Copper 360 - Pure exposure to a 'metal of the future'
Copper 360 is a copper producer focused on processing historical mined copper rock dumps and mining surface and shallow copper resources.
Listing on the JSE
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Copper 360 is looking to raise R152.5 million by way of a private placement, of which R90 million has already been committed to by the Ekapa Consortium and Coronation Fund Managers.
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The company plans to list on the AltX of the JSE on 21 April 2023.
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A listing will provide Copper 360 with access to capital, allow stakeholders to participate in the success of the company and provide shareholders with a liquid, tradeable asset with a market-determined share price.
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The proceeds of the private placement, in combination with an interest-free loan will provide Copper 360 with additional capital to fund its expansion. The interest-free loan of R62.4 million has been granted to Copper 360 by Ekapa Consortium who, after the listing, will own ~12% of the total issued share capital of Copper 360.
About Copper 360
Copper 360 will mine and process copper, and ultimately produce two products, namely copper cathodes and copper concentrate:
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Copper cathodes are the final products of the copper oxide ore refining process (hydrometallurgy). Copper 360, through Cape Copper Oxide (CCOC), will refine copper oxide ore from rock dumps. The product sold is copper sheets known as cathodes (99.98% copper).
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Copper concentrate is produced in the copper sulphide ore refining process (pyrometallurgy). Copper 360 will process copper sulphide ore from CCOC and Shirley Hayes IPK Proprietary Limited (SHIP) to produce copper concentrate. It is not the final product in the sulphide ore refining process - to create copper cathodes, copper concentrate (~30% copper) must still undergo further processing elsewhere.
CCOC
Cape Copper Oxide (CCOC) is 100% owned by Copper 360. CCOC has built and is operating South Africa's first Solvent Extraction and Electrowinning (SE-EW) copper oxide ore processing plant in Nababeep in the Northern Cape. The plant produces copper cathodes from on-surface ore stockpiles (or rock dumps as referenced above) and is already producing positive cash flow. Following the listing, a new concentrator plant will be commissioned by CCOC to process its own slag deposits and copper sulfide ore from SHIP.
CCOC is classified as an "environmental clean-up" business because it produces copper by processing historically mined rock dumps and slag and uses the discard from the process to fill up old, mined areas and restoring the environment to its pre-mined state.
SHIP
Copper 360 owns a 91% stake in Shirley Hayes IPK Proprietary Limited (SHIP), which will increase to 95% after the listing. The remaining 5% will be owned by an employee trust. SHIP is the holder of a mining right covering 12 historically mined open and underground copper mines and 60 copper prospects.
The mines were previously worked by large mining companies Newmont and Gold Fields with both companies having left behind an extensive geological dataset now owned by SHIP. It is believed that the capital requirement to return to mining is very low and following the listing, SHIP will begin work to bring Rietberg mine into production. The detailed geological dataset will reduce required exploration expenditure attached to the prospects. The mines and prospects provide Copper 360 with a strong organic pipeline of growth.
The mining right area of SHIP is 8km away from the CCOC processing facility.
Copper 360's strategy
As things stand, CCOC is producing copper cathodes at its SX-EW facility by processing copper oxide ore from existing rock dumps. The proceeds from the listing and interest-free loan will be used by CCOC to expand the SE-EW plant and to begin building the new concentrator plant that will produce copper concentrate from copper sulphide ore from existing slag dumps. SHIP will use some of the proceeds to start the process of bringing the Rietberg mine into production (to produce copper sulphide ore), and to fund confirmatory drilling at a planned open-pit mining complex (to produce copper sulphide and copper oxide ore).
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Purpose
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Entity
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Estimated Amount (ZARm)
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| Expansion of SX-EW plant (copper oxide/cathodes operation) |
CCOC |
20 |
| New concentrator plant (copper sulphide processing) |
CCOC |
145 |
| Mining capital expenditure (Rietberg) |
SHIP |
65 |
| Confirmatory Drilling |
SHIP |
16 |
| General working capital and listing expenses |
Group |
11 |
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257 |
Leadership and shareholder structure
The founding shareholders of Copper 360 are Jan Nelson, Shirley Hayes, Rupert Smith and Stephan Du Plessis.
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Hayes is the non-executive chairman of Copper 360 and has 32 years' experience in building mining businesses. She was the founder of SHIP.
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Nelson is the CEO of Copper 360 and was previously CEO of Pan African Resources. He founded Big Tree Copper which later became Copper 360 after a reverse takeover by SHIP.
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Smith is the non-executive deputy chairman of the board and is a legal professional with specific experience in mining-specific deals and has been involved in the building of several junior mining companies.
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Du Plessis, a CA(SA), is the CFO of the business and has extensive experience in the mining sector.
Hayes (56.8% of total issued share capital) will be the largest shareholder after listing, the Ekapa Consortium, and the entity holding the combined interest of Nelson, Smith and Du Plessis (5.8%). Copper 360 acquired a 91% interest in SHIP in September last year for R1.8 billion in exchange for shares in Copper 360. With 73.5% having been acquired from Hayes, this makes her the largest shareholder in Copper 360 (before and after the listing).
Copper as a 'metal of the future'
Copper has been identified as a key metal of the future as it relates to its application in new technologies and in particular, electrification and decarbonisation. Demand is expected to be driven by these mega-trends with Bloomberg conservatively forecasting that copper demand could rise at on average 2.5% per year through 2030 (up from 2.2% in the last two decades). The main driver of new demand is expected to come from electric vehicles and renewable power generation. Other experts believe that demand could be even more than this, particularly beyond 2030, if momentum towards “net zero” global carbon emissions gains traction. S&P Global expects global refined copper demand to top 49 million tonnes (about double current demand) by 2035, steadily increasing to 53 million tonnes in 2050.
