Kutcho Copper (TSX-V: KC) CEO Vince Sorace on the Robust Economics of the Advanced Stage, High-Grade Copper-Zinc Kutcho Project
Vince Sorace: Thanks for having me today, Gerardo.
Gerardo Del Real: So, listen, we're in the midst of this new copper and zinc bull market and Kutcho Copper, which was formerly Desert Star Resources, has managed to put together a transformational transaction for the advanced stage Kutcho Project, that included a financing package from Wheaton Precious Metals for over $115 million Canadian. Kutcho, of course, is an advanced stage, high-grade, copper zinc project, with enough gold and silver to convince Wheaton to write a check, and we'll talk about that in a bit.
But before that, I'd love for you to tell us a bit more about the team. You managed to put together people that include Allison Rippin Armstrong, who's VP of Community & Environment, and Stephen Quin, who I have the utmost respect for and is a Director and CEO of Midas Gold, and who also happens to be pretty familiar with the project. Tell me a little bit more about your background and tell me a bit about the team you've managed to put together.
Vince Sorace: I'm very excited about the team that we've been able to put together. I believe the team is tailor-made for the future success of the Kutcho Project, from all aspects. We have a fantastic technical team, with regards to this. With Rob Duncan and Rory Kutluoglu, they both have immense experience in these types of deposits and the work required to drive and to complete the feasibility study that we're targeting next year. We've got the permitting team led by Allison Rippin Armstrong, who you mentioned, who, I would suggest, is one of, if not the premier, community environment people in the field. She has a fantastic track record, did a great job for Kaminak, alongside Rory actually at that time. And then, a very strong board, both on the technical and corporate side, with Stephen Quin, being a previous owner of the Kutcho Project, so knowing it very well and liking the project a lot. It was his ambition to have that put into production back in the Sherwood Copper days.
Gerardo Del Real: Let's talk about the project. Mineralization was first discovered way back in 1968 and since then the property has had several owners, including Sumitomo, Homestake Mining, Barrick Gold and of course, you mentioned most recently, Capstone Mining. Now, the geological model is very well understood. The 2017 PFS demonstrated an after-tax, net present value of $265 million Canadian and an IRR of 27.6%. Now, that's using $2.75 copper and $1.10 zinc and we're obviously right at about $3.20 and $1.53, the last I checked. So, you got that going for you and we'll talk about that as well.
But, you've secured up to $85 million dollars in a streaming agreement, as I mentioned earlier, with Wheaton Precious Metals, and yet you have a market cap of just roughly $42, $43 million Canadian. Tell me about the project. What excites you about it?
Vince Sorace: A little intro to the project. It's an advanced stage, development stage, high-grade copper zinc deposit in northern BC, Canada. It currently has probable reserves of 10.5 million tonnes, grading 2% copper, just over 3% in zinc, which equates to about 2.9% copper equivalent. And as you mentioned, the project demonstrates robust economics and that highlight there is, those were done at $2.75 copper and $1.10 zinc, with substantially higher commodity prices currently. It does raise the bar for this project immediately, as it is very sensitive to copper and zinc prices. Another note is we have a very manageable Capex at, you know, initial capital of $220 million, and we've got this significant upside potential, I would deem it to be low risk, with ultimately our goal to double the size of this project from its current 10.5 million tonnes. In addition to all that, this is a VMS district. There's been no significant exploration done since 1990 and we think there's upside potential from that perspective as well.
On the financing side, Wheaton provided us with three methods of financing. The streaming arrangement, which provides us with about $65 million dollars U.S., towards developing the project and they're actually advancing us $7 million dollars up front to complete the feasibility study. They also participated in the equity round for $4 million dollars Canadian. They haven't done that in a junior developer since 2008, so this is their first time in a long time. I believe it speaks highly to their confidence in the asset. And in addition to the stream and the equity position, they provided us with a $20 million dollar convertible loan, which they have never done with a junior developer in the past. We believe Wheaton has expressed their confidence and interest in the project with their checkbook.
Gerardo Del Real: Absolutely. Now, I couldn't agree more and something that's interesting to me, and correct me if I'm wrong, but I believe that the financing package, the metals that they've acquired basically, through the streaming deal, that it's only 8%, right? It's the gold and the silver. It's not actually the copper and the zinc. Am I accurate in that?
Vince Sorace: Yes, it was a very attractive proposition for us and for Wheaton. It was definitely a win-win in that we were able to do the stream on an element of the project, the silver and the gold only, that represents only about 8% of the revenue of the project, so we weren't further encumbering the primary commodity, if you will, the copper and the zinc on the asset, so it worked out really well.
