Trilogy Metals Inc. (TMQ, Financial) is advancing the Upper Kobuk Mineral Projects copper project. Besides copper, the deposit also contains zinc, lead, gold, silver and cobalt.
Trilogy used to be called NovaCopper and incorporated in April 2011 as a wholly owned subsidiary of Novagold Resources Inc. (NG, Financial). In 2012, NovaCopper was spun out to its shareholders.
Financial strength
South 32 (SHTLF, Financial) took out an option on Trilogy Metals. It paid the company $10 million per year for the last two years and will pay again in 2019. The money is supposed to be spent on Bornite exploration. South 32 already owns 12% of the equity but could excercise its option to start up a joint venture between it and the company for an additional $150 million. This means there is quite a bit of income:
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Meanwhile the balance sheet is squeaky clean.
Management
The management team is very experienced. Especially given this is such as small company. The CEO was previously CEO at Novagold, which is a strong sign. The team also owns about 4% of the equity outstanding and various option packages that can result in very good paydays.
Valuation
Valuation is a tough nut to crack with junior mining companies. However, there are some reference benchmarks because BMO Capital Markets canvassed the market:
Interestingly, the closest comp in terms of grade and resource size is Arizona Mining. Arizona Mining just got bought out at a valuation of $1.6 billion or at least around 6x Trilogy Metals' price. It was acquired by -- wait for it -- South32, which already owned 17% of the equity prior to its bid.
Nevada Copper (TCU, Financial) is trading at a similar valuation to Trilogy Metals, but its resource is clearly inferior. On a relative basis this is a standout among junior copper companies in solid jurisdictions.
Risk
There are many risks that this company shares with the broader market. However, there are a few that are perhaps especially pressing:
The copper price has been falling lately, which is bad. If this continues or it stays down for a long time it, can delay the development or even derail its advancement.
This is a very early-stage mining company, and it is still permitting to get roads to the mining site. If the permitting process is delayed or killed, that could hurt the company and thus the stock price.
A slowdown in China (which it looks like is happening judging by its market) may cause depressed copper prices and commodity prices.
Outlook
This idea is going to take a while to play out. It will take time to get a road permitted. Drill results from Bornite 2018 program could be important drivers of value. The company is also finishing up plans for its 2019 $10 million Bornite Exploration Program (funded by South32), which will be interesting. If this goes well, it stands to reason that South32 will be interested in repeating its Arizona Mining playbook.
Finally, Seth Klarman (Trades, Portfolio)'s Baupost Group is a major shareholder. It holds 10% of the company.
Disclosure: Author owns shares in TQM.
