Kutcho Interview with Crux Investor
0:00 – Company Overview
00:54 – Representative Background, Small Scale Projects & Getting To Success
10:10 – Potential Issues, Deferred Payments & Recent Press Release
15:55 – Economics, Press Reactions, New Ratios & Versions
32:48 – Outro
Vince Sorace: Hi, I’m Vince Sorace, President and CEO of Kutcho Copper Corp. We are a development-stage, Copper-Zinc asset-based company in British Columbia in Vancouver. We have our asset, located in British Columbia, a mining-friendly jurisdiction of north-eastern BC. We are proximal to a number of operating and development-stage companies. We are in the midst of completing our Feasibility Study and looking forward to advancing this project through permitting and eventually construction and production.
Matthew Gordon: Thanks for coming on the show. I appreciate that. We’re trying to find good Copper stories; we’re going to find out today if you’re one of them. Let’s get a little bit of background from you first of all.
Vince Sorace: I’ve been in the capital markets for about 25-years and, specifically in the last 15-years, resource companies: putting together opportunities that we see we can advance. Kutcho Copper was one of them that we saw about 3-years ago, as I’ve liked the Copper market for some time now and we saw this advanced-stage asset that was getting no love and sitting dormant in Capstone’s basement. It’s been around for some time and never really saw the light of day, and through my role in in the past, I’ve helped companies to develop assets, raise money and go forward to some point of exit
Matthew Gordon: Tell me about that used phrase, ‘It wasn’t getting any love.’ You have a USD$76M market cap today, up from the lows of 2020. It’s still small, right? It’s a small-scale project. Is that the problem, or is it the fact that this has been going on for so long that people are tired of the story and have moved on elsewhere?
Vince Sorace: That’s a very good observation. Kutcho, the asset, was discovered way back in the day. It was a fragmented discovery with Sumitomo and some other groups that had made this discovery, but as a fragmented land position. It was only consolidated and put together in the early 2000s by a junior resource company in Vancouver, and that’s when it started getting advanced and had its first PEA. It was consolidated and it shown to be something that was very interesting to move forward. They ran into some financial problems in the mid-2000s, but interestingly enough, a company called Sherwood Copper, which had just put a project called Minto into production, and it was led by Stephen Quinn, they saw the opportunity and he acquired the Kutcho project from Western Celtic who held it at the time. Stephen had this philosophy where he wanted to advance the company with these smaller, low capital, high-margin assets. That’s how he wanted to grow Sherwood Copper. He did a fantastic job putting Minto into production and Kutcho was next as their pipeline project during the mid to late 2000s.
Shortly thereafter, Capstone and Sherwood Copper merged. Darren and Steven had 2 different philosophies on how they wanted to grow the company. Darren want to take bigger bites in the industry. He went on to acquire Santa Domingo, Pinko Valley, and that was the path forward. Kutcho at that point didn’t really fit that philosophy so Stephen and Darren parted ways.
Stephen Clinton went on to basically run Kutcho for some time in the years after and Kutcho really was at this point in its cycle where Capstone was preparing a Pre-Feasibility, but it just was not something that they were concerned about so they quickly finished that Pre-feasibility and shelved it. It just got thrown in the basement. They did try to sell it in 2014. It wasn’t a very good year for Copper. They had a number of interested parties, but they couldn’t get the price point they wanted, so they basically shelved it again.
So what happened with this asset is that it passed through a lot of hands over many years and never got brought to a point of fruition where people could understand it or wrap their arms around it. I would suggest even that Pre-Feasibility Study done in 2010 was not done properly. It was not done to completion, there were a lot of holes in it. And when we were out looking for an advanced-stage asset in the Copper space and I knew the guys at Capstone, we took a hard look at it and we saw all this opportunity that was left on the table, and that’s why we pursued it.
We saw opportunity in the ability to grow or scale the asset. What attracted us to it immediately was the high grade, that was reported in this and they had 10Mt in reserves at just under 3% Copper equivalent, in a mining-friendly jurisdiction. Therefore, we pursued it and we saw opportunity in everything, from enhancing metallurgical performance, growing the project to scale and really loved the fact that it had the grade, it was low Capital. It was something that we thought the market would like. As we moved down that path, we simply negotiated a price with Capstone of around CAD$28M in cash. In order to facilitate that we also brought in a partner in Wheaton Precious Metals, and that was a multi-prong approach.
