An old message but an interesting analysis from someone who was eventually proven wrong, but his final thought about emerging on ownership terms with full control seems to echo the markets hesitation with this stock.
Bottom-Fish Comment - December 19, 2008: Lack of cash forces Copper Fox to suspend feasibility work on Shaft Creek
WhenI talked to Gui Salazar last September at the Las Vegas Hard Assetsshow I discovered that there might be a solution to the problem of whathappens if Copper Fox Metals Incsubmits a feasibility study to Teck Cominco before the deadlineDecember 31, 2011. The problem, which Salazar with some irritationconcedes I have been hung up about since day one, was that the terms ofthe agreement Salazar had struck with Teck during the pit of the bearmarket at the start of the decade allowed Teck Cominco to back into theShaft Creek copper project upon submission of a positive bankable feasibility study by electing within 120 days to spend 4 times CopperFox's expenditures and arrange production financing, but without anydeadline for spending the money or putting the deposit into production.This problem has troubled me for a long time because it allowed TeckCominco to recover nominal control of Shaft Creek for nothing. The majorcould inventory the project, leaving Copper Fox with no near term exit strategy other than a capitulation deal from CopperFox that restores 100% to Teck Cominco at minimal cost. Salazar's legalteam, however, had studied the agreement and concluded that if thefeasibility study was bankable and positive, Teck Cominco would haveonly 4 years to put Shaft Creek into production if it elected to back infor 75%. Importantly, the feasibility study had to be written by anindependent engineering firm, and more importantly, an independentengineering firm was entitled to use 3 year trailing averages for themetal prices in its base case. This surprised me, because I was underthe impression that no numbers where allowable for feasibility studiesother than worst case scenarios, which included ignoring recent historyif it was favorable. On September 15, 2008 CopperFox released a prefeasibility study by Samuel Engineering Inc of Denverwhich envisioned a 23 year 100,000 tpd open pit mining operation forShaft Creek that would generate an 18.6% internal rate of return andwhich had a pre-tax net present value of $2.76 billion discounted at 8%.These robust numbers, however, were based on the 3 year trailingavarege prices of $3.12/lb copper, $33/lb molybdenum, $693 /oz gold and $13.09/oz silver. Since then copperhas collapsed below $1.30 per lb and molybdenum below $10/lb, and,while in the long run higher prices will prevail, the 3 year trailingaverage will probably not be very impressive when Copper Fox is in a position to complete and submit a feasibility study some time during the next 2 years. To be blunt, CopperFox is an outright victim of the Midnight Massacre Don Coxe allegesthat Henry Paulson unleashed on the commodity sector on July 13, 2008 inorder to protect his toxin manufacturing buddies on Wall Street fromthe incineration they deserved. So the risk now exists that when CopperFox does submit a feasibility study to Teck Cominco, it will not bepositive and bankable to the extent that Teck Cominco has to put ShaftCreek into production within 4 years of electing to claw back a 75%interest, reducing Copper Fox to 23.3%, but at least giving the junior a hard asset with an exit strategy. Thanks to the market crash CopperFox is now in a difficult financial position. Back in September thecompany had about $4 million working capital left and was engaged in amajor geotechnical drilling program which Salazar expected to consumethe rest of the money by the end of the year. On November 7 Copper Fox announced a private placement of 25 million units at .12 with an undisclosed "related party". On December 16 CopperFox announced that the financing had been cancelled, presumably at therelated party's choice based on management's comment that the companywas "investigating the situation with its legal counsel". On December 18long time backer David Mullen, owner of various industrial businessesincluding a drilling company, resigned from the board. Management is notdiscussing the issue, but it is clear that there has been a significantfalling out between management and a key financial supporter. Copper Fox has shut down all operations, including metallurgical studies aimed at boosting flotation recoveries above 88.4% for copper, 71.3% for molybdenum, and 81.3% for gold. CopperFox has invested about $35 million in Shaft Creek, and estimates thatit would need to spend another $5-$10 million to deliver a fullfeasibility study. Teck Cominco itself has run into serious problems andis probably not in a mood to grant any concessions to Copper Fox which would allow the junior to claim title to an active project. Novagold Resources Inc,which traded as low as .53 on December 5, recently announced that itwould not meet a $1.8 million cash call from Teck Cominco for its GaloreCreek project in northwestern British Columbia not far from ShaftCreek. The stock has since traded as high as $3.05 even while Novagoldrenegotiated the terms of a $20 million bridge loan due December 29,2008 from a $12 per share conversion price to a new one of $1.53 whichgives the New Jersey based merchant bank Auramet Trading LLC the abilityto recover its capital by converting and tendering its position to anyreasonable bidder. The most plausible explanation for the market runupis speculation that Barrick Gold will make a takeover bid for thefinancially strapped Novagold to wrap up control of Donlin Creek. Such abid would be a far cry from the US $16 per share Barrick offered in mid2006 which Novagold vociferously rejected before handing half of GaloreCreek to Teck Cominco which literally studied both the deposit andNovagold to death. Novagold's decision in late November not to make aGalore Creek cash call in order to make a Donlin Creek cash call willdilute its stake in Galore Creek below 50% to 48.9%, which might beconstrued as a poison pill to ward off a bid from Barrick whom one mightassume would want to be on a equal footing with Teck Cominco on GaloreCreek. But I suspect Barrick would probably prefer to let Teck Comincoimpale itself on its own upon Galore Creek, which might be good news inthe long run for Copper Fox and its lower grade but better located Shaft Creek copper-golddeposit. My immediate concern, however, is the bottom-fish buyrecommendation at .20-.29 that has been open since April 15, 2005.Although CopperFox is out of money and suffering a management split, the stock has notyet suffered a washout from tax loss selling. I don't see a quicksolution to the Teck Cominco back-in problem, nor any reason in theshort term for the stock to attract at higher prices the $5 million orso the company needs to complete its feasibility study. So I am closing out the CopperFox bottom-fish buy recommendation at .065 for a 78% loss from thebottom-fish buy limit, while keeping the company on watch to see if itcan emerge with ownership terms that give it permanent control over thedirection of Shaft Creek, a development which would justify treating Copper Fox as a world class call on future copper prices.
