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2/3/15

Nevada Copper (NCU.to), its tunnel, its treasury (from IKN299)

This was a piece on NCU.to that formed one part of IKN299 last Sunday. With NCU.to now rising on the back of the copper pop this morning, it's starting to look seriously tempting as a short.

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Nevada Copper (NCU.to): An update on that (in)famous shaft sinking effort that NCU needs to complete in order to get its stage one operation going. As at January 7th 2015 (company filing of its latest presentation (9)) the tunnel was at 1,655 feet and advancing, and I quote, “5 to 7 feet per day, depending on ground conditions”.

The last time we checked in on this subject was IKN295 and in that edition, we noted that the tunnel was reported by the company at 1,520 feet depth, with another 580 feet to be tunnelled before the job was done. At that time we noted the rate of advancement was well below the “5 to 7 feet per day” the company claimed. With the new numbers we can check up on progress.

  • November 25th to January 7th progress from 1,520 feet to 1,655 feet = 135 feet.
  • Days elapsed = 43 days.
  • Average progress per day = 3.14 feet
Once again, the reality doesn’t match up to the claims made by NCU. And even if we’re generous and cut a week out of the time for the Christmas/New Year period the resulting 36 days is an average of 3.75 feet per day, well short of the 5 to 7 feet in the glossy brochures.

But the future is what concerns us most and we know that from January 7th, NCU has 445 feet left to tunnel in order to reach the mineralization and complete the shaft. Here come the calculations:

  • At 5 feet per day: 89 days = 3 months less a couple of days = completion ~early March
  • At 4 feet per day: 111 days = 3 ½ months = completion ~late March
  • At 3 feet per day: 148 days = nearly 5 months = completion ~end May
Back in the more detailed analysis of IKN295 we noted that NCU’s cash treasury, even after its recent refinancing with Red Kite, was scheduled to be dry by April 2015. That means at the very least it needs to get this tunnel done by the end of March and even then (here’s a chunk of the IKN295 text)...

“...there’s the little matter of the $24.3m they have earmarked a the bill for the production equipment they need for the underground operation. Your author understands from good authority that NCU hasn’t spent a dime on that as yet, so it will need to fund the purchases some way.

...so even with the tunnel done it’s by no means out of the woods. But getting the tunnel complete before the company runs out of ready cash is now an absolute minimum requirement for the company (and please note, importantly, that when the company gets to the 1,906 feet mark and digs no deeper it’s going to give you a fanfare NR for sure, but it will still need to tunnel nearly 200 feet before the project is complete) and the way things are going, well, let’s give them the benefit of the doubt but even so it’s nip and tuck here. And it remains to be seen how NCU plans to pay for the machinery it needs.

There’s a difference here between NCU the company and NCU the stock. The company has large insto support from Pala and from Red Kite, so it’s unlikely to be denied those last few millions it will need to buy machines, go into production and produce real fanfare NRs come the time. But how it gets that money is another story and there’s a pattern of cash raising here that is squeezing equities out of the picture. Pala is of course a big holder of NCU stock, but the last time the company tapped its backer the money came not in the form of another equity raise but two small bridging loans, both with sizeable interest rates and specific payback criteria. Then Red Kite, which is all about debt financing and not about holding shares or warrants. NCU is collecting debt on its balance sheet and come March or April, if we see another debt deal to secure machinery financing, in the current price climate for copper those holding shares should look out below.  And as for M&A, nobody but nobody is going to buy this thing, not with all that debt on board and a long road before positive free cash flow. All that aside from the dubious quality of the asset, particularly the marginal economics of the larger stage two operation.

Being a Canadian-listed company makes it difficult for the retail player, but all the same and even with the PPS drop seen in January NCU is an obvious short here. Its share price could end up in the pennies. Or in another way, the standard model mining stock...errr...“flow” chart: