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Castillo Copper (ASX:CCZ) is a metal explorer primarily focussed on Copper, Zinc, Cobalt, and Nickel. The bulk of Castillo’s assets are in Eastern Australia, comprising 4 tenure groups in Queensland and New South Wales (NSW). The flagship project consists of three prospects at Jackaderry in NSW which are highly prospective for Copper-Cobalt-Zinc.
The Jackaderry project is highly differentiated compared with other copper plays in Australia or globally, owing to the unusually high grade of ore being identified. In this report we examine the substantial economic benefits associated with higher ore grades.
On September 3rd 2018 Castillo released results from its most recent assays (ore analyses). These show copper ore grades of up to 10.25%, which is more than 10x the global industry average. The results confirm massive sulphide mineralisation across the completed drill-holes, and were described by the company as a “demarcation point” for the project.
The share price has increased from A$0.025 to A$0.044 over the last 6 weeks, even while the copper price has been declining. We do not find this decoupling surprising, as the assay results have taken over as the main share price driver. In this report we examine the share price drivers with regard to further exploration results.
The Jackaderry project already has JORC compliant Inferred Resources (explanation p2) of 3.2Mt of copper @ 3.25%, as well as zinc, silver, and gold. The drilling campaign aims to upgrade the certified resources, and we believe that definitive results are feasible within 12 months, given the rapid progress so far.
The Jackaderry project includes three tenements in New South Wales around 50km northwest of the town of Grafton. The project lies on an ultramafic system which is well known for high-grade copper-cobalt, and includes the historic Cangai copper mine.
The Cangai mine was abandoned in 1917, and subsequently re-evaluated in 1982-84 and in 1990-92. Both of these re-evaluations were discontinued by their sponsors due to tough economic conditions. Castillo Copper (CCZ) acquired its tenures at Jackaderry in 2017, with the aim of establishing whether mineralisation extends outside the envelope of previous explorations.
The following map shows the line of lode encompassing the historic mine workings.
At the time of the acquisition, the tenements were understood to contain
*JORC – We will frequently refer to the Joint Ore Reserves Committee (JORC) which oversees the documenting of mineral reserves in Australia. JORC compliant reports are the essential steps in verifying a discovery.
The big economic incentive in developing the Jackaderry project is the presence of very high grades of copper ore. Since acquiring the assets as Jackaderry, Castillo Copper has completed its Phase I exploratory drilling programme, and made significant progress in its Phase II programme.
Assay results have corroborated the original JORC (legacy) Inferred Resources, and identified high grades of copper ore within the stockpiles. But the real payoff in the project lies in the potential for bigger deposits of high grade ore at greater depths or outside the line of the original mines. The most recent assay results have confirmed the presence of extensive massive sulphide mineralisation of up to 10.25% copper. The following image is from the drilling campaign.
The high grades of copper ore being uncovered represent a major point of differentiation for the Jackaderry project compared with other Australian (or global) copper mining projects. We next consider the economic significance of higher ore grades.
The original JORC compliant inferred resources at Cangai included 3.2Mt of Cu at 3.35%. This percentage refers to the actual proportion of copper compounds within the rock. The most recent report from CCZ includes deposits of up to 10.25% Cu. Amongst other listed copper plays in Australia, many are reporting ore grades of <1% and very few have ore grades above 2%. Indeed, globally the average ore grade is now around 0.6%. And this is declining as richer deposits become depleted. The following chart shows copper ore grades, globally.
The high grade of ore at Jackaderry represents a huge potential competitive advantage due to the impact of processing costs in copper production. Typically ore is shipped to customers in the form of concentrate (refined ore). In order to produce concentrate, the raw material extracted from a mine (with 0.6% copper compounds) is pulverised to fine dust. This dust can then be put through a chemical separation process to extract concentrated copper compounds.
The following chart shows the cost breakdown for the process of extracting concentrate from raw material.
When compared to the industry average of 0.6%, a mining enterprise extracting 3.0% ore would need to crush and grind 0.2x the amount of rock for each tonne of concentrate, cutting the associated costs proportionately. This ignores the additional substantial costs of blasting and hauling rock in the first place.
What this means is that Jackaderry is potentially a very highly profitable project, and also a project that remains viable even if the copper price should move lower. The major focus for CCZ then is to establish that these high grade ores exist in large enough volume to progress the project.
In an ASX release dated September 3rd 2018, CCZ disclosed the latest findings from the Phase II drilling campaign at Cangai. The release highlights “extraordinary” results from the first five drill holes, confirming “extensive massive sulphide mineralisation”. The following table summarises the best intersections.
These results confirm the presence of high ore grades outside the envelope of the original JORC modelling, and offer encouraging evidence in respect of the deeper deposits potentially present.
