However you Compute it, Ascendant Copper is One Very Undervalued Company
By D. J. Hadfield
Jan, 23rd
Certainly, one of the most daunting challenges an investor faces is putting on the thinking cap and calculating the value of a mining or junior exploration company share. There are countless ways of valuing and comparing companies, and tens, if not hundreds of variables to consider when making your final investment decision.
How do we determine the value of a mining company? The first thing to keep in mind is that all production is prospective, although it comprises the company’s primary source of value.
In the case of Ascendant Copper (TSX:ACX), we have some near term revenue generating potential, and some longer-term prospects.
For example, the company is in negotiations to purchase St. Genevieve Resources (CNQ:SGVL), which is a junior with base metals holdings in Arizona and Nevada, including two near term, past producing properties, namely Zonia and Emerald Isle.
When Ascendant has completed the purchase of SGVL, the company estimates it could go to production at the larger of the two deposits, Zonia Mine, within two years and generate some substantial cash flow annually for some time to come from that property.
The 3,000 acre Zonia Mine property produced 33 million pounds of copper from 1966 to 1975. A NI 43-101 technical report dated October 2006 by Scott Wilson Roscoe Postle Associates estimated an inferred resource of 63 million tons averaging 0.37% total copper at a cut-off grade of 0.25% copper. The total resource was estimated at 460 million pounds of copper.
A note on mine valuation: Determining the price of copper for a non-producing exploration company is a relatively complex task. The actual price of copper – presently about $3.25/lb – must be discounted for future and ongoing exploration costs, fluctuations in the price of copper, risk and other extraction and capital costs, to name just a few. For the purposes of this essay, I will use an average discounted price used in a recent report by an investment bank. For this report, it compared the market capitalization of five non producing copper junior companies divided by the number of pounds of in the ground copper, all of whom can be considered peers to Ascendant. The resulting average value of a pound of copper in the ground is a highly discounted $0.03.
Of course, there are variables that can affect either side of this equation – resource property evaluation is certainly not a precise science. For example, the actual value of all of the metal suspected to be in the ground at one US property and one Ecuadorian property – Zonia and Chaucha, respectively – not calculating for extraction costs or risk, etc., is easy to figure out: approximately $8.0 billion. Just multiply known resource estimates by the present price of copper.
To do that kind of math would be like figuring out the price of a car by multiplying its weight by the price of iron ore – nonsensical, at best.
Thus, the near term Zonia Mine, with 460 million pounds of copper, multiplied by a valuation of $0.03/lb Cu would yield a value of about $14 million to Ascendant.
$14 million is a random sort of number, until we turn it into a per share valuation. Presently, ACX has almost 71 million shares outstanding. After a merger with SGVL, based on the terms of the deal outlined in press releases, I calculate about 100 million ACX shares out. Thus, on a per share basis, Zonia is worth $0.14 per share. Right now, ACX trades at $0.25 per share.
But didn’t I say that ACX is undervalued? You bet
But future production from Zonia is only a small fraction of what Ascendant has on its plate. Let’s go to South America.
Ascendant has two major projects in Ecuador, right now. If you know Ecuador, then you know there’s some uncertainly at the moment, as the Government reworks the existing mining laws.
Nevertheless, the language from the government and actions by other mining companies in the country suggest a return to business as usual. Dynasty Metals and Mining (TSX:DMM) recently bought out its NSR for $1 million on its near term Zaruma deposit in Ecuador.
Haywood Securities analyst Eric Zaunscherb recently noted the risks involved in operating in Ecuador, including the possibility that a 70% windfall tax could be imposed on mining companies operating in the country, but also added that, "The President and the Ministers of Energy and Mines have already stated that they would go for a contractual arrangement on a one-to-one bases.”
Additionally, the government’s new tax will only be levied on certain commodities, and only when prices cross a particular threshold. What the specifics are only time will tell.
Historical estimates on Ascendant’s Chaucha property are 2.2 billion pounds of copper in the ground. Again, using the average valuation of $0.03 per ground pound of copper, we can calculate the relative value that Chaucha adds to ACX’s share price. The exploration value of the Chaucha (2.2 billion pounds X $0.03) is $66 million for a per share value of $0.66
By adding the per share value of Chaucha to that of Zonia, we get a total per share valuation of $0.80 and a post-merger market capitalization of $80 million and that is based on only two of its properties.
Another way to value a property is by determining its net present value – the value today of production tomorrow after considering cost of production, both capital and operating versus revenue. If one assumes average capital costs for constructing an SXEW operation and all production break even cost of, say, $ 1.15 per pound, then at the price of even $2.00 per pound of copper a back of the envelope calculate would indicate a possible net present value for Zonia (at a 10% discount rate) of over $50 million. Divided by the shares outstanding, on a per share basis under this scenario, Zonia could be worth $0.50. It is too early to run a discounted cash flow for Chaucha, but adding in the $0.66 per share for Chaucha, $1.16 per share is the sum of a discounted cash flow model for Zonia and an exploration valuation for Chaucha. 12-24 months from now, a discount cash flow model on Chaucha may be feasible, significantly adding value to Ascendant’s stock price.
Presently Ascendant Copper has a market cap of approximately 14 million.
Go figure. If we agree on the $0.80 valuation, generating an $80 million market cap, this is over 470% difference from today’s market price. If the discounted cash flow model for Zonia and an exploration valuation for Chaucha are used generating a post merger valuation of $116 million in market capitalization or a $1.16 per share price then that’s as much as a 725%% difference from where the stock is trading today. And even if we just take a discounted cash flow valuation for Zonia at 50 million, and leave everything else aside for a moment; that is still over a 250% difference from where Ascendant is presently trading.
Of course, these calculations can be augmented or detracted from in any number of ways. In the former case, the company may find it can go to production at another property before or during production at either of Zonia or Chaucha. The other US property involved in the acquisition of SGVL called Emerald Isle, is a past producer and could, according to Ascendant, add another $22 million in cash flow over four years.
Moreover, the company has a much larger property in Ecuador that has been slowed by an anti-development group. Nevertheless, there’s another potential 19 billion lbs copper and 864 million lbs molybdenum to be moved into measured and indicated categories at Junin, too.
All told, if you’ve heard the rumour that Ascendant Copper is possibly the most undervalued junior exploration company trading on the TSX, then you’re certainly not alone.
