Resource Maven

Mailbox: Thoughts on Rio’s investment in Western Copper & Gold

From the Maven Letter: July 21, 2021

It would be great to read your take on Rio’s 8% investment in Western Copper & Gold (TSX, NYSE: WRN). It is my second largest position. In the past you have liked it very much as an optionally play. I would think that this could be 6-18 months from a true partnership with Rio, a buyout from Rio, or a consortium that includes Rio & a 3rd party like Newmont. -- Reader FA

The market obviously liked the news about Rio investing in WRN. And what’s not to like? Casino is clearly a major project ‐ its capital costs will be $3+ billion (will be updated in the feasibility study) – so it needs an owner with very deep pockets. WRN is not that owner so a deal is needed. Rio is a great potential owner and buying in now (1) validates the project and (2) gives WRN the cash it needs to finish the feasibility study and permitting.

That’s all good. But what’s even more interesting about Rio’s investment is in the details.

Usually an 8% investment is what it is: the new shareholder puts money in and gets shares, plus often the right to maintain ownership (participate in financings) and an obligation to vote with management on directors and not sell shares without disclosure.

Those basic things are in the Rio deal. But the deal has more than that. Specifically, Rio also got the right to appoint a member to the Casino project technical committee and to observe all board meetings. That’s more than 8% usually gets you. Moreover, the deal stipulated a scope of work to be completed over the next 18 months, including examination of the resource (a few drill holes to confirm the resource model), additional metallurgical work, continuing geotechnical studies, and certain additions to community relations efforts.

Why does Rio get to require all of this of WRN when Rio only owns 8% of the company?

I think the answer is because Rio is pretty darn interested in buying Casino but needs more time to work the data. Rio has been into the Casino data room for over a year already, so ‘working the data’ is already well underway. But buying Casino is committing to building a multi‐billion mine that would operate for decades. It’s not a decision to be made lightly.

Rio and Western talked at length about investment options. As part of that, Rio was open with WRN about what else it needed to know or understand about the project.

6 WRN’s goal is to make money for its shareholders. Given the scale of the Casino project, the best outcome is to sell the project to a major mining company. As such, it’s in WRN’s interest to support Rio’s need for information, within reason of course.

And so this investment deal is the outcome. The structure ‐ including the scope of work, having Rio participate in the technical committee, and letting Rio listen to board meetings ‐ says to me that Rio thinks it wants to buy

Casino if its outstanding questions come back with positive answers and the WRN will work to answer those questions.

Importantly, there’s also a timeframe on the deal. The extras that Rio is getting only last for 18 months. While 18 months may seem long, it’s actually not: the deal was signed in May, WRN can do the field part of the scope of work this summer, and it will take months thereafter to get all results (assays and met testing and so on). Once answers are in hand, it would still likely take months for Rio and WRN to negotiate a deal. So 18 months is about right.

So: I think the deal suggests Rio is very interested. I think the fact that the deal does not give Rio any other advantages in terms of a bid (like the right to match) leaves the door open for other suitors. I think the timeline was a very good component to include in the structure because it puts market expectations within a framework and forces Rio and WRN to get their jobs done. Finally, the timeline also aligns with WRN’s primary plans, which are to redo the feasibility study (due out next year) and keep permitting marching ahead (permitting decision expected within 1‐2 years).

All that said, the market doesn’t congratulate a deal until it happens! So until it does (if Rio indeed makes an offer), WRN remains a standout copper optionality play. Rio’s investment has given the market reason to boost WRN’s valuation in that context (strong endorsement from a major miner and potential bidder). It has also of course given WRN the cash to get Casino to the production decision line, which is also a value boost.

WRN’s share price has given back a lot of the gains it enjoyed following the Rio news. I think that’s correction from a big move combined with a weaker moment in the market. I think WRN will enjoy improved leverage when copper against shows strength, which means I think WRN has some near‐term upside. From there, a bid from Rio would likely be 30% above market at least, should it materialize.

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