Pat Donnelly provides an analysis of the current copper market and provides an update on Trilogy Metals progress and how the company is navigating through the current crisis. Pat stated, “ there’s no other assets in the world that have the quality and the grade that we do. And matter of fact there is very few good copper assets out there. So I think eventually we will be taken out [by a major miner]. The last few acquisitions of all the copper assets, have always gone for a good premium over their share price and the premium over their NAV. 
Regardless of the market situation, we’re still running out of copper and specifically we’re running out of high grade copper…[Trilogy] is an ideal story where if you like copper… we are a good call option on the medium to long term copper [price].”
Pat is the Vice President, Corporate Communications & Development for Trilogy Metals and has a broad range of experience in mineral exploration, capital markets, corporate development and investor relations.
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0:15 Introduction
1:20 What is going on in the copper market?
3:19 Some copper mines to remain offline after COVID-19 crisis passes?
4:36 Further copper price depression will amplify future copper bull market
5:29 Trilogy’s JV partner South32 is in excellent financial shape
8:18 EIS completed for proposed access road
9:29 Update on the CEO search?
10:46 Insiders currently buying Trilogy shares in the market
12:58 JV is fully funded; Investors have no share dilution risk for years
14:04 Summer exploration season could be impacted by current crisis
Ticker: TMQ in Toronto and New York
TRANSCRIPT:
Bill Powers: This is Mining Stock Education and I am your host Bill Powers. Thank you for tuning in. Well, as markets are falling and vacillating, going up and down, and people are fixated on the price of the precious metals, we also want to be paying attention to Dr. Copper. Copper has fallen from $2.80 in mid January. It’s about $2.20 per pound now. Not many mines are profitable at that. I believe that’s like about the 90th centile based on a recent article on copper that I read. So I reached out to Pat Donnelly. He is the vice president of corporate communications and development for Trilogy Metals, one of our sponsors. Pat, welcome back to the show and could you provide us your take on what’s going on in the copper market with mines shutting down around the world? Many are speculating, saying there’s going to be an economic contraction. What will that do to the price of copper? Please share with us your thoughts here.
Pat Donnelly: Yeah. Thanks for having me on Bill. Copper, we call it Dr copper specifically, because it’s a leading indicator of global economic activity. And so when you see the global economy slow down, it’s going to have a significant impact on copper and specifically 50% of copper demand is from China. And as the epicenter of this whole virus. That being said in the short term copper’s is going to be under a lot of pressure, but I think it further supports the mid to longterm case where we’re going to have a shortage of copper and mines are getting deeper, grades are getting lower and just to maintain production, a lot of these mines are going to have put in billions of dollars of sustaining capital.
For example, Codelco which is the world’s largest copper producer and it’s owned by the government of Chile and in South America they supply about 7% or 8% of the global supply of copper and need to put it off $4 billion a year just to maintain their production. They are also raising in a lot of debt. There is not going to be help from the government and the reason billions of dollars in debt and that’s going to catch up to them. And in the next three or four years we’re going to be in pretty good squeeze. The average copper mine nowadays, you need at least $3 to $4 copper to go into production. And average head grades are about a 0.6% copper. Again, I think we’re going to be moving into a very nice sweet spot for copper in the next three, four years.
Bill: Pat, with copper at $2.20 now, and some mines in some of these countries like Peru, where they’re on care and maintenance for a minimum of 15 days, but it looks like it could be longer. Do you think that when a lot of these copper mines do go on care and maintenance because of the COVID-19 crisis and now that copper prices are so low, will some of them just continue to remain offline?
Pat: That was a really good question. I’ve seen this happen before. You got to remember, if you want to shut these mines, often the care and maintenance costs are pretty high. And if you want to shut them permanently, the closure costs are incredibly high. And then you also got the social issues where if you’re laying off people in some of these countries that could cause problems. I think they’ll try to keep them open.
