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Desk Note - Eagle Mountain (EM2.ASX Last $0.25)
High Grade Copper/mine - Exploration Commencing - Catalysts + Positive Thematic

Eagle Mountain (EM2) is a copper junior, with an existing resource and underground mine on care and maintenance in Arizona USA, which they purchased out of administration (previous owners had $1.07 per pound copper hedge vs copper now $2.95 per pound). There are two main reasons I am taking a closer look at EM2. 
 

  1. Company-specific news flow.

  2. The Copper Thematic

The Company

 
  • EM2 has Oracle Ridge (80% interest) and Silver Mountain (100%). Both located in Arizona US (Arizona very mine friendly – Tier 1 jurisdiction for mining investment).
  • Oracle Ridge is one of the highest grade copper projects listed on the ASX 11.76mt @ 1.5% Cu (non-JORC). It sits amongst some majors in Arizona (BHP’s Resolution 1,787mt @ 1.53% Cu as a standout example, some monsters but most run at grades of 0.30% to 0.66% Cu).
  • Oracle is high grade but in search of additional tonnes. Historical drill results of 7.7m @ 5.11% Cu, 9.1m @ 3.97% Cu and 18.3m @ 2.84% Cu, show the potential. Copper rich “skarns” host the copper, which lie in sheets. These skarns appear open in many directions outside the existing resource, which the company is about to test through drilling. Bigger objective is to find a feeding porphyry.
  • Oracle had an estimated US$26m spent on exploration (76,000m drilled, tech studies, permitting) since 2011. Has 18kms of underground development (with regular care and maintenance). Non-JORC mineral resource estimate of 11.7m tonnes at 1.57% copper and 17.47g/t silver for 185k tonnes of copper and 7.2m ounces of silver. Last mined in 1996 when copper was around US$1.07 per pound. EM2 paid US$6.9m for 80% (US$500 upfront and the remainder a 10-year convertible note, with no repayments for first 5 years
  • Managing Director/Major Shareholder is Charles Bass (~36%) – he was the geologist who discovered Jundee (Gold WA), and Aquila Resources which was acquired for $1.4b in 2014.
  • Listed in March 2018. Raised $1.8m at $0.15/share via PAC partners back in January.
  • Silver Mountain – also Arizona (100km Northwest of Oracle), sits amongst some world-class porphyry copper deposits. Early days, but it is in the right neighbourhood (the world-class United Verde deposit has 34.5mt @ 5% CU and 1.13gt Au). (market not really placing much value on it at this stage)

Catalysts

 
  • Aero Magnetics – has been flown over Oracle Ridge – currently being interpreted for release in the next few weeks. Note they flew over some surrounding ground as well.
  • JORC Compliance – company needs to bring the existing NI43-101 into JORC 2012 compliance. Can this deliver more than the 11.76mt at 1.5% under the old code? We know the answer in about 2 months.
  • Drilling – just about to start the drill program. Key is to increase tonnage and reduce costs. The cost reductions come with scale, with they can increase the resource and be mining multiple loads at once. Drill preparation is commencing now and should spud in the next week or two.
  • What is the target? Targeting the existing magnetic high anomaly within the existing mine tenements – the conceptual exploration target is to at 14-29mt with a grade of 1.1-1.9% Cu (plus gold and silver credits)
  • What might you then have? Adding existing with exploration target - 11.7mt at 1.6% plus 14-29mt – then you have 25-40mt @ ~1.6%cu. Peer analysis shows that it would be one of the highest-grade copper deposits across the ASX juniors (PAC Research). Given existing infrastructure, can this deposit be readily brought back into production?

