Monday, 27 August 2012

Salman Partners notes “excellent value” creation in Curis Resources’ shares

Salman Partners’ senior mining analyst Ray Goldie said that hitches and delays regarding Curis Resources’ (TSE:CUV) Florence copper project in Arizona have made the market skittish, but created “excellent value” in the miner’s shares. 
Curis plans to use in-situ recovery methods to extract copper from its deposit at Florence, which requires no movement of rock or overburden and substantially less mechanical energy in the form of trucks and explosives.
But Goldie, who has a "buy" recommendation on the company, said in his research note that in January 2011, the company reported that the Town of Florence had supported “a resolution put forward by the town staff to urge agencies to deny permit applications for the Florence Copper Project.” 
“However, about half of Curis’ project’s resources lie beneath lands administered by the State, and its project could likely operate economically – at least initially - under only the State lands,” the note said.
“So Curis is able to be patient about permitting the portion – approximately half - of its deposit that is under municipal lands.”
Earlier this month, the company released its quarterly financial statement, and said it continued to work toward permitting for phase 1 of the copper project, while progressing with “feasibility-level” optimization and design studies for the full production scenario. 
Curis recently reported the results of an independent survey of residents in the town, which showed “a majority” supported the project and “three series of polling by Curis’ independent consultants ... has further confirmed this support.”
The company's CEO, Michael McPhie, says two primary operating permits are required for phase 1.  BHP Copper, the previous owner, secured full commercial operating permits for the project back in the late 1990s, and since that time Curis has been working to amend and update these for current operations.
The junior miner has already secured critical air, land and water permits for the project and the remaining state and federal permits for phase 1 are expected in the near term.
Once the updated state Aquifer Protection Permit (APP) and the federal Underground Injection Control (UIC)   permits are approved – expected in the coming months - Curis can develop a 24 well injection and copper recovery system and a "state of the art solvent extraction electro-winning plant" - otherwise known as phase 1 operations. This production test facility (PTF) phase is expected to last 18 months.
Phase 1 development is scheduled to begin construction in the third quarter of this year, once the permits are received. The phase 1 facility will produce London Metal Exchange grade pure copper cathode, Salman noted. 
“In parallel with Phase 1 operations, Curis will advance the completion of the amended Phase 2 commercial operating permits,” Goldie wrote. 
Rather than focusing on expanding the size of the resource, which is already quite large, Curis is taking the approach of focusing on metallurgy and getting more copper from what is already there.
The company’s CEO McPhie says there is room for improvement in the commercial scale production forecast, with copper recovery for its Florence project in the PEA assumed at 49 per cent, which is "very conservative" compared to the previous work done by BHP that predicted this would be the minimum recovery possible.
If recoveries can be improved, the same amount of effort will be put in, but the miner will be able to get more copper out of the ground at a quicker pace.
Up until February of this year, 4 of 16 laboratory scale metallurgical tests had been completed with copper extraction ranging from 45 to 81 per cent as compared to a recovery of 49 per cent reported in the PEA. 
The remaining 12 metallurgical tests are ongoing with completion now expected in the third quarter, Salman’s note said, adding that the tests were initially anticipated in the second quarter. 
“The test materials all had grades considerably higher than that assumed by us. And, usually, the higher the grade, the higher the metallurgical recovery rate,” Salman’s Goldie asserted. 
The test results from February suggested an average rate of recovery of 58.4 per cent, which is much higher than Salman’s assumption of 49 per cent. Salman also noted that 58.4 per cent is recovered in only 6.4 months, whereas the 49 per cent takes six years.
“On balance, we found the results to be supportive of the view that our assumptions in modelling the Florence project are conservative assumptions,” the report said. 
“However, as the completion dates given by Curis demonstrate, completion of this metallurgical program is behind schedule.”
And turning to community relations, Curis “may have to be patient”, said Goldie, as Arizona’s Southeast Valley Register says that at its regular meeting on August 6, the Florence town council passed an ordinance banning in-situ mining and other operations that use large amount of sulfuric acid. The argument is that the chemical poses a danger to residents. 
In response, Curis said: “Curis has been the subject of a well-funded campaign opposing the development of the project by a group of out of state neighboring landowners and a local water utility company (Johnson Utilities). 
“This campaign has resulted in a real harm to the company’s reputation and ultimately to its share price. Curis …will continue to investigate any and all means available by which to address these matters.” 
Salman noted that Curis has hired “good help” in its community relations efforts, with Rita Maguire joining the company as senior legal and government affairs adviser. She served as director of the Arizona Department of Water Resources from 1993 to 2001 and oversaw the operation of the  Arizona Department of Environmental Quality and the State Land Department as deputy chief of staff for Gov. Fife Symington.
“We believe that Curis’ share price has been weak both because of opposition, in Florence, to Curis’ proposed project and because the market has recognized that there has been a delay in reporting expected metallurgical results,” Goldie concluded. 
“We believe that an appropriate valuation for Curis’ shares is 100% of NAV. Accordingly, our current 12-month target price for Curis’ shares is Cdn$6.40, down from our previous target of $7.00 per share.”
The Florence asset is close to a railway, has an "abundance" of water, and is referred to as a well-understood deposit with more than 500,000 feet of drilling. The project rests just 70 miles north-northwest of Tucson, and 65 miles southeast of Phoenix.
According to the latest timeline, the company could begin full commercial production by early 2015, after which it expects to produce between 55 and 84 million pounds of copper per year.
The project, which has an estimated after-tax net present value of $360 million at a 7.5 per cent discount rate and a $2.50 per pound copper price, hosts a measured and indicated oxide copper resource of 429 million tonnes grading 0.33 percent copper at a cut-off of 0.05 percent. 

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