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Excelsior Mining Will be a New Copper Producer in 2018

Excelsior Mining is developing the Gunnison copper project in Arizona. It is an In-Situ-Recovery (ISR) project and many people including a significant portion of the industry itself are not familiar, or at least not comfortable, with it. ISR involves drilling wells and injecting a dilute acid to dissolve copper from fractured rocks. The pregnant solution is then recovered and standard solvent extraction and electrowinning is used to produce a copper cathode (sheets of nearly-pure copper that are sold directly to manufacturers and therefore no refining is required). Lack of familiarity by the market is usually an opportunity for astute and fearless investors, and it is the case here.

I am going to dispense with a lot of the background. Read the corporate presentation for that. I am here to provide an analysis, not a regurgitation. Bottom line is that the project is awaiting the issuance of a final permit and this will be granted early in 2018. From there I envision three possible scenarios with high probability of a strong positive outcome. The details are as follows.

The Underground Injection Control (UIC) permit from the U.S. Environmental Protection Agency (EPA) has a public comment period that ends on January 8, 2018. Then a few days will pass while the EPA goes through the comments. These are expected to be few and mainly concerned about the use of local water resources for the operation. Fortunately, there is nobody actually using that water so the "concerns" amount to a nothing-burger. The fact is there has never been any opposition to Gunnison, organized or otherwise. Therefore permit issuance should occur before the end of January 2018. That will be followed by a 30 day appeal and most likely no appeals will be lodged as there weren't any at the state level for the same permit. So the project should have its all clear before the end of February. Behind the scenes, Excelsior management will already be arranging the financing and this may be announced contemporaneously with the permit issuance. Given this timeline, the project will have its green light right before the annual PDAC, which is typically when a lot of investors are looking at companies in the resource sector. I think the confluence of factors will drive the share price to C$1.60 - C$1.70 range at this point.

From there, they will build the initial well field and subsequently announce start of production sometime in the second half of 2018. That is another price catalyst and the shares should be trading in the C$2.00 range by then.

Note that they haven't done injection testing or hydraulic control before at Gunnison so there could be complications. At Florence, which is another ISR copper project in Arizona being advanced by Taseko, they have been required to demonstrate hydraulic control on several occasions and still need to do another test before applying for operating permits due to concern about contaminating the groundwater. Florence is located right next to a town. Gunnison is in the middle of the desert. So Gunnison doesn't have to do this demonstration with test wells because an excursion of contaminants wouldn't have a deleterious effect on anybody (although the operation would have to halt until a new plan was devised). 

The requirement to demonstrate hydraulic control with test wells prior to production does not apply to Gunnison so Excelsior is able to take it directly into production. That's the good news. The bad news is that it could take a while before they are able to optimize pump and acid rates. They may also need to adjust well layout. The worst case outcome is that poor water flow and difficulty with hydraulic control cannot be overcome due to variable fracturing of rocks. In the past there has also been fear-mongering about the build up of gypsum that can get dissolved from the carbonate rocks at Gunnison (unlike Florence which is porphyry, Gunnison is a skarn). As part of its feasibility studies, however, Excelsior has shown that any gypsum buildup is minimal and does not have a significant impact on flow. Acid buffering by carbonates could mean higher acid consumption and this is addressed in the operating plan by increasing acid application and injection times. Also the copper recovery assumptions have been reduced ... to levels that could actually turn out too conservative: the final copper recovery for Gunnison is 48% vs. 70% for Florence.

So I foresee two probable scenarios:
  1. Things go as expected per plan and it takes them only 6 to 9 months to demonstrate the operational feasibility. This should be followed by an announcement of a stage 2 production increase (toward annual 100 million pounds of copper outpute). The share price at that point (early 2019) could be in the C$3.00 - C$4.00 range with possible buyout at significantly higher level to follow.
  2. It takes them quite a bit of time to adjust the process, up to 2 years, until they get satisfactory results. The share price drifts between C$2.00 - $3.00 in the meantime, all other things being equal. Then scenario 1 unfolds (2021 or later).
I favor scenario 2 simply because they don't have a test well history and ISR can be tricky.

Worst case scenario is the possibility that the Gunnison deposit, or at least the majority of it, proves too difficult for ISR and the Excelsior share price collapses. There is maybe a 20% chance of that (probably lower). So given the risk-reward (20% chance to zero, 80% chance for a 5-bagger), this should be a no-brainer. Thumbs up.

UPDATE: Permit timelines were assessed too optimistically (so what else is new?) and the project start date has basically been delayed by a year. Also copper prices have fallen and the market for mining stocks in general remains in a funk. Moreover, Excelsior has opted to raise double the DFS initial capital in order to create a safety margin given the uncertainty of initial ISR performance. As a result, Excelsior's share price has not achieved any of the forecast targets but I still think the scenario as laid out in the original analysis is very possible with share prices still capable of achieving similar upside (a year out) especially if market sentiment were to improve. At minimum the shares have tracked copper stocks as a group by losing "only" 23% since the publication date of the original analysis. MIN.to Price 12/2/2017: C$1.08 vs. Price 2/7/2019: C$0.83. Compare to COPX US$24.54 vs. US$20.21 (-18%) or highly prospective junior explorer REG.v C$1.91 vs. C$1.65 (-14%) and finally SOLG.to/CGP.v (+31%/+37% being one of few copper names actually trading higher) as "best in class" during this period with many other copper names (especially exploration/development) losing much more than 23%. So there.

Disclosure: This is not investment advice. Consult your own expert. No position direct or indirect in, nor any relationship with, Excelsior Mining as of the original publication date. Subsequently indirect position has been taken.

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