In any event, supply for copper is constrained and investment is required to bring new supply on-line. However, the capital flowing into new supply projects is currently woefully inadequate. In 2022, copper mined supply stood at ~22 million tonnes. This is expected to grow to ~29 million tonnes in 2029 but there is very little commitment in terms of new supply after that. While recycling and new technologies will help plug the gap, new supply commitments are required. In the S&P Global "ambitious" scenario there will still be a supply deficit through 2035. This means it is likely that there will be sustained upward pressure on the copper price.
When the copper price increases, there may be some incentive for new investments to be made in primary (mined) supply. Still, mine inflation is currently high and large miners have become more careful when it comes to capital allocation, which could mean that the “incentive price” will be at much higher levels than what was previously assumed.
Financials
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Revenue is expected to increase from R33.9 million in FY23 to 28 February 2023 to R463 million in FY24 and R700 million in FY25. This is because of the additional output from the SX-EW plant but also due to the production of copper concentrate once that plant becomes operational.
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Revenue is dependent on output, the copper price achieved and the rand exchange rate. Cathodes columns is forecast to ramp up from 40 tonnes per month in FY23 to steady state levels of 100 tonnes per month in FY24. Concentrates production is forecast to commence in July 2023 at 250 tonnes per month, increasing to a steady state production of 380 tonnes per month from October 2024. The revenue forecast is based on a copper price of $9 000 per tonne in FY24 and $9 252 per tonne in FY25. The rand exchange rate is forecast at R17.27 per US dollar for FY24 an R17.77 per US dollar for FY25.
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CCOC has entered offtake agreements covering its entire production of copper cathodes from its own copper oxide resources. The company is currently negotiating a long-term concentrate offtake agreement.
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During the construction of CCOC's plant at Namabeep, it entered into revenue sharing agreements where it will pay 17.19% of monthly revenue from the processing of rock dumps (so this excludes SHIP) till the depletion of the resource (anticipated to be FY42).
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Operating profit is anticipated to recover from a loss of R67.4 million in FY23 (due to comparatively low output since the SX-EW plant was ramping up output during this year), to a profit of R245 million in FY24 and R390 million in FY25. This will be mainly driven by the concentrator product category.
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Headline earnings per share are expected to improve from a loss of 30.3 cents to earnings of 24.9 cents in FY24 and 38.7 cents in FY25.
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The net asset value (NAV) post-listing is expected to be R3.48 per share. Long-term debt is expected to total ~R130 million post listing, with most of the debt not carrying any interest.
Dividends
Copper 360 aims to distribute 30% of profit after tax less stay-in-business capital requirements. The maiden dividend is intended to be paid in respect of the financial year ending 28 February 2025.
What we like about this company
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Copper 360 will be the only "pure-play" copper producer listed on the JSE.
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We like the demand/supply dynamics in copper and believe that the metal price should be well-supported into the next decade, with demand anticipated to continue increasing while new supply is not expected to come up as quickly.
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This will also provide Copper 360 with additional incentive to add new ounces through its own mine development efforts. The organic growth pipeline for the business is strong - with several mines already developed and many prospects thereafter.
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We like that the business is vertically integrated through mining and processing - this should be margin supportive. The environmental clean-up angle is also interesting and a serious differentiator on the rock dump and slag processing side of the business.
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In the mines and prospects within SHIP, the resources are close to surface which allows for cost-effective extraction.
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Copper 360 has low levels of debt; this means that it is less exposed to rising finance costs and has the balance sheet flexibility to take up opportunities as they arise.
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Copper is priced in US dollars, and this provides a natural hedge for a structurally weaker currency. The business will also benefit from its rand cost base should the local currency continue to weaken.
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The money raised via the private placement will be enough to cover the copper sulphide concentrator build and bring the Rietberg mine back into operation which, together with its existing SX-EW operation, will let the company achieve its 8 000 tonnes per annum targeted run rate.
What we don't like about this company
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There is execution risk in building up the copper sulphide concentrator (cost and timing overruns) and it makes up a substantial part of management's revenue and profit forecasts. By FY25, 74% of revenue and 90% of operating profit is expected to emanate from the concentrates business.
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Copper 360 will be exposed to a single commodity. The prevailing copper price will be a major factor determining the success of the group outside of management's control. The business is also exposed to currency risk. While the rand is a structurally weaker currency, bouts of strength may have a negative impact on dollar cost and rand revenue received.
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The revenue sharing agreement in COCC will limit potential upside to shareholders in this business, although it is anticipated to be the smaller contributor to sales as the copper sulphide concentrator ramps up to full processing capacity.
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The business is highly exposed to power interruptions. Currently the company runs diesel generators to insure uninterrupted production - with the concurring cost implications. The group is exploring renewable options as a medium-term solution.
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Arising from a previous prospecting partnership agreement, listed junior miner Galileo Resources now contends that it is (or is entitled to become) the beneficial owner of 15% of the issued share capital of SHIP. This dispute is currently under litigation and will be heard in the High Court on 15 August 2023 - Copper 360 has laid out the key facts surrounding the dispute and are confident that the probability of Galileo Resources being successful with its claim is very low.
Valuation & SPM View
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Current earnings forecasts place the company on a 12-month forward PE of 14.5 times at the offer price and a price-to-net asset value of 1.1 times.
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The forward PE is in-line with peers, although the near-term growth trajectory for Copper 360 is much steeper. Most pure-play copper companies globally trade at more than double their NAV.