Wheaton in, they liked the asset, we did a Stream with Wheaton on the precious metal component of the asset, which was only about 8% of the revenue of the project so we didn’t find the stream encumbering on the primary commodities – on the Copper and the Zinc. They participated in the equity round. They also did a USD$20M convertible loan to us to help us acquire the assets. That speaks to their conviction, and as we all know, Wheaton’s got a very good technical team. They looked at this thing and saw the opportunity that we did. That was in December of 2017. We closed the transaction.
Essentially, the strategy that we employed was the quickest path to Feasibility Study, permitting and production. We believe that this would eventually be in production. We spent 2018 in the field really closing all the gaps: re-engaging on the permitting side, getting all the baseline studies and everything that we needed to, ready for the permitting process. We went in and basically did some resource expansion drilling. We did the required metallurgical drilling and geotechnical drilling, everything was ready to feed into the Feasibility Study to really get that going. That was all of 2018, and in 2019 we started putting all that data together, working towards the FS.
As we all know, 2018, 2019, and parts of 2020 were not the best markets, especially on the base metal side. We were going through this little thing called the trade war with China and the US, and people were not too excited about the future of base metals and Copper. So we took our time, we were very sensitive to maintaining capital structures within companies and not wanting to blow that up. We raised enough money and we were patient in getting ourselves prepared for moving to the next phases of the company’s life cycle. And we really got this thing going in the middle of last year when the markets came back online post covid. I was able to raise some money at reasonable prices and we really kicked things off with the Feasibility Study.
As you started this conversation with, this is going to be a significant milestone for the company, because of its life cycle and because of how it’s been around for a long time and is almost an untrusted asset, because there’s been so much information out there through different parties with no one really taking that to fruition, this is going to be it. We’ve got a very credible engineering firm with CSS Global who are doing our Feasibility Study. We’ve got a good team in place who care about this asset. We’re going to do a great job in moving it forward. I think on completion of this Feasibility Study, which I think will be within the next 6-weeks, it’s going to finally show this asset in a very comprehensive, final, trusting state that’s never been shown before. And I think that’s going to be a significant shift for the company.
Matthew Gordon: Thanks for that fulsome answer, including some of the history and how you got to where you are. I do want to talk about the announcement that the Feasibility Study will be coming through in October. The interesting bit in that for me is the move from underground to potentially open pit on some of the property, which is exciting in terms of the economics. Before we discuss that, it’s worth stating that mining is never easy and sometimes with stories like this it’s very easy for people to say that this is just a re-tread story: it didn’t work before, it’s not going to work going forward. You’re starting on the back foot here, right? What you see and what the market believes are 2 different things. With Wheaton coming in, that was a big coup for you in 2017, but do you feel that potentially is another issue for you going forward? Because they could convert and be up to 27% owners. I know they’re not there now, but you’ve just renegotiated or deferred interest on the debenture with them. Is that another problem that you’re having to overcome?
Vince Sorace: Let’s set the stage with Wheaton: Wheaton is interested, and their business model, and I think we can all see that by looking at the history; They’re not interested in equity ownership. They don’t want to own assets. They want to own the Stream. That’s their thing. They helped us, they like this asset, and at the time raising, CAD$28M was difficult for anybody. They helped us and then they actually participated on the equity piece of the financing as well with about USD$4M. They don’t want to own this. They never have, they never will. They have just helped us along to really move this forward. I’ve had many conversations with them over the last couple of years and, yes, this debt is out there and I think that we’re going to find a very creative way to deal with that, that will be around Feasibility Study because that’s when they have to formally make their election to elect into the Stream. Now, trust me, I’ve been working very closely with them over the last couple of years. Their technical team has been working with us over the last couple of years on this asset. Their technical team helped us through our completely revised met program and they were fantastic. They’re very, very good. Thus, they know a lot about this already. They’ve not been in the dark at any point in time through the last 2-years.
I don’t see it as a problem. I actually don’t think they would convert. That’s just not their MO. That’s not what they do. And so again, that’s something that we’ve been talking about and we will find a creative solution to lifting that.
