different commodities based on different multiples. I will use the net recoverable amount (thus after applying the expected recovery rates) of pounds and ounces (10 billion pounds of copper, 4.1 million ounces of gold and 34 million ounces of silver)

Copper	Value	Gold	Value	Silver	Value
1ct/lbs	100M	$25/oz	102.5M	$0.5/oz	17M
2ct/lbs	200M	$50/oz	205M	$1/oz	34M
3ct/lbs	300M	$75/oz	307.5M	$1.5/oz	51M
4ct/lbs	400M	$100/oz	410M	$2/oz	68M
5ct/lbs	500M

If I use a base case assumption NGEX will be able to attract a price of $0.02/lbs of copper, $50/oz of gold and $1/oz of silver, the Los Helados project carries a value of approximately $440M, which is more than the company's entire market capitalization. If you want to use other values, you can compile your own expected sale price based on the previous table.

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It's obvious NGEX Resources is undervalued, as even just its share of the Los Helados project already warrants a higher value than the entire company.

The Balance Sheet

In this paragraph I'll look at the balance sheet to see if NGEX has any short-term funding issues and if the company can continue its exploration work in the foreseeable future.

The company has a working capital of $19.8M and approximately $22M in cash and equivalents, using a 1.04 USD/CAD conversion rate. The company recorded an operating loss of $4.4M in Q2 because its exploration efforts were way down from Q1 (as the winters are the preferred exploration season) when the company recorded a $16.3M operating loss. At the current cash burn rate and expected annual exploration costs, NGEX currently does not have sufficient money to conclude another full winter exploration program, and will likely have to raise cash, possibly on the back of the resource estimate updates.

Investment Thesis

NGEX Resources (partially) owns three projects in an emerging copper district on the Chilean-Argentinean border with substantial resource estimates totaling in excess of 25 billion pounds of copper and almost 20 million ounces of gold.

The company has found an excellent partner in Pan Pacific Copper, which is the joint venture vehicle of two gigantic Japanese conglomera! tes. As P! an Pacific Copper also operates a $3B, 100,000tpd copper project, the company can obviously offer a lot of technical expertise.

As its main Los Helados project is located in Chile, I feel NGEX Resources is a relatively safe play to bet on a further recovery in the copper price with a potential buyout scenario by the Japanese as cherry on the pie. The Argentinean Josemaria project and the Chilean Los Filos project provide additional upside even after the company sells Los Helados.

Source: NGEX Resources Could Be The Next Copper Giant

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NGQRF.PK over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)