The following diagram shows the drill holes in the previous table, relative to the historic mine works.
The diagram shows that the drill holes have identified high ore grades outside of previously explored areas, and approaching the Volkhardts DHEM (Down Hole Electro Magnetic sulphide target.
Next steps include:
• Updating on the next phase of the drilling programme
• Progressing the DHEM surveys to gain greater understanding of the underlying mineralisation
• Generate assay results for the section east of the line of lode
• Commence diamond drilling (core sampling )
The primary focus of the Jackaderry project is copper. However there are other potential resources within the same mineralisation. The following chart shows the resources identified within the original JORC modelling.
The work currently being done is aimed at upgrading the resource estimates (discovering further deposits). There is no way of knowing how much material is present in the tenure. However, we infer from the high prioritisation that CCZ is giving to Jackaderry that the company is expecting to find resources some multiple higher than the circa $800m in-ground value of the legacy data.
Once CCZ has done sufficient work to identify/classify the available mineral deposits there are a number of key steps towards achieving profitable commercial extraction:
From a feasibility perspective, existing local infrastructure is a positive for the Jackaderry project. The following map shows the locality.
The Jackaderry tenements sit around 50km north-west of the town of Grafton, which is connected by rail to the ore-exporting port of Newcastle. Transportation from the Jackaderry project to Grafton is by road, and the concentration of the ore could be done on-site (with significant capex) or somewhere on the route to Newcastle.
In terms of financing, in the latest quarterly update Castillo Copper reports cash balances of A$1.7m. The cost of re-opening mining at Cangai is likely to be a considerable order of magnitude higher, and indeed one would not expect an exploration company to be sitting on cash piles of that size. Possible routes for financing would include project financing and/or commercial partnerships with other mining entities.
Before any of the aforementioned can happen, the company needs to produce more results from exploration. The JORC resource classification system has three levels: Inferred Resources, Indicated Resources, and Measured Resources. The existing JORC modelling for Jackaderry covers Inferred Resources. We believe that to secure financial backing the project is likely to need to certify substantial Indicated Resources, and some Measured Resources.
The current Phase II drilling campaign has been delivering quite rapid results, in part due to the suitability of the geology for DHEM (Down Hole Electro-Magnetic) surveying. This technique is not suitable in all locations, as background materials such as graphite or ground water are electrically conductive and therefore produce “noise” for the DHEM sensors. However, the rock type at Jackaderry is well suited for DHEM.
Based on the pace of progress so far, we believe that it is feasible to start upgrading JORC compliant resources potentially as soon as H1 2019. The following timeline summarises progress so far, and the next steps.
From an operational point of view, the steps from H2 2019 onwards obviously represent a lot of work. However, from the shareholder’s perspective we argue that a lot of the action could play out over the next 12 months. If substantial high grade ore deposits are verified, we expect the share price to reflect this well before work starts on the actual extraction. We examine this point in the following case study.
There are very few examples of ASX-listed miners with similar high grades of ore that CCZ is exploring at Jackaderry. It is even harder to find a stock that can broadly be valued as a pureplay on a single high-grade copper project.
The closest analogue we can find for CCZ is Sandfire Resources (ASX:SFR), which confirmed a large mineralisation of high grade copper ore in 2009/2010 at its DeGrussa exploration project, revealing 7.13Mt of copper ore at 5.2%. The following chart shows how the Sandfire share price performed around that event.
An important observation here is that the share price moved from 8 cents to over A$7.00 in the space of 18 months, before the board had even signed off on the decision to mine the site. Once investors can see evidence of the available resource, the shares begin to move. This is why we believe that the next 12 months could be an exciting time for CCZ shareholders.
There are also some specific parallels between the Jackaderry project and Sandfire’s Degrussa/Doolgunna project:
Clearly we are not suggesting that the project or the share price are likely to present an identical replay of the Sandfire experience. However, we believe that the Sandfire analogy provides a good example of why the CCZ share price is likely to be highly sensitive to newsflows around Jackaderry assay results over the next 12 months.
The Jackaderry project is the main focus for CCZ, but it is not the only holding. The company has four tenure groups in Australia. The following table summarises Castillo’s projects.
These other programmes differ from Jackaderry in their scope and in their maturity. The following schematic illustrates:
The schematic is illustrative and based on our analysts’ interpretation. The areas and positions of the bubbles are not calibrated to correspond exactly to any empirical metrics.
We summarise our conclusions as follows:
• We believe that CCZ is entering a decisive phase in its flagship project at Jackaderry
• Results so far are encouraging, with a potential timescale of only 12-18 months for more definitive data
• Upside potential for shareholders is substantial, notwithstanding significant unknowns which still exist
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