Matthew Gordon: Okay I buy that. In terms of the deferred interest payments, obviously that will be rolled up. When is it deferred to?
Vince Sorace: Until 2023, or the end of 2023.
Matthew Gordon: Is there anything punitive or was it just run-of-the-mill interest payment, single digit?
Vince Sorace: Run-of-the-mill. I’m hoping to have that situation restructured, and that potential overhang optic taken care of by the end of this year.
Matthew Gordon: You used a good phrase there – the optics. You’ve got the optics for the market here and I appreciate those are the small fires that CEOs need to deal with, even though the reality may be different.
Coming back to Wheaton, some of the terms of that deal were about you getting to 4,500t/day. The 2017 PFS talked about 2,500t/day. What’s the Feasibility going to come back with?
Vince Sorace: That was part of the press release we put out yesterday and because of our move to this open-pit scenario on the main lens, which is most of the tonnage, we were able to increase throughput. We’ve said to market now that we are targeting 4,500t/day production. As you’ve noticed, that kicks in about a USD$20M bonus with Wheaton Precious Metals. Let’s just say that’s one opportunity in terms of debt restructuring or things like that, but there’s a number of levers that add to the potential to taking care of the situation we discussed earlier.
Also, we intentionally modelled the throughput to stay below 5,000t/day because that only requires provincial permitting. That’s the trigger. That’s the threshold. When you’re over 5,000t/day, you then trigger a federal review process in Canada. So it works out well from a number of different scenarios to have that throughput targeted at 4,500t/day.
Matthew Gordon: Can you give us a sense of the economics from the Feasibility Study? I don’t know how much work you’ve done on the various aspects, but you’re going to come up with a definitive number. Is this thing going to make money? Or was it just a good deal for a Wheaton?
Vince Sorace: I’ve got to be very careful about what I say here. Unfortunately, most people will have to wait to see the numbers because, obviously, Feasibility Studies are very sensitive and the data is very sensitive. We tried to put out everything we can in the press release yesterday to update the market as to what we’re seeing and what’s going on. I think this is going to make money and will be a very robust project. I don’t want to point people to the PFS, because it has been turned on its head. Going back to when we acquired the asset, we were working and advancing the asset, we had all these completely different ideas about learning methodology, planning and all the results, so if you go back and look at what we’ve done with the met program, and as I’m talking to the investor audience out there, everyone’s like: hold on, you’re telling me that the FS is not going to look anything like the PFS? Yes. I am. Then, the reaction is: we need to wait and see because you just told us that a very trusted document isn’t going to look anything like the Feasibility Study. We have the same issue with the PEA: previous PEA didn’t look like anything like this PEA and we’re telling the market that we’re going to make everything better in the FS. So again, this is part of the problem, but also part of the opportunity where the Feasibility Study, for the first time, is going to show this in the correct light.
Back to your question, if you look at the PFS and you look at the sensitivity analysis, it was priced at $2.75 Copper, this thing, this thing would have been put into production at $3.50 Copper. I don’t think those metrics are going to change. I think this project is going to be robust at cheaper Copper prices and I think it’s going to be extremely robust at current Copper prices.
Matthew Gordon: Yes, Copper has done a lot of heavy lifting for a you over the past few months and hopefully will continue to. Looking at the combined measured and indicated of 28.2Mt at 2.6%, that’s pretty punchy. Most people would be happy with that in terms of where you’ve move from the PFS to potentially what you’re going to build out to announcing October. But the market reaction yesterday was muted. I would have thought you’d have got more. Were you expecting more?
Vince Sorace: To be honest, I would have expected a little bit more but we’re seeing a better reaction today in the market. It is being digested. It’s very new, especially the open-pit scenario. This project has been marketed for 20-years as an underground-only scenario, so this is a significant change. When we started our Feasibility Study last year we were continuing going down that path, the underground-only scenario was when we started doing the trade-off studies at the Feasibility Study level back in January-February. Everybody knows that open pit makes a hell of a lot more sense, because your mining costs come down significantly. You’ve also got to take this cautiously because when you go to open pit all of a sudden, the first response people have is: hold on. Will there going to be greater permitting concern? That stands on 2 fronts with us with our First Nation partners and with government.
