A quickie teaser solution for you today as we enjoy the peace and quiet of a holiday when the market is closed… and we spend most of our day away from work, trying to spend some time reflecting on the life of Dr. Martin Luther King, Jr.
The ad I was asked about a few times late last week is from Stephen Leeb, a pitch for his Real World Investing ($1,495/yr, no refunds), and it’s another mining story… this is the intro:
“Discovered: $26 Billion Treasure Trove 48 Miles North of the Arctic Circle
“Move on this tiny $2 company today and you could walk away with $312,400”
And the catalyst for all of these riches, apparently, is that they’re about to build a road to make this huge “treasure trove” accessible:
“As you’ve seen, a road is being planned in Alaska to reach a massive deposit of copper — a substance more important to our modern way of life than gold, silver, platinum, or lithium.
“After five years of prep work, endless meetings, and legal wrangling, the wheels are finally in motion to unlock $26 billion in trapped wealth and bring it to the outside world.
“And one small company is sitting on the motherlode of it all.
“Its stock is now so cheap that it gives you the chance to turn $10,000 into $312,400… and possibly much more.
“And it’s all coming to a head in the coming weeks.”Are you getting our free Daily Update
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So what’s the story?
That $312,400 is not, of course, a likely outcome — that’s what Leeb describes as one “scenario” that could have the stock spiking to almost $50 a share from the current $2ish. I suppose it’s not impossible, but don’t count your chickens.
What’s being teased here is Trilogy Metals (TMQ in both Toronto and NY) and its projects in the Ambler Mining District in Alaska that htey call the Upper Kobuk Mineral Projects.
The name might not sound familiar, but Trilogy used to be called NovaCopper and was spun out of NovaGold about eight years ago. Stephen Leeb, in case you’re curious, has been a big fan of these folks for many years and was teasing Novagold as a favorite in the years after the global financial crisis… so in case you need an extra reason to be cautious, or you haven’t yet seen how challenging the large-scale mining business can be, we’ll note that Novagold, which had two projects they wanted to develop but has now sold one of them in addition to spinning off its founder and its copper project to what is now Trilogy, has spent well over ten years working to develop a major gold mine in Alaska (Donlin Gold is one of the world’s largest potential mines, with a very high average grade), but hasn’t ever actually built anything or generated any revenue in almost 25 years. In fact, Novagold would almost have to double today to get back to the $16 hostile takeover offer they rejected in 2006 from Barrick (ABX), which owns the other half of Donlin Gold.
But that Novagold business is neither here nor there — what’s this Trilogy copper story? Like Novagold’s Donlin, their lead project is a 50/50 joint venture — the copper-focused projects in the Ambler district are owned by a joint venture with South32 (SHTLF), which is a collection of “non-core” projects in the US, Australia and Colombia spun out of BHP Billiton a few years ago but also, importantly, has a lot of revenue and cash to support building more projects (they’re putting up $145 million in cash). They have some strong institutional backing, like Novagold (John Paulson, Electrum, Baupost, etc.).
And, yes, a road is key — there are other mines in northwest Alaska, like the Red Dog Mine, but they’re close enough to the ocean that they don’t need massive roads — the Ambler Mining District is more isolated, and the next step is to get a road permitted and built that could connect the district to the highway and then to the railroad for shipping ore out of the port at Anchorage. There are a couple options for roads, depending on whether or not they have to go around some National Park lands, and the expectation is that a permitting decision on the road will come quite soon, perhaps in the next few months — there’s a good summary here from the Frontiersman if you’re interested.
Assuming that permit is granted and they move forward to begin building the road, which is no small feat, then Trilogy enters into permitting — one big Federal permit and a bunch of state ones, and the permitting process, they expect, will take about three years. After that they’ll have to have raised the larger chunk of money for mine construction, and the engineering and construction of the mine will likely take about three years… so this is going to be a permitting and exploration-driven story for the next five or six years, moving based on success or delays in the permitting process and on new discoveries or assessments they publish along the way as a result of the ongoing drilling exploration.
The prefeasibility highlights for the Arctic project that they post in their latest investor presentation sound impressive — a huge open pit with 5% copper equivalent grades, including meaningful amounts of zinc, lead, gold and silver, and they say they calculate the post-tax net present value at $1.4 billion, with a 33% internal rate of return. And there’s also some potential in their second location (Bornite, which is nearby), which looks like it’s another meaningful copper cache and also hosts a substantial amount of cobalt.
So that all sounds lovely, a $350 million company like Trilogy owning even half of that $1.4 billion “value” — but, of course, that’s a prefeasibility study and there are a lot of variables that could change meaningfully in the 5-10 years it would take to actually begin producing copper from Arctic.
And, of course, even going just by the prefeasibility study. the guess is that the initial capital cost of building the project will be almost $800 million, which is easily justified if the production and pricing works out as they imagine (they anticipate $450 million in annual free cash flow from the mine, so “payback” is only two years), but it’s still a LOT of money and a long period of time before this might become a real business.
So yes, a road will be a big deal in this part of Alaska, and they need it to move forward with the project… but there are lots of other permitting and financing steps along the way, so investors today will have to hope both that all of the permitting goes well and that copper prices are favorable over the next ten years (and, particularly, that copper prices are rising happily at the time that they go looking for mine financing).
So sure, things could go very well with good permitting response, a fast and successful construction period, and strong copper prices over the next five years… but don’t get too confident about any of that being guaranteed. This isn’t the kind of thing I like to invest in very often, building big mines over long periods of time, but that doesn’t mean it can’t work out — if you’ve got an opinion about Trilogy or these Ambler projects in Alaska, please let us know with a comment below.
P.S. And yes, I thought this one sounded a little bit familiar — so I went back and checked, and it turns out that this “$2 hero company” was also teased by Leeb as an absolute steal in September of 2018, with the story at that time spun largely around the potential that they might also eventually produce cobalt.