Historically, usually what happens is when we go through a prolonged bear market in metals, mining companies have always went after the high grade ore to keep things open. I don’t know how much high grade is left, but you may see some of these mines remain on care and maintenance, but if you got below $2 copper where they’re really bleeding cash, I think then you would see some closures.
Bill:There are a lot of economists and commentators that I’ve listened to recently that are arguing for a deflationary situation and the economic contraction, if that occurs and copper stays depressed. Not only this year, but let’s say the next couple of years because of the economic situation, that essentially will just make the bull market out of that greater, right? It’s almost like a coiling effect.
Pat: Yeah, absolutely. Once you shut these mines down, it takes a while to get them back up again. Some of them are the biggest mine in the world, they’re mining a couple hundred thousand tons per day. These are massive multibillion dollar operations and maybe they don’t get reopened again because of grade. Yeah, absolutely. I think what you’re saying makes sense.
Bill: A lot of the major miners though, they understand the value of copper and then also the need to plan in advance. So we’re going through a crisis. It’s big to us when it’s up close, but you have a partner in South 32 so they understand the copper projects take a while to develop and come online. Where’s trilogy at right now with this crisis? Are you scaling back? Do you have any input that you can share with us on what South 32 is thinking?
Pat: Well South 32 they’re in very good financial shape. They have net cash position of I think $250 million. They have a line of credit, I think for over a billion dollars. They’ve always been very, very profitable, and they’re in very strong financial shape, so I’m not too worried about them not weathering the storm. As you’ll recall in last February we signed a joint venture agreement or the exit we completed, the formation of a joint venture with South 32 in which they put $145 million into the joint venture. It’s a 50/50 joint venture between Trilogy and South 32.
So that $145 million should last us at least three years and therefore it’s business as usual for us. And so out of the $145M, $72.5 million of that is attributable to Trilogy Metals, not to mention we have almost 20 million in cash at the company level as well. So in total we have about $90 million attributable to Trilogy, so it’s business as usual for us. This year is a very, very busy year. We’re working on a feasibility study for the Arctic project and we’re going to start permitting Arctic later this year. I think the only impact apart from us all working from home right now with the COVID-19 situation is that may impact or summer field season, that usually does not start till June. So if this thing does subside, then we may be able to stay on track for the summers field season.
We’re currently looking at a number of scenarios for our summer program if this situation continues. But that being said, I don’t think it’ll have impact over our timeline. We’re busy with the permitting of Arctic. We’re busy with, like I said, the feasibility study and the Bureau of Land Management just still making incredible progress for the permitting of the Ambler road to the Dalton highway.
Bill: And you had your final environmental impact statement issued just within the last week?
Pat: That’s correct. The Bureau of Land Management issued the final environmental impact statement for the Ambler road that came out last Friday. That’s a critical document. They’ve been working on that document for like four or five years now. We’re almost at the touchdown line with the permitting of the road. As you recall, the issues never been about whether they’re economic or not. The issue’s always been infrastructure. And currently the BLM is permitting a 211 mile road to our project from the Dalton highway in Alaska. And so now the next steps, now that the environmental impact statement is completed is for the Bureau of Land Management to issue their record of decision.
And that will be jointly issued with the 44 permit, which is issued by the Army Corps of Engineer. We expect these two documents to be filed within the next 30 to 60 days. So let’s say before the end of the second quarter. So those are two huge catalysts for this company.
Bill: Anything you can share with us publicly on the CEO search?
Pat: Yeah, we’re almost there. We had 12 candidates and we widdled it down to two people who are very, very solid candidates and so hopefully in the next couple of weeks we’ll have some news on that. We had some really talented people approach the company given that we have high quality assets in a great jurisdiction and as I mentioned before, we’re well cashed up.
Bill: The Alaskan government is very favorably disposed towards mining. Any restrictions that they mandated from the state level because of the COVID-19 crisis that would impact the mining industry currently?
