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McEwen Mining (MUX) and its copper at Los Azules

The note Bloomie earlier this week telling us McEwen Mining (MUX) is looking to farm out Los Azules in some way, shape or form soon comes as no surprise to this desk. We noted as much in a more extensive write-up on the stock a couple of weeks ago, in IKN628 dated June 6th to be exact. Here’s the excerpt on Los Azules:

A valuation of Los Azules

Located in the higher reaches of the Andean cordillera in San Juan Argentina, Los Azules has been part of McEwen Mining longer than the name itself. Inherited as part of Minera Andes (ex-MAI.v, the ticker now used by Minera Alamos) here’s the current resource count at the project:

So, Los Azules is a big porphyry copper deposit, one of the massive ones that are discovered and put into operation as long as conditions are right. In this case, aside being in Argentina the specific zone is very arid and water procurement may always be an issue. Grade at 0.48% Cu used to be low compared to peers, these days the market doesn’t raise so many eyebrows (as long as other inputs are good). In IKN626 two weeks ago we mentioned the 2017 PEA and here’s a slide from MUX’s latest corporate presentation, that does the quick summing up:

The capex is the obvious hurdle and, for a gold company run by a gold miner, it’s a hurdle the company will never manage to clear on its own. Indeed, way back in 2011 Rob McEwen once tried to spin Los Azules out of what was then the Minera Andes corporate structure, only to go cold on the idea a couple of months later when copper prices went against him.

MUX has recently made clear noises about wanting to monetize Los Azules. That may happen via a spin-out, or bringing in a large partner to JV and finance the project forward. MUX may even decide on a straight sale, but copper at $4.50/lb is the right time for MUX to do something. At present, Los Azules is given scant value by the market and that will surely change on the announcement of any deal. The issues may be with the price, because even after impairing its valuation from an obviously overstated U$430m,  since 2105 it’s been carried at a straight $191.49m and any deal coming in would have to reflect at least that value, else cause a nasty hole in the MUX balance sheet (Los Azules is $190m of its total $280m in mining properties). This chart, repeated from last week, shows the artificial nature of the valuation, but I suppose at $4.50/lb copper McEwen can justify it in 2021.

As a benchmark, Aldebaran and its current C$86.4m market cap is searching for the same metal in the same type of deposit in the same province of Argentina, with the right to earn in to 80% of Altar….while Los Azules has technical issues such as water, and tough drilling conditions (those foothills tend to be covered with metres of loose scree), any deal to bring in a partner to this copper project would add immediate equity to MUX as well as removing over $2m per year in background upkeep and maintenance costs. Today we estimate Los Azules has a U$50m weighting on MUX, with the potential to move to $100m on any deal announcement.

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