Billionaires build copper call option with Alaska mega-deposit

The company’s Arctic and Bornite deposits in northwestern Alaska contain huge caches of high-grade copper and zinc, as well as lead, gold and silver. But they are currently remote fly-in, fly-out camps without a link to the state highway system.

Arctic and Bornite, located 25 kilometres away from each other, host an impressive 8 billion pounds of copper in the indicated and inferred categories. When byproduct credits are included, the resource estimate grows to 9.5 billion pounds of copper equivalent indicated and inferred.

How important is the transportation piece?

“With the road, it’s a mine,” says Van Nieuwenhuyse, who founded NovaGold and was its CEO until 2012 when NovaCopper was spun out. “Without the road, you don’t have a mine.”

Northwestern Alaska is elephant country for copper and other base metals, particularly zinc. Teck’s Red Dog mine, one of the world’s largest and highest-grade zinc operations, lies 170 miles to the west.

But a 322-kilometre access road to the Dalton Highway – linked to a deep-water, year-round ice-free port at Port Mackenizie – would cost hundreds of millions of dollars to build. That’s a big pill to swallow for any mining company.

However, a division of the Alaska government wants to construct the road as a revenue-generating piece of infrastructure and charge NovaCopper to use it. The state’s “Road to Resources” plan uses the same template as Teck’s Red Dog mine.

The Alaska Industrial Development and Export Authority (AIDEA), a State of Alaska owned company owns the road leading to Red Dog, as well as the port, and collects payments from Teck.

“You could almost model it as a low-cost loan that NovaCopper pays for with production,” explains Stefan Ioannou, a Haywood Securities mining analyst who covers the company.

There are other more marginal deposits in the area that could come along for the ride once a road is built, Ioannou noted.

“The Alaska government realizes that this has district-scale potential.”

NovaCopper is working with the AIDEA on finalizing road details. Van Nieuwenhuyse says formal permitting on the road should begin soon, and he expects about a 2.5-year process.

NovaCopper began as a subsidiary of NovaGold Resources Inc., where Van Nieuwenhuyse was founder, president and CEO. NovaCopper was spun out to NovaGold shareholders in 2012, with shareholders getting one NovaCopper share for every six shares of NovaGold held.

Van Nieuwenhuyse founded NovaGold in 1997 after seven years as vice-president of exploration for Placer Dome. NovaGold is focused on permitting its 50%-owned Donlingold project in Alaska, and also owns 50% of the Galore Creek project in northwestern B.C. The largest shareholder of both companies is Electrum, which is owned by U.S. natural resources billionaire Thomas Kaplan.

Other major shareholders include high-profile hedge funds such as John Paulson’s Paulson & Co. and Seth Klarman’s Baupost Group.

Importantly for NovaCopper’s remote project, the deposits are very high-grade on a global scale. The Arctic deposit has average copper grades above 3% and the average for both deposits comes in at about 2.5%, Van Nieuwenhuyse says – far above average global copper grades of well below 1%. There are also substantial credits from zinc, lead and precious metals, helping push net cash costs below $1 a pound.

That insulates the company from a copper price that has plummeted to $2.40 from 2011 highs well above $4. After a long downhill slide, the building-block metal has rebounded slightly in the face of production cuts by the likes of Glencore, Freeport and Codelco.

But Van Nieuwenhuyse is playing a long game and remains more interested in where the copper market is going than where it is now. At US$1.70 copper, a mine at Ambler would still be profitable, he says.

Van Nieuwenhuyse’s quiet confidence in the face of stormy times in the mining sector is reinforced by a belief that a copper supply crunch is looming. There just aren’t enough new mines opening to replace the ones closing down, he explains — and that was true before recently announced production cuts at mine run by copper giants Freeport-McMoRan and Glencore.

Glencore, for example, recently announced it would suspend operations at two large mines in Zambia and Congo, cutting its copper production by almost a fifth.

“Now’s the time to be buying things that are cheap, that are high-quality but still under-valued in the current market,” Van Nieuwenhuyse asserts.

NovaCopper’s motherlode is the result of an aggressive drill campaign that enlarged a historic resource. At Bornite, for example, NovaCopper has drilled more than 8,100 metres and re-assayed more than 11,100 metres in the past 3 years, adding 5 billion pounds of copper.

NovaCopper recently completed about 3,000 metres of infill drilling and geotechnical drilling as part of a $5.5-million field program ahead of a prefeasibility study on its Arctic deposit. Assays are expected in coming weeks.

Van Nieuwenhuyse and the exploration team he assembled at NovaGold (and took to NovaCopper) won the Thayer Lindsley exploration award at PDAC in 2009 for the discovery of the massive Donlin gold project.

The team is now putting its exploration chops to work at Bornite, and they’ll be kept busy in coming years both there and on the entire property: “There are lots and lots of targets to explore,” Van Nieuwenhuyse says. Stepout drilling at Bornite has yielded long intercepts at impressive grades, including 4% copper over 178 metres and 1.9% copper over 236 metres. Mineralization remains open along a 1 kilometre front along the north edge of the deposit. In addition, an even larger soil anomaly remains largely untested at the Aurora-Partner Hill target 4 kilometres to the west of Bornite.

Bornite and Van Nieuwenhuyse are about the same age – the mineral deposit was first discovered in the mid-1950s by a prospector looking for uranium. NovaCopper predecessor NovaGold secured the rights to Bornite through a deal with NANA, the pro-development Alaska native corporation whose lands are in northwestern Alaska. NANA owns the huge Red Dog zinc deposit and partnered with Teck to develop it and 25 years of production, profits and jobs have made NANA and their 14,000 Inupiat shareholders believers in mining. Consequently, NANA bought the patented claims covering Bornite area from Kennecott in the early 1980s.

