Proactive:
TNR Gold’s royalty on the giant Los Azules copper project is about to move into the spotlight, as McEwen Mining gets set for serious newsflow
How valuable is the royalty held by TNR Gold Corporation on the mighty Los Azules copper project in Argentina?
That’s a question that begs many imponderables, but there’s a fair amount that we can be sure of too.
First, Los Azules is one of the largest undeveloped copper, gold and silver projects in the world. The presence of Rob McEwen and McEwen Mining is one indication of that. And the arrival of a potential development partner in the shape of Rio Tinto subsidiary Nuton Technologies is another.
Nuton put up US$25mln of the US$81.85mln that McEwen raised at the end of August to help it take Los Azules forward.
And the thinking is that when McEwen Mining comes to IPO Los Azules inside its own distinct vehicle – McEwen Copper – Rio Tinto will, directly, or indirectly, be one of the biggest stakeholders.
So, one way or another, the powers that be in mining are lining up to develop Los Azules.
And, with a 0.36% net smelter royalty, that sets up TNR Gold nicely for some serious income in the future.
Exactly how much income remains unclear at the current time. But there’s little doubt it’s liable to be substantial.
Recent estimates from Rob McEwen have argued that if you rolled all the copper, gold and silver up into a gold equivalent resource number it might net out at around 60mln ounces. By any standards, that’s absolutely huge, which takes us back to the reasons why McEwen and Rio are there in the first place.
A preliminary economic assessment completed five years ago, put the net present value of the then smaller resource at US$2.2bn, on the assumption of a US$1,300 gold price. It’s nice to be conservative, but given that the gold price, even with the recent headwinds it’s faced, is still holding its own at over U$1,800, it looks like there’ll be a serious amount of upside on the table when McEwen comes to update its numbers for the project later in 2023.
According to the timetable laid out by McEwen here, the plan is to update the preliminary economic assessment in the first quarter of 2023, then to complete the independent listing of McEwen Copper by the end of the first half of 2023, with a full feasibility study on the project due in 2024, following on from the completion of a massive 59,000 metre drilling campaign.
So it’ll be a little while yet before the cashflow from TNR’s royalty actually starts flowing, but it won’t be much time at all before we have a much clearer idea of valuation.
After all, valuing a royalty is a bit like valuing a project itself – there’s a certain amount of de-risking that must be done before the underlying value can really start to show through.
Here, as 2023 opens, we are at the start of that process. McEwen has set out a clear timetable for the next couple of years, and a potential development partner has shown up with hard cash.
So far, so good.
From TNR’s perspective, and based on what can justifiably be argued at this stage, once Los Azules is up and running, the royalty could generate around US$7mln of pre-tax cash flow per year. That hypothetical is based around an assumption that McEwen will look to produce around 200,000 tonnes of copper per year, and that copper will sell at a ballpark US$10,000 per tonne.
Now, US$7mln per year doesn’t exactly propel TNR up into the same leagues as Rio Tinto or McEwen Mining. But on the other hand, with that kind of income coming towards it, and with the de-risking process that’s going on at Los Azules, there’s a strong argument to be made that TNR itself is undervalued.
For one thing, the current market capitalisation on the Venture Exchange is just over C$7.5mln, or slightly more than one year’s cashflow looking ahead, say, five years.
There is some way to go yet, of course, but there are other assets to take into account. TNR also holds a substantial royalty on the Mariana lithium project, currently under construction by giant Ganfeng Lithium, the Shotgun gold project in Alaska, and has benefitted from a recent cash injection. With all that in mind, there is some merit to the argument that the current market capitalisation is on the mean side.
After all, these other projects are not lying idle.
TNR Gold started a new round of exploration at Shotgun in August, preparing the project for a potential strategic partnership with one of the major gold mining companies.
For the moment, though, it’s still arguable that the Los Azules royalty is the jewel.
The upside to value is undeniably significant, especially if you take into account the valuations placed on comparable royalties that have recently changed hands, such as that on First Quantum’s Taca Taca project, also in Argentina. This royalty, which at 0.24% was smaller in percentage terms, changed hands for US$12.75mln a couple of years ago when it was acquired by Nova Royalty Corp. (TSX-V:NOVR)
So, what price a royalty in the same jurisdiction but on a bigger project and overing a bigger percentage of the net smelter return?
Speculation in the market has been that it might be worth as much as US$20mln, or slightly under three times TNR’s current market capitalisation.
For the time being TNR’s chairman, Kirill Klip, has no plans to sell. He knows how much upside there is left, both at Los Azules, and inside the wider TNR portfolio.
“We are pleased to see these significant developments on the Los Azules project and continued support by Rob McEwen of McEwen Copper,” he says.
“It’s very encouraging to see the opportunity to expand the deposit, and the involvement of Rio Tinto, which may accelerate realizing the enormous potential of the Los Azules project with Rio Tinto’s innovative technology. The personal commitment from Rob McEwen and his investment of US$40mln enabled the rapid advancement of this deposit to this new phase of development in an appropriate corporate structure. McEwen Copper has raised more than US$81 mln and is well positioned for further stages of development of the Los Azules project.
TNR Gold does not have to contribute any capital for the development of Los Azules. The essence of our business model is to have industry leaders like McEwen Mining as operators on the projects that will potentially generate royalty cashflows to contribute significant value for our shareholders.”
With newsflow from McEwen Mining all set to move up a gear, it might now only be a matter of time before the wider market starts waking up to the potential in TNR too."
