As global demand for sustainable energy solutions continues to grow, the demand for copper, a crucial component in many green technologies, has grown along with it. Importantly, this increase in demand for copper is taking place during a macro environment of relatively cheap valuations for mining companies, especially for those in the exploration and development stages.
Many industry observers now believe that the current M&A cycle is only beginning to gain momentum. With commodity prices driving an uptick in Free Cash Flow (FCF), there is a higher propensity for M&A activities, especially within the developer space which has been the largest laggard in the past year.
The Changing Face of M&A in the Mining Sector
Over the past five years, larger mining companies have predominantly been interested in Tier 1 assets, but now, a shift in focus is noticeable. Large mining companies are willing to consider any copper asset, especially those with potential operational synergies in unpopular jurisdictions.
Recent transactions reveal a striking departure from the no-premium mergers of 2020. Over the past two years, the median M&A premium is about 40%. Most of the larger miners appear to have fairly limited internal growth opportunities in ESG-friendly commodities, particularly in copper, which suggests that M&A will likely be a large part of the solution. Larger players are also signalling a new openness to investing in higher-risk jurisdictions given the dearth of quality opportunities elsewhere.
Solaris Resources (TSX:SLS) (OTCQB:SLSSF): A High-Grade Copper Machine
Solaris Resources, with a market capitalization of US$730 million, stands out in the exploration and development copper sector with its growing 1.5 billion-tonne copper project in southeastern Ecuador. The upcoming 43-101 resource update around year-end is expected to push the total tonnage towards 2.5 billion tonnes of copper.
The main value driver for Solaris is the high-grade Starter Pit within the global resource, which the company aims to double in size with the updated resource. The current Starter Pit consists of 287 million tonnes at 0.8% CuEq, running a ~0.8:1 strip. Given the high copper grade and low strip ratio, this pit has the potential to be a free cash flow powerhouse.
For context, analysts published that this Starter Pit generates a $50 per tonne margin and with an annual output of 40 million tonnes of ore, the pit would generate US$2 billion per year of EBITDA for nearly 7.5 years. And the company plans to double the size of the Starter Pit to approximately 500 million tonnes in the updated resource, further adding to the robust economics of this copper machine.
In addition, the company has made two recent discoveries located in close proximity to the current mineral resource, offering the potential to rapidly add near-surface, high-grade mineralization to the deposit that could contribute to future Starter Pit growth. With six major deposits now discovered within the Warintza porphyry cluster, the Project is a world-class M&A proposition offering significant pipeline growth for any major mining company. It is important to note that Solaris’s current market cap of US$730 million is significantly less than the analyst consensus NPV of US$4 billion for the current 1.5 billion tonne 43-101 resource, implying a P/NAV of just 0.2x at today’s share price. This discrepancy suggests a significant potential upside for Solaris Resources in addition to any potential M&A activity.
Skeena Resources
Skeena Resources, a junior mining company with a market capitalization of $CAD 660 million, owns the last remaining high-grade open pit project in Canada with a Tier 1 scale, making it an attractive prospect for senior producers.
Skeena’s reserves stand at 3.85moz at 4gpt AuEq with resources of 5moz at 3.5gpt AuEq. The company has an average production of 352 koz, reaching a peak production of 475 koz at an average AISC of $652/oz. The project’s NPV is CAD 1.41 billion with an impressive IRR of 50%.
Skeena’s closest comp, Sabina, was acquired by B2Gold this year for $1.1 billion, implying a potential takeout valuation of CAD 4,932 per oz produced for Skeena, which is currently trading at $1,720 per oz produced. This highlights the significant upside potential in Skeena’s valuation. Furthermore, the exploration upside remains strong as Skeena continues to chase high-grade mudstone at depth and the near-mine 21 and 23 zones.
Adding to the appeal is Skeena’s 100% ownership of Snip, a site that hosts 600-700 koz @ 13 gpt Au material. If the ore from this site can be blended into the mine plan, it could significantly enhance the project’s overall value. Skeena’s First Nations support is also rock solid, evidenced by Tahltan investing $5 million of equity in the company, and it has advanced well on permitting, signing the first-ever permitting charter in BC.
NGEx Minerals
NGEx Minerals, with a market cap of $CAD1.2 billion, represents a greenfield exploration venture with enormous synergies in the Vicuña district, touted as copper’s next significant district.
The company recently made headlines as Lundin Mining acquired a 51% majority position in the Caserones mine, an asset bordering NGEx’s Los Helados property. This adjacency creates the potential for enormous synergies, especially if the two properties share the same ore body.
Sharing Caserones’ plant and tailings infrastructure with Los Helados can drastically reduce capital requirements compared to average high-Andean projects and mitigate water security concerns. A recent discovery of a new zone at Porto Cliffs boasting high-grade Cu, Au, Ag mineralisation further enhances NGEx’s prospects.
The Future of Copper Exploration
These three companies alone highlight the potential opportunities within the junior copper exploration sector, showcasing significant growth potential and M&A opportunities. The current environment makes these companies attractive targets for larger mining corporations. As we move forward, these junior exploration companies may also have an important part to play in meeting the global demand for copper, contributing to a more sustainable energy future.
