Sherwood Copper SWC.v W
March 22, 2006 - 2:18pm EST by
2006 2007
Price: 3.07 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 120 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Sherwood Copper will start producing copper by mid 2007 with negative cash costs. That’s right, negative cash costs. How is that possible? They have a high grade gold by-product that will essentially pay for all the costs and then some of actually mining for the copper. What you are left with is a company that will be producing nearly 40 million pounds of copper a year with no cost. With shares outstanding of only 39 million, and a market cap of C$120 million, Sherwood is absurdly cheap. But that is changing fast. This stock should at a minimum be trading at C$6 now and in a year could easily be C$10 a share.

Minto Copper/Gold Mine

From the company:

“The Minto Project is a high-grade copper-gold deposit located in the Yukon Territory of Canada. In the late 1990’s, a feasibility study was completed by prior owners, permits obtained and construction of an open pit mine commenced. Construction was suspended after expenditures of approximately $10 million, due to depressed copper prices.”

Sherwood came in and bought the project and then re-drilled only to find substantially higher grades of copper and gold and substantially more gold. Two things have changed to make this mine so much better. Most importantly the higher grades also substantially changed the valuation equation. And the price of copper and gold are up substantially since 2004. The higher grades though are the key to the investment.

This mine is after all the second highest grade of copper and gold mine in development in the world.

Based on current estimates, the Minto mine should be in production by mid 2007, but could happen earlier. Note that 25% of the construction of the mine is already completed. Management believes that with current resource estimates the mine will produce 37 million pounds of copper a year for nine years.

Free Copper anyone?

According to the company, the grade of gold by product at the mine was high enough to cover some of the costs of mining both the gold and copper. Then SWC started intersecting higher grades of gold. If the gold averaged 1.2 grams of gold per ton, then SWC would be able to recover 85% of the operating cost with gold at $550 an ounce. However, earlier in March, Sherwood announced that they were intersecting gold at an astounding 2.5 g/t and one intersection came in at 3.66 g/t. This indicates that SWC should be able to recover all of their operating costs and then some from just the gold by-product and that the copper is cost free.

Just in case you think that this is a little too good to be true, this is the case for a few mines Freeport McMoran (NYSE: FCX) operates.


So, let’s work through some numbers of what the company could earn with gold fixed at $550 and copper at $1.75, $2, $2.25 and its current $2.35 a pound. These numbers are just assuming that gold pays of 100% of the mining costs, not any more. There is a real possibility that gold pays out more than 100% and the cash flow is even more.

Cash flow per share P/cash flow Stock price @ multiple Stock price @ multiple Stock price @ multiple
copper at (US) 2 3 4
$ 1.75 $ 64,750,000 $ 1.66 1.61 $ 3.86 $ 5.79 $ 7.72
$ 2.00 $ 74,000,000 $ 1.90 1.40 $ 4.41 $ 6.62 $ 8.83
$ 2.25 $ 83,250,000 $ 2.14 1.25 $ 4.97 $ 7.45 $ 9.93
$ 2.35 $ 86,950,000 $ 2.24 1.20 $ 5.19 $ 7.78 $ 10.37

As you can see the stock is ridiculously cheap on almost any multiple or copper price you use. The stock is so cheap it trades at 2.8 times $1 copper.

Additional development opportunities

There are three targets around Minto project that show up on magnetic imaging as abnormal. SWC plans to drill these and I expect that the resource of the Minto project, and the surrounding areas will ramp to 15 years from its current projected life of 9 years. This will be another reason for the multiple and valuation to increase as investors will assign the company a higher valuation.

Feasibility Study

The Minto Project’s feasibility study is coming up very soon and should be reported on April 15th. I expect the feasibility study will cause a massive revaluation in the company’s shares. This catalyst cannot be understated.


They have C$28 million in cash fully diluted with every warrant being exercised, but need around C$40 million for the capex to finish their drilling and to finish the mine and plant. At some point they probably will hit the equity market up for 5 or 10 million shares, but they certainly aren’t going to do it around $3. Even assuming a terrible raise of money, just reduce the per share valuations by 10% or 20% and you still have dramatic returns.

First marketing trip coming at end of March

The company has no analysts. However, this is going to change very rapidly. They are going on their first ever marketing trip at the end of March. On March 30th, Sherwood will be in Toronto and on March 31st, they will be in New York City. I seriously doubt once analysts pick up coverage and investors get to hear their story for the first time that the stock will be anywhere near C$3.


I think there is a fantastic opportunity to buy the stock before two major events, its first marketing trip to Toronto and New York City and its big feasibility study coming out on April 15th. With a valuation so low, no analysts covering the stock, and a potential to be trading at one times cash flow, Sherwood has nowhere to go but up.

My previous recommendation of Constellation Copper (Toronto: CCU) took a long time to get going (it has doubled since the end of October when I recommended it) and get discovered due to it having 170 million shares outstanding. Sherwood only has 39 million outstanding, so it can run a lot faster. I think it will go to C$6 in short order.


1) Analyst Coverage
2) First road show
3) Feasibility study
4) New discoveries at drill site
5) Progress on mine
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