In 2011 NovaCopper penned an agreement with NANA and consolidated a 353,000-acre land package known as the Upper Kobuk Mineral Projects (UKMP). The claims had previously been owned piecemeal by more than 20 different companies.

The deal includes a 1% to 2.5% net smelter royalty for NANA. The Alaska native corporation also has the option to buy in as an equity partner (16-25%) or receive a net proceeds royalty once a mine is operational.

Haywood’s Ioannou says NANA, the landowner at Teck’s Red Dog zinc mine, is “by far” the most business-savvy native corporation in Alaska, so its support bodes well for the project.

“You’ve got the government working with you on the road and a very good First Nations partner,” he said.

The story of how NovaCopper secured the Alaska deposits starts when Van Nieuwenhuyse was a young geologist with Anaconda. His field partner at the time was Tom Albanese, who would later become Rio Tinto’s chief executive officer.

Years later, a chance encounter between the two former colleagues at the 2003 PDAC show in Toronto and a conversation about Rio’s Ambler property led to a deal the following year. NovaGold signed an option with Kennecott, by now a Rio Tinto subsidiary, to acquire 51% of the Ambler property in Alaska. NovaGold later bought out Rio Tinto.

“The Ambler mining district’s size and high grades are a competitive edge because many of the large copper porphyry systems on the market are low-grade”, says Ioannou. But getting the project permitted is a marathon, not a sprint, he cautioned.

“Some investor patience is required here.”

It’s a sentiment reiterated by Van Nieuwenhuyse: “Mining is not something you invest in short-term, it shouldn’t be.”

A deal the company did in the spring bolstered NovaCopper’s treasury, helping it navigate the path to production as it advances its Upper Kobuk projects in the Ambler district. In April, NovaCopper issued shares to purchase Sunward Resources, a cash-rich junior with a low-grade multi-million-ounce gold resource in Colombia.

NovaCopper came out of the deal with over $US20 million – sufficient money to advance the Arctic deposit towards feasibility over an estimated 2- to 3-year period. The cash will pay for in-fill drilling and the collection of geotechnical and metallurgical data at Arctic, further de-risking the project.

Initial capex for a mine would be about US$750 million, Van Nieuwenhuyse says, with the metals revenue breakdown about 60% copper, 30% zinc and 10% precious metals. The CEO plans to keep the share structure tight, so the company could finance using debt or streaming deals.

Ioannou says NovaCopper is also an interesting call option on zinc, which many analysts expect to go higher in coming years because of mine closures and a supply crunch.

“There aren’t a lot of good zinc projects out there,” the analyst noted. “Zinc may actually be the tipping point for attracting somebody’s attention.”

Upcoming catalysts for NovaCopper include assays from drilling at the Arctic deposit as well as the start-up of permitting for the road. This week, Van Nieuwenhuyse is on the road marketing the NovaCopper story at the Precious Metals Summit in Beaver Creek, Colorado.

Van Nieuwenhuyse will be speaking at CEO.CA’s upcoming Subscriber Investment Summit in Vancouver on October 8, 2015 at the Pan Pacific Hotel. There are a few seats remaining for this free and outstanding event. Please reserve your seat now before it’s too late (Registration link).

Cautionary Note Regarding Forward-Looking Statements

This article includes certain “forward-looking information” and “forward-looking statements” (collectively “forward-looking statements”) within the meaning of applicable Canadian and United States securities legislation including the United States Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, included herein, without limitation, statements relating to development of the Ambler mining district and advancement of the Arctic deposit, are forward-looking statements. Forward-looking statements are frequently, but not always, identified by words such as “expects”, “anticipates”, “believes”, “intends”, “estimates”, “potential”, “possible”, and similar expressions, or statements that events, conditions, or results “will”, “may”, “could”, or “should” occur or be achieved. These forward-looking statements may include statements regarding perceived merit of properties; exploration plans and budgets; mineral reserves and resource estimates; work programs; capital expenditures; timelines; strategic plans; market prices for precious and base metals; or other statements that are not statements of fact. Forward-looking statements involve various risks and uncertainties. There can be no assurance that such statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. Important factors that could cause actual results to differ materially from NovaCopper’s expectations include the uncertainties involving the need for additional financing to explore and develop properties and availability of financing in the debt and capital markets; uncertainties involved in the interpretation of drilling results and geological tests and the estimation of reserves and resources; the need for cooperation of government agencies and native groups in the development and operation of properties; the need to obtain permits and governmental approvals; risks of construction and mining projects such as accidents, equipment breakdowns, bad weather, non-compliance with environmental and permit requirements, unanticipated variation in geological structures, metal grades or recovery rates; unexpected cost increases, which could include significant increases in estimated capital and operating costs; fluctuations in metal prices and currency exchange rates; and other risks and uncertainties disclosed in NovaCopper’s Annual Report on Form 10-K for the year ended November 30, 2014 filed with Canadian securities regulatory authorities and with the SEC and in other NovaCopper reports and documents filed with applicable securities regulatory authorities from time to time. NovaCopper’s forward-looking statements reflect the beliefs, opinions and projections on the date the statements are made. NovaCopper assumes no obligation to update the forward-looking statements or beliefs, opinions, projections, or other factors, should they change, except as required by law.

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