Pat: I’m not aware of any projects that operations have shut down yet. They have reduced people coming into the state from outside the state and like everywhere else they really, really clamped down on social gatherings. But so far I’m not aware of any mines being shut down. But obviously, like I said before, if this situation continues, it will impact our summer program.
Bill: Pat, when I spoke with you both at the Sprott conference last year and then also recently at PDAC, both times you told me you wanted to swallow up the Trilogy stock because you felt it was undervalued. Can you talk about the valuation? Some investors may say, well, the mine development is far out, but what would be the appeal to investors today?
Pat: Well, yeah, we have been swallowing up shares. Actually Jim Gowans, our CEO, he’s been our interim CEO. He’s been buying stock in the market. We had a couple of directors been buying stock. I’ve been accumulating stock and I’m still trying to get some more. I’m going to keep buying with every penny I have I’m going to put into it. That being said, yeah, I mean in the short term things are tough, but I think eventually … South 32 they’re putting this money into Trilogy because I think they believe in the assets and they’re going to use this money to de-risk our assets as much as possible. And I think inevitably they will pull the trigger and take out the company altogether.
One question I often get is given, our share prices pull back, do we feel vulnerable? Fortunately I’d say 60 to 70% of our shareholders are friendly and they have a very high target price for what they want and they see the value in these assets. In particular, our top three shareholders have been in the story since the beginning. Paulson & Co., Baupost Group and the Electrum Group and they collectively own 40% of our stock, they’re not going to give this thing away. And like I said, there’s no other assets in the world that have the quality and the grade that we do.
And matter of fact is very few good copper assets out there. So I think eventually we will be taken out. The last few acquisitions of all the copper assets, have always gone for a good premium, premium over their share price and the premium over their NAV. Regardless of the market situation, we’re still running out of copper and specifically we’re running out of high grade copper.
Bill: Yeah. You’re one of the best plays on high grade copper. And as you mentioned for three years, investors don’t need to worry about any dilution.
Pat: Yeah. There’s no reason for us to raise money. At the corporate level, there’s only about a half a dozen of us in the office and our technical people have moved on over to the joint venture and we have more than enough money in the joint venture to get Arctic all the way up to a construction decision. And not only that, but also do work on the rest of the belt. Remember it’s a 70 mile belt and has dozens of prospects and historical resources. We also have our Bornite project, which we’ll do a little bit of work at this year. As I said before, we own not just the mine but our potential mine, but also an entire mining district that could be in production for decades.
Bill: Yeah. And I’ll also point out that I don’t have your chart in front of me, but I believe, nine months ago your share price was over double what it is today. So that’s just how you’re-
Pat: Triple.
Bill: Okay, triple. And so the only timeline pushback of expected catalysts for this year really would be the exploration season then? Is that what investors should expect?
Pat: It could be impacted by what’s going on in Alaska. And we’re looking at a number of scenarios. How do we address that? But that being said, this is an ideal story where if you like copper, but not in short term, we’re perfect because we don’t have to shut any down. By the time we have Arctic ready to go, I’d expect copper prices to rebound and be above $3 again. A lot of these other copper producers are struggling right now because they’re dealing with all their operations. We don’t have to deal with that right now. And yet we are a good call option on the medium to long term copper [price].
Bill: Yes. And the website is TrilogyMetals.com and you can find it on the big boards in New York or Toronto under the ticker TMQ. Pat, I appreciate you coming on the show. Any final thoughts as we conclude here?
Pat: Like I said, I think the main thing is we’re in a great jurisdiction, great relationship with the native corporation, NANA, great relationship with South 32. The other thing I should mention is the reason we have great support from Alaska is because most of Alaska’s tax revenues come from oil and gas. And we’ve seen oil getting hammered and not only that, the tourism industry is a big contributor to the economy and fishing and those are the other two sectors in Alaska, they’re getting hammered and that’s motivated the government to diversify away the economy. And that’s why we had the tremendous support for the road and tremendous support for assets. We’re in a very, very strong situation. And again, as I mentioned before, compelling value and we don’t need to raise money.