When we first looked at the potential benefits of it, and I also needed to make sure that before we committed in this direction that I wasn’t going to run into any roadblocks with my First Nations partners and/or government with permitting. We are having those conversations now, we still have to do things properly and we still have to address all the technical risks and move that forward. But from a conceptual standpoint, it’s not a problem. If you look at the jurisdiction, there’s a number of companies up there running open pits in Tahltan Nation territory. We’re in a very friendly mining jurisdiction within British Columbia. It has got its pockets but where we are on the map, there are a number of projects in production. We don’t expect pushback on the permitting side.
I think people are digesting this news. I think they’re looking at the opportunity. In the last year I’ve had no shortage of phone calls from strategic or institutional investors. As to your question of us showing you more, there’s this build up into the Feasibility Study because this has been somewhat of an untrusted asset from the past. Over the next 6-weeks we’ll be talking more about this big pivot in the open pit, what that means for exploration opportunities, not only around the pit but Greenfield stuff as well. A few other things leading up in the Feasibility Study. I think this will start catching a little more attention and more prominently over the course of the next period.
Matthew Gordon: I think people looking forward are trying to understand what the new NPV looks like, what will the new capex look like? The previous ratio was a nearly 1:1, right? It wasn’t pretty in terms of going out and raising capital to do that project. Do you think that this is going to be more financeable, as a result of the work that you’ve done?
Vince Sorace: I think it’ll be financeable and attractive for a number of reasons. We’ve increased throughput, so by nature the capital will go up; it’s a bigger plant and facility. Anything these days sub $500M in capital is very attractive. If you think back to 2011-2012, these multi-billion dollar capital projects, I mean everybody got stung. Even today people are still very cautious. It’s still hard to get those financed, but sub-$500M, that’s a niche. That’s a sweet spot. That’s financeable.
Don’t forget that part of that Wheaton Stream is they’re going to be paying us USD$70M-$75M dollars for that stream in development capital money. So I’ve got a big part of that coming in to help Finance the build on this. So I think we’re in a sweet spot with respect to, and I can’t specifically say where I think we’re going to land on development capital, but we’re in a sweet spot with respect to financing this size of project and that type of capital. I’m not a huge fan of the metric of it’s a 2:1 cap. I think there are more important ratios to look at.
Matthew Gordon: Such as?
Vince Sorace: Looking at IRR, cash flow and NPV, those are the big drivers. I think cash flow, higher NPV over a 2:1 capital versus NPV ratio. And I think this will be very attractive from those perspectives.
Matthew Gordon: It also helps us understand the type of funder that you’re going to probably move to, because again, there hasn’t been much conversation about drilling, exploration or resource building, to get that scale. You’re focused on getting into production. That seems to be the management’s intent: show the market we think we can get into economic production with the numbers we’ve got today, is that fair to say?
Vince Sorace: Right. And then the upside potential.
Matthew Gordon: Then you’ll focus on that. Okay, and that’s reasonable given that money is tight. I know you raised USD$4.1M in June. Was that to get you to the point where the Feasibility could actually be published, then you will reassess what you need to do next?
Vince Sorace: Correct, also, you may have seen our press release with respect to the Royalty buy-back and the off-take. This was a big one. We wanted the money for that as well. I’ve wanted to do that for years because even though it’s nice to buy back that Royalty and, trust me, the impact compared to what we paid, even on, the NPV is significant. So we got a great deal and I thank Sumitomo for that. But the bigger piece of that, and why I really wanted to get it done is that there was a role for the off-take. With that role forgone, it opens me up to do a strategic deal with an off-taker, that if done properly can be very lucrative and help provide the capital to build the asset.
We’ve seen guys like Trafi and Glencore do this with a lot of different people; they get involved from an equity or a lending perspective against an off-take and do these strategic deals. That’s why I was so interested in getting that: it was about the role for off-take and about obviously about the Royalty. But that sets me up, and I think this asset will be set up to do something strategic.
Matthew Gordon: I wanted to understand the significance of the timing and what it cost you. What did it cost you?
Vince Sorace: It was USD$3.5M over staged payments.
Matthew Gordon: Okay, how are we doing for cash right now?
