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Casino Courts Attention

This isn’t a story about a piece of news, but about an idea. The company in question isWestern Copper & Gold (TSX: WRN). I wrote about WRN and its Casino project in the July 18 letter, after visiting the project. I will repeat a chunk of that July article below to set the stage.

Casino is a massive deposit: resources total 18 million oz. gold and 11 billion lbs. copper, hosted in a porphyry that has a gold oxide cap, a supergene copper blanket, and a hypogene sulphide body.

About half the resources are defined to reserve levels, which back a feasibility study outlining a mine churning through 124,000 tonnes of ore a day to produce 171 million lbs. copper and 266,000 oz. gold annually for 22 years.

If those numbers seem big – they are. This is a huge mine, which is why building it would cost US$2.4 billion. Almost US$1 billion of that is just to build the mill; it simply costs a lot to build a facility of that size. The mine would also need a liquefied natural gas power plant – the mine would need as much power as the entire Yukon currently uses – and an access road, plus a gold heap leach facility and a significant tailings facility.

The project is halfway through permitting right now. What WRN expected would be a 2-year process has become a 5-year endeavor, due at least in part to the Mt Polley tailings facility failure in BC that has regulators demanding higher and different standards to permit tailings ponds. Fair enough.

Casino would be a very significant mine for either a gold miner or a copper producer, with the byproduct metal pulling costs down into negative territory. And despite its construction cost, its economic are good: the mine would generate a 19% post-tax IRR at US$1,335 gold and US$2.15 copper.

We have gotten so focused on grade that it is easy to overlook huge, lower-grade porphyry deposits like Casino – but to do so is to ignore the deposits that produce most of the world’s copper, and much of its gold. And not just in Chile – British Columbia has a list of copper-gold porphyry mines with similar, if not lower, grades than Casino.

Why am I revisiting this now? Because a couple conversations with the WRN team made me wonder if a deal is close.

Without saying too much, it is clear that Western is in talks with majors miners. That alone is neither surprising nor significant: majors are kicking tires all over the world and most of those conversations go nowhere.

There are a few aspects to the Casino story, though, that make it stand out.

First is the location. Ever since Goldcorp bought Kaminak, miners have been pouring into Yukon looking for opportunities. It makes sense: Yukon is a stable and supportive mining jurisdiction.

And Yukon has lots of geologic potential…but there are actually only a few assets that are sufficiently advanced and sizeable to attract major attention today. Miners will take stakes in explorers or joint venture early-stage assets to have a toehold in discoveries that could turn into something big – they already are – but when it comes to projects that could become part of a major’s development timeline this cycle, there are very few options. Coffee was one. Victoria Gold’s Eagle is another. Casino is the third.

There’s another side to the location argument too, one that’s specific to Casino.

In announcing the Kaminak deal, Goldcorp made clear that it sees Coffee as its entry point into a new district of focus for the company. That is great for Yukon, but more specifically: Casino is 30 km from Coffee.

That is really close. And the projects have synergies: both have oxide caps with sulphide mineralization below. The current plan at Coffee is just to mine and leach the oxide cap, but I imagine Goldcorp is also very interested in the sulphide ounces. And if you start thinking about building a mill and flotation facility to process sulphide ore at Coffee…you start to wonder if you should just use the one that will be built at Casino.

So Goldcorp is undoubtedly looking at Casino. But others are looking too.

Casino is home to 18 million oz. gold. That is a huge number. The capital requirement to build the mine is also huge, but Goldcorp or Kinross or any of the biggest gold miners could do it. They could do it alone if they so desired, or they could do it in partnership with another company.

Partnerships for big projects can work very well. The 40% Goldcorp, 60% Barrick partnership at Pueblo Viejo successfully built one of the world’s largest gold mines, in the Dominican Republic.

And gold miners are by no means the only option. A copper miner could just as easily join the mix because, remember, alongside all that gold Casino also offers a massive copper resource.

The snag there is that we’re a bit early in the copper cycle (that’s a nice way of saying that the copper price is still bottomed and has yet to show any signs of life). As such copper majors are not yet shopping. But Casino isn’t yet ready to be built – the permitting process will take another 2.5 years. A copper miner with long-term vision could scoop up this asset today for very little (WRN’s market cap is roughly $100 million), spend a few tens of millions over the next few years getting it permitted, and be ready to roll when copper lights up again.

I know the sector is still hesitant to talk about big projects. Many of the debacles in the last bull run centered on huge assets where capital costs soared and balance sheets broke. The resulting focus on margin over size is good – very good – but don’t forget that majors need a few really big operations to maintain their production levels. Pueblo Viejo will produce almost a million ounces of gold this year and those ounces are essential in getting Goldcorp and Barrick to their 2016 guidances of 3 million and 5 million ounces respectively. Coffee should generate nice profits, but at 184,000 oz. annual output it will not be a heavy hitter in Goldcorp’s portfolio.

The majors need heavy hitters. I should note here that most gold and copper majors do have some kind of big Casino-like porphyry project already but many of those projects are challenged, whether because of permitting problems or infrastructure needs or engineering issues or something.

Western has been able to advance Casino steadily, to the point where risks are significantly lowered. It’s technically simple, halfway through permitting, simple to scale, and in a safe and supportive jurisdiction.

And now the company is getting enough interest from majors that it is hiring a crew of bankers to help ensure they maximize value for shareholders should opportunities arise. Companies hire advisors all the time, so again that in itself is not newsworthy. And this may turn into nothing. But Paul West-Sells and his team at WRN have had a very busy summer fielding interest and that interest might turn into something: a project partner, an equity stake, or perhaps a complete asset sale.

If nothing comes of this, Casino remains a huge asset in a good location and the WRN team will remain focused on getting it permitted. That’s a pretty solid foundation off of which to speculate.

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