Following a period of quiet after re-listing on the main market’s Standard List last August, Pembridge Resources (LSE:PERE) delivered on its word to investors last month by announcing its maiden mining acquisition. The company has decided to enter the booming copper market by acquiring the producing Minto mine in Canada from Capstone Mining for $37.5mand a 9.9pc stake in its share capital. With Minto offering impressive predicted production and Pembridge’s experienced management already planning a number of ways to cut costs and boost resources, it looks like the business plans to stay at the site for a long time.
Trading in Pembridge’s shares is currently suspended due to the UK’s rules on reverse takeovers, but, when it returns, it will be interesting to see how the attractive acquisition impacts shares, which last stood at 1.3p.
New beginnings – the Minto Mine
Pembridge came to be in its current form last August when it de-listed from AIM and re-listed on the Standard List of the LSE in conjunction with a £2.2m fundraise, which was accessible to private investors through the Teathers App. Chief executive David Linsley saw an opportunity for Pembridge – formerly a cash shell – to invest in orphaned mining projects where existing management had underinvested capital. In particular, he wished to focus on acquiring base and precious metal projects which were either producing or near production across North and South America, Europe, and sub-Saharan Africa.
Private investors can often be impatient and the perceived lack of news flow saw Pembridge’s share price drop noticeably below its listing price. Those that sold out early might live to regret now that the company has announced its acquisition of the Minto mine in Canada from Capstone Mining. Minto was highlighted to Linsley by Guy Le Bel, one of Pembridge’s non-executive directors who had previously worked at Capstone and had knowledge of the site.
Minto is an open pit and underground copper-gold-silver mine located in the Yukon region of Canada, where it is currently the only project in operation. As a cash flow generative copper producer with a 10-year production history and all key infrastructure, facilities and operating teams in place, the mine is very much ready to go. What’s more, over $350m of capital expenditure has been invested in the site since construction began some 12 years ago.
As Linsley put it in an exclusive interview with ValueTheMarkets.com: ‘Minto ticked all the boxes for us, it was a non-core asset for Capstone, which is much bigger than us, so we intend to go in there and provide the mine with all the attention and capital that we can.’
Pembridge will acquire 100pc of Minto from Capstone for $37.5m on a debt-free, cash-free basis. Capstone will also be granted a 9.9c stake in Pembridge. As this constitutes a reverse takeover, trading was suspended in Pembridge when the deal was announced. As such, the funds will be raised through a placing and debt offering of around $50m once the firm returns from suspension. The price at which shares will be placed is not yet known, but Linsley had the following to say on the matter: ‘The price will be determined by the market, but there will be money left over for working capital for initiatives we want to carry out at the site.’
Ramping up production at Minto
Financially, Minto looks very attractive for Pembridge from the get-go. Capstone’s existing plan for the mine supports annual production of 18,000 tonnes of copper with gold and silver as by-products. In 2017, Minto produced 16,332 tonnes of copper and production guidance from Capstone for 2018 is 19,000 tonnes, with all-in sustaining costs of $2.55 to $2.65 per lb.
At current copper prices of $3.2/lb and costs of $2.65, 19,000 tonnes of production would generate a profit of roughly $23m (£16.7m). (19,000 tonnes = 41,887,830lbs) ((41,887,830 X 3.2) – (41,887,830 X 2.65) = $23,038,306). Although this is a rough estimate, it towers over the company’s current £2.9m market cap, and it will be very interesting to see what price Pembridge will be able to raise money at.
To this end, Pembridge has said that immediately following the acquisition it plans to start work on significantly extending Minto’s current four-year mine life by drilling to upgrade more of the resource category material into reserves, as well as further exploration on targets within the project area. As it stands, no exploration activities have been carried out at Minto since between 2008 and 2012. During this period, Capstone invested $24m in exploration, adding over 500,000 tonnes of contained copper resource.
Pembridge has also announced it has already planned several near-term initiatives to enhance the mine’s economics. Specifically, it has identified potential operating efficiencies that it could significantly lower operating costs. When it listed, Pembridge said its long-term aim was to create a portfolio of projects diversified along the mining cycle. But with Minto offering attractive financials, a large resource base and plenty of room for improvement, it will likely remain the firm’s sole focus for the time being. As Linsley put it to us:
‘Minto is going to acquire a lot of time and attention so I do not think we will be out looking for other acquisitions. Perhaps if we found something opportunistic that we could add on then we could do that, and there are obviously opportunities in Yukon for further assets and ground. I don’t think we will end up with a portfolio of assets anytime soon as we have to get this one right. It is a big transaction and we need to concentrate on it so it can really deliver value to investors.’
Through its acquisition of Minto, Pembridge has entered the copper market at a, particularly robust time. After crashing to around $4,000 a tonne in early 2016, copper rose to its highest price in four years in Q4 2017. Aside from strong global growth and renewable energy growth, copper prices have been boosted by China. The world’s largest copper consumer has cracked down on importing scrap copper and increased its copper wire consumption.
The booming electric car market is also boosting demand. Electric cars use around four times as much copper as normal cars and the metal is also needed for charging networks. There has also been a drop in supply across the market, with political turmoil hitting many of the world’s largest copper producers. For example, labour negotiations are disrupting supply in Chile and Peru. With all this in mind, analysts at Goldman Sachs believe copper prices could move from their current value of around $7,000 a tonne to above $8,000 by 2022. This is only going to further enhance Minto’s profitability.
It is still early days for Pembridge, but there is no doubting the potential of its first acquisition. Minto is a mine that already has infrastructure in place and is producing copper, a metal enjoying a particularly strong market backdrop. Using previous owner Capstone’s predictions, the mine should also offer a hefty amount of income to Pembridge within just its first year of operation, far outstripping its current market cap.
What’s more, for its part, Pembridge believes it can extend this value through efficiency and nearby exploration. It is even willing to temporarily forgo further acquisitions in order to make the most of the opportunity it has been given.
As it is still a young firm, a lot of the investors’ faith in Pembridge will come from their confidence in its management. This shouldn’t be an issue, Linsley has both experience in the resources industry and a long history as a fund manager and president Peter Bojtos has over 40 years of experience in mining in a number of CEO and CFO positions.
Furthermore, as Linsley points out, the business has so far done exactly what it said on the tin.
He told us: ‘The fact that we managed to secure an asset which came through our own network is a perfect illustration of what we said we were going to do. Often people say they are going to do things and then they don’t. We are suspended right now, but post the acquisition the value of this will hopefully be reflected in our share price.’
With shares sitting at just 1.3p at the time of the suspension, it will certainly be interesting to see how investors react to the potential value on offer at Minto after Pembridge’s fundraise. To conclude, Linsley said:
“When I took over Pembridge I said my goal was to build an investing platform, based on my experience in fund management. We certainly applied that discipline in identifying Minto and it helped us secure this transformational transaction. However, now that we have done so our strategic outlook has changed. This is a fabulous and sizeable opportunity for the company. If we get this right we will unlock significant value and as such our full focus is on that. Pembridge is now a copper company.”
Author: Daniel Flynn
The author of this piece does not hold shares in the company mentioned