Vince Sorace: We’re good. Again, I raise that money to get us through the Feasibility Study and post Feasibility Study. Again, the way I’m reading this is that once I get that Feasibility Study out there, and given the interest levels that I’ve had, I’ll tell you, I’ve turned down money in the last year. I’ve been very surgical in how I’ve raised my Capital. I’m very cap-table focused. I could have raised a lot more money in the past at the prices. Personally, I think there should be a significant re-rate after the Feasibility Study. I think it will be a surprise and I think there’s a big institutional idea to the bankers out there looking for good Copper stories. This is going to be a foreseeable endeavour, I think people are pretty happy about where they see base metals in the coming years. My path here is to minimize dilution and maximize opportunity with the right investors. If it’s a combination of strategic investors that I can tie something in with that’s going to come after Feasibility Study at some point and I think it’s going to be a higher price. That’s my objective.
Matthew Gordon: I hear that a lot. People are looking for catalyst moments; sometimes they happen, sometimes they don’t. With regards to the cash point at the moment, are you running it on vapour waiting for this re-rate? Or if you don’t have the reading that you want is it going to be expensive money for you to raise?
Vince Sorace: No, I’m not running on vapour. I manage my cash flow very, very carefully. I always give myself some runway. I’ve got built-in runway to deal with all those circumstances if they were to occur.
Matthew Gordon: Tell me about some of the conversations you’re having with the institutions, because if you are right and they’re looking for big Copper stories, and I believe that; we’re struggling to find decent Copper stories. There’s a handful of obvious ones, but there’s a lot of re-treads and try-hard stories and not a lot of good stories out there. If you get the Feasibility Study right and you can present that to the institutional market, are you aware of institutions who are waiting for that information? Have you had conversations? Will you get that positive response? How sure are you?
Vince Sorace: There’s nothing sure in life other than taxes and death, right? I’m confident. I’ve been in this a long time and I can feel the pent-up expectation here. I need to deliver. We need to deliver as a team into those expectations. We’ve been out looking for additional assets for the last 2-3 years. I think Kutcho actually is a phenomenal benchmark project, so there’s another opportunity here. Whether our exit is that we get taken out or it’s a rollup strategy with other good, small high-margin assets out there to really create maybe this next mid-tier type producer because there’s a major gap in North America with respect to these mid-tier type producers.
Things have changed for the Capstones, the Copper Mountains in that they’ve had significant share price increases, but before that you had all these smaller guys. Then you have this massive delta up to the Hud Bay’s, the Lundin, the First Quantums; there was nobody that really fit that bill in the middle. Where they existed was maybe down south in Australia and South Africa. They’ve got producers that fit that gap. There’s a number of different opportunities I see for us again post-Feasibility Study because my phone’s been ringing with not only institutional investors, it’s been ringing with strategic investors or corporate opportunities. Again, they’re all waiting to see the Feasibility Study. It’s a common theme, and I can understand it. That’s just what we have to deal with right now. I’m excited to start re-engaging in those conversations because we’ve already had a lot of them.
Matthew Gordon: I think that’s a good version of the story today. Maybe if you come back on in a few weeks and we can get into the weeds with a few other things. I saw the economic participation agreement with the First Nations. That’s really critical that that happens so that was good to read. Perhaps we should wait until you can come back and talk actual numbers with the actual Feasibility Study. I know it’s going to take a little bit longer than you’d hope. What’s the date we’re looking for?
Vince Sorace: End of October.
Matthew Gordon: Well, that will be a great moment and we will be looking for that re-rate and the market reaction to that. I appreciate your time today, Vince. Good story.
Vince Sorace: Thank you very much for having me today. This is fantastic. I look forward to sharing more of what’s in the future with you. To leave people with a few thoughts here: Kutcho represents something that we believe is a very clear path to production. This is an advanced-stage asset. We’ve taken a lot of risk out of this. We’ve de-risked this significantly and the Feasibility Study will be a significant de-risk point. From there, there is still opportunity, and we can talk more about this in the future about making this bigger and better. We have a lots of exploration upside on this asset. You’ll see more news about that in the coming week or two as well.
As we discussed, there aren’t many good Copper assets out there. So I think the market, with respect to where the money wants to go, is really trying to find stories like this. If we do our job properly and we surprise and do this Feasibility Study right, it’s got a a really good chance of focusing that capital on stories like Kutcho.
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