Tuesday, 25 October 2011

Crazy Horse Resources

Crazy Horse Resources is a Vancouver based mineral exploration company, that is focused on developing the Taysan Copper-Gold Porphyry Project, in Batangas Province, Philippines. Batangas is on the main island Luzon, about 100 km south of Manila. The Taysan Project is an advanced copper-gold porphyry deposit. The Crazy Horse Resources Inc. website is at http://crazyhorseresources.com/
You can check the essentials of their new NI-43-101 compliant resource report at http://www.goldminerpulse.com/c/czh.php. The deposit has been explored historically with 225 drillings. CZH continued the exploration work with 77 more drillings done. As a result, over half (53%) of the resources are now upgraded to the 'measured and indicated' category.
Crazy Horse Resources is ranked N° 1 by the Valuation metric and as such, I have received some questions on this explorer before. So off we go.

A potential copper producer
In the first place, it is not correct to qualify Crazy Horse Resources as a gold explorer. When looking into their new resource qualification, you will notice gold is only about 21% of the total resource value. The lump part is copper and there is a fraction of silver present too.
When checking the grades: CZH publishes an extremely poor gold grade of 0.083 g/tonne in its new NI-43-101 compliant resource report (down from 0.11g/tonne). Copper grades are up to 2,700 g/tonne or 0.27%. Better copper ores grades are around. Yet they claim that copper production cash cost would be about $0.80/lb. You see the logic: copper production cash cost, with credits for the byproducts gold, silver (and some iron ore).
When digging underground, cut-off grades used to delimit the resource are always higher than what CZH is reporting here. Open pit exploitation indeed is quite a lot cheaper, yet when treating ore with a poor grade, metal recovery is typically lower. A simple comparison of the grades published with those of the proven reserves of the operating Grasberg mine (exploited by Freeport McMoran and Rio Tinto in JV) says a lot: Grasberg has copper grades of 1.11%, over fourfold what CZH publishes for its Taysan project. The gold grades are 1.1g/tonne or over twelvefold the grade of the Taysan project.
The Taysan resource is quite extended and would allow producing for about 25 years with extra exploration potential. See: http://crazyhorseresources.com/i/pdf/2011-09-20-IFS-Crazy-Horse.pdf
CZH claims to be the cheapest copper explorer in terms of resource value relative to market cap. There is little reason to doubt this; there are however quite a number of caveats:
1.       The capex required to build an operational mine is about $ 870 M. This isn’t too high, yet for a nanocap (market cap = CAD 21 M) it would require either massive dilution or finding a mining partner with deep pockets in exchange for a share of the resource.
2.       Any mining partner is not going to pay big for a share of the resource if he can buy CZH for ‘pocket money’. So CZH is to grow first, raising new capital to pay for its share of the capex. The resulting dilution may be less massive, but valuation will equally be less attractive than what it appears to be now.
3.       I’m afraid that the economic viability of this project is heavily reliant on cheap energy and labour costs to confine the cash cost per tonne of copper produced.

CZH is not a suitable investment if you want to invest in a gold exploration company. The ‘valuation metric’ may tell you otherwise, but I’ve shown here that the CZH  input data for the valuation indicator are way out of the application field it is designed for.


CZH was quoting CAD 0.31 as I wrote this posting. We were nearly 30% lower at CAD 0.23 after only one month. With copper trending down, it had become increasingly obvious that this project was unlikely to be developed. Over three years and one 3 for 1 reverse stock split later, CZH nevertheless quotes around a penny. Delisting will probably be the last press release to follow.

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