This week Pembridge Resources (LSE:PERE) announced a major offtake agreement with a Japanese Trading House, ahead of the company returning to the market with its Minto Copper Project, in the Yukon. With Pembridge’s shares currently suspended pending completion of the Minto RTO and financing, investors are eagerly awaiting the outcome of this and finding out what price the company will return at.
The environment for the readmission of Pembridge couldn’t be much better. Copper prices are at a three-year high amidst fresh rounds of industrial unrest at BHP’s giant Escondida mine in Chile. Steady growth in global demand for the metal, which is essential to all things electrical from air conditioning units to electric vehicles, has also helped. There is a dearth of new copper projects to meet this projected demand, and as a result, the London market is somewhat starved of listed copper plays.
Away from the diversified majors such as BHP, options are limited to a small number of mid-tiers (notably the two Kazakhstan-focused producers Kaz Minerals (KAZ, £4.5 billion market cap) and Central Asia Metals (LSE:CAML, £500m), and new Spanish producer Atalaya (LSE:ATYM, £350m). Exploration and development plays include Georgian Mining (LSE:GEO, £12m), Metal Tiger (LSE:MTR, £30m) and AIM darling Asiamet Resources (LSE:ARS, £113m).
Alongside these established copper names Pembridge is the new kid on the copper block, led by Chairman and industry veteran Peter Bojtos, who will be familiar to many as the Chairman of Asiamet Resources until 2013, and CEO David Linsley from global mining advisory firm Behre Dolbear.
Pembridge is a cash shell and is currently suspended from trading whilst it undergoes an acquisition that would constitute a reverse takeover. It had a market cap of £2.8m at the suspension mid-price.
The stated strategy of Pembridge is to use the shell to acquire one or more assets in the base and precious metals space that the team can add value to. Stock market returns to shareholders are the result of change – in some way, a company has to be “better” in the future, which is then reflected by a rise in the share price and thus economic return to the shareholder. That might be the result of uplift in the price of the underlying commodity (and here copper producers like CAML would provide that leverage), or operational improvements that increase output and reduce costs. Pembridge is focusing on assets that allow both.
To this end, on 14th Feb 2018 Pembridge announced that it had signed an agreement to acquire 100% of Minto, a producing copper mine in Canada’s Yukon Territory, from TSX-listed Capstone Mining. The deal involves $37.5m in cash and enough shares so that Capstone would own 9.9% of Pembridge post-financing.
On 11th June 2018 Pembridge then announced that it had signed heads of terms with “a leading global Japanese trading house” for a $30m offtake agreement and a strategic alliance. Under this agreement, the Japanese trading house gets three-year exclusivity to buy copper concentrate from Minto, up to a maximum of 125,000 tonnes. To secure the deal, the trading house has agreed to pay Pembridge $30m in cash as an up-front partial pre-payment. Although the overall value over three years of the offtake agreement is not disclosed (and anyway will fluctuate depending on the copper price), a reasonable estimate can be made from the historical accounts of Capstone. These reveal that Minto has averaged around $100m per annum in revenue from its copper production over the last three years. On this basis, the $30m pre-payment corresponds to roughly four months of production, and over the three-year offtake, one might therefore expect Pembridge to receive of the order of $300m in total revenue.
There are five major commodity trading houses in Japan, including Mitsubishi and Sumitomo, although the identity of Pembridge’s counterparty has not yet been disclosed. One would expect it to be named in the re-admission document.
In addition to purchasing concentrate, this trading house is described as a strategic partner, with
“Both parties envision working together on the Company’s planned development of the Minto site and developing the broader region“
Quite what that means is unclear, although may hint at future financing options from the trading house for the upgrading of the mine and the planned exploration programme into the surrounding area. It would be a positive message to the market if Pembridge can use the Japanese trading house as a cornerstone financier, and thus not have to return to the market for equity finance for those planned activities.
The next steps for Pembridge are to complete the fundraise to acquire Minto and re-admit to trading, plus implement measures to improve Minto. The RNS reveals one example of such steps being taken:
“The Offtake agreement allows the Company to sell concentrate from Minto at the mine gate thus eliminating the historically large working capital requirements when the site is unable to transport concentrate owing to seasonal weather conditions”
To put that in context, Minto is on the other side of a river from the main Yukon highway. Shipping the concentrate to the end customer thus involves either the use of a barge (when the river is free of ice), or via truck and an ice bridge in the winter. However, for around 12 weeks every year, neither option is available, which results in concentrate that is being produced having to be temporarily warehoused on site. Previous offtake agreements with Capstone saw payment only upon delivery to the port of Skagway, which meant that a substantial working capital reserve was required to cover production during those months. However, Pembridge has now negotiated an improved offtake agreement that specifies payment upon delivery to the mine gate, as opposed to Skagway. This is a subtle but critical point, as it means that payments still continue to be received by Pembridge even when the concentrate has to wait sometime before it can be shipped to Skagway. Given the revenues involved, this change will have a very positive effect on the cash flow at the mine.
The next key stage is the announcement of the funding package. Provided that they can deliver on that, acquiring a producing copper mine with such revenues, and to get $30m in cash up-front, would be a major coup for a cash shell with a sub £3m market cap.
Author: Ben Turney
Disclosure: The author holds shares in the company mentioned in this article.