 

Copper Thematic

 

  • Speculative demand has seen the “financialisation” of copper over time, with copper prices driven speculative positioning in futures markets (futures traded 1.6b tons of copper or 64x’s more than the ~25mn tons consumed last year). So while supply/demand is important, the drivers of speculation are equally so. The 3 key variables that tend to drive that speculation are -

    (i)  Chinese 2-year sovereign yields (there is headroom for these to move higher as growth accelerates, Chinese housing and credit cycles have turned higher);
    (ii) the Chinese equity market (i.e.  the Shanghai Composite, policymakers are supporting equity markets for now, to the extent they are rumoured to be buying equities, encouraging trading activity, state-owned media talking up the market); and
    (iii) the Renminbi vs. the US$ (while the outlook for the currency is finely balanced, and perhaps still down in the long term due to structural issues, the spread between Chinese inter-bank rates and the US rates are supportive of some further CNY strength).
     
  • As with the post GFC environment, the post-COVID set-up should be positive for commodities.
  • Demand-side argument – electric vehicles, renewable energy systems use a lot more copper. The copper price more recently has come to represent somewhat the speculative activity around these markets. (correlation with Tesla Chart for instance).
  • Supply-side – existing mines are maturing. There is limited large scale exploration success globally, and the average copper grade is falling, whilst costs are not.
  • Supply deficits forecast to begin from 2022/23 onwards.
  • LME copper warehouse stocks are falling (30, 60, 90, 1yr, 5yr) - http://www.kitcometals.com/charts/copper_historical_large.html
  • If you want to read the bullish supply and demand argument – then read https://cambridgehouse.com/news/8708/prepare-to-profit-from-the-coming-copper-crunch. In short ore grades are declining, production costs climbing, few big discoveries are being made despite the money being spent exploring, a lot of copper is in unfavourable mining jurisdictions. I could go on.

    Summary – I am bullish on the copper thematic in the near to medium term.

My summary view

 
Following the call with Management last week, I have started to accumulate some EM2. There is plenty of buying interest again at the small-cap end of the market again, and not necessarily easy to accumulate stocks like EM2 (like in the good old days). I like the copper thematic, and I think they should have some genuine catalysts that can drop through over coming months. At last trade of $0.25, the fully diluted Mkt cap (including all options if exercised at all levels) would be $39.8m. Peleton, CPS Securities and Canaccord were all involved in the IPO, so there are eyes on it. PAC Partners has most recently published research after raising the $1.5m at 15c, with a 12m price target of $0.51.
 

Attachments/Links

 
EM2 - 2 YEAR CHART (Click to expand)
FROM AUG 2020 - SLIDE PACK
Unfortunately, the resolution is not the best, but you can see the Oracle Ridge and Silver Mountain locations along with the major copper system in Arizona.
Oracle Ridge sits in the formation (Laramide Arc) that hosts some exceptionally large porphyry copper deposits. 
  • MissionComplex-900Mt @0.52%Cu
  • TwinButtes-940Mt @0.5%Cu
  • Christmas-367Mt @0.38Cu
And whilst Oracle ridge has only mined/drilled the Skarn formations, they believe it is prospective for a deeper porphyry type system. 
The NI43-101 resource (NON-JORC 2012). 
Complex little diagram but worth a look - essentially highlighting the key areas of exploration in the upcoming program, along with nearby intersections.
Speculative demand is more influential on copper prices than supply and demand alone.  (source Longview Economics - Last year,  for example,  the notional volume of copper futures traded on major exchanges was 1.6 billion tons  (64x more than the copper that is produced and consumed in the physical market each year,  i.e.~25mn  tons). 
Longview Economics multifactor model brings together the key drivers of copper into one chart. Currently, these drivers are supportive of further strength on aggregate when taking a forward view. 
Disclosure - I own shares in EM2. These shares have been purchased on the market. I have also been accumulating shares for clients. I have not been paid any fees by EM2 or any of their associated parties. 

This is not a research note, not personal advice or a recommendation to buy the Company mentioned (EM2) and EM2 should be considered high risk and very speculative. The company currently has no revenue, will require additional funding rounds and subject to exploration risk. Many other risks are not discussed. See disclosure below. 

Best, 
Tom

Thomas Schoenmaker
Head of Wealth Management
Director

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