Gerardo Del Real: Excellent. Now, well done. Now, you mentioned the substantial upside and there's multiple ways to add value quickly with this project. The most immediate way, and you referenced it, is lowering the resource cutoff grade and converting the inferred resources into a higher confidence category. There's also significant expansion potential via the drill bit. Can you walk me through each of those scenarios, Vince?
Vince Sorace: Yes. Lowering the cutoff grade was an opportunity that we spotted early on in our due diligence. In 2011, Capstone used a 1.5% copper cutoff grade, and did not take into account the byproducts, including zinc, silver, gold. So, we conducted and completed a detailed analysis and we were able to drop the cutoff grade comfortably to 1% copper. This has increased the M&I Resources by approximately 50% or around 5 million tonnes and that was essentially just a paper exercise and would be a mine planning or mine revision exercise into the feasibility study. Given that lower cutoff grade, there's a third lens, which was completely in the inferred category, called Sumac, which will require infill drilling this upcoming season, but that would add another approximately 5.8 million tonnes.
In addition to that, we also know that the lenses, or the deposits, are open down-dip and along strike, which would provide additional tonnage to the mine plan. So, hence, our goal to double the size of this project, we think that's very achievable. Much of this in a low-risk kind of scenario and a lot of that will come to light throughout probably the latter parts of this year, as we commence doing the work on the project. We'll be drilling about 30,000 meters, which will include much of this infill drilling and some exploration drilling and some down-dip drilling on the project. And, of course, all of this will come together very nicely and provide an updated story to the project economics when the feasibility study is complete early next year.
Gerardo Del Real: That's a lot of shots on goal and you have a heck of a head start, obviously. Now, we talked about the people, we talked about the financing and, of course, the project. What does the share structure look like, Vince?
Vince Sorace: Share structure is, in my view, very good. Because we're able to do a big piece of this with that convert with Wheaton, we've got currently about 47 million shares issued and about 69 million shares fully diluted. This does not include Wheaton's convertible, so I think the share structure's good, intact and can set us up for some good gains in the future.
Gerardo Del Real: Excellent. Excellent. Now, can you walk me through what shareholders can expect in 2018? I have the feeling that a lot of people that are not familiar with the story are going to get familiar very, very quickly. I mentioned the fact that the net present value was approximately $265 million, using the lower copper and zinc price. Your market cap right now, of course, is nowhere near that. What can we expect from the company in 2018, Vince?
Vince Sorace: Yeah, you know, I think you just touched on a point there that one of the things that we're going to be obviously trying to make the markets and shareholders aware of in 2018, is that this is a very undervalued story. I think this is probably one of the best value opportunities in the space right now, in a development stage company. Right now, we're trading at multiples of around 0.2 times NAV. We've put some comps out there and you can find them in our presentation, where the averages are trading at about 1.6 times net asset value, so I think we've got significant upside to fill in the gap here, just on the current multiples. And those multiples are based on the 10.5 million tonnes, have nothing added into that upside potential, coming this year.
I do think there's a lot of room for appreciation from the value perspective once people get to know more about the project and then throughout the year, we are going to be doing a number of different things. It'll be a busy season. We're going to be conducting a robust, metallurgical program to optimize recoveries. We're going to be significantly advancing the permitting process. We're going to be conducting over 30,000 meters of exploration and resource expansion drilling and providing updated resources and reserves on the project, showing its growth potential throughout the latter parts of this year.
Just as a final bit, in addition, we're always going to be looking for additional opportunities to add value to Kutcho, either through M&A or other strategic type initiatives.
Gerardo Del Real: Well, that's a lot of catalysts for one 12-month period. I encourage everybody to actually go to Kutcho's website, because the presentation is really well done and it provides a very, very clear timeline to what you hope will be excellent execution. And I got to tell you, Vince, if you're able to hit on all cylinders, it should be an exciting year. The website is kutcho.ca, so that's K-U-T-C-H-O, dot C-A. Vince, I want to thank you so much for your time. Obviously, I'm looking forward to having you back as you check some of these milestones off. Is there anything else that you'd like to add?
Vince Sorace: No, at this point, keep your eyes peeled. I think it's going to be an exciting year for the company, and thank you for having me.
Gerardo Del Real: Excellent. Thank you for your time again, Vince.
Vince Sorace: Thank you.