Luca Mining – 2 Recent Acquisitions Transform The Company Across Its Production Profile, Metals Mix, Jurisdictions, And From A Valuation Perspective

Hello and welcome into the K.E. report. I'm your host Shad Markwitz and today we're getting an update on Luca Mining. Luca Mining is traded on the TSX-V under the ticker LUCA on the OTC QX under the ticker LU CMF and on the Frankfurt Exchange under the ticker TSGA. And I'm joined today with the CEO of Luca Mining Dan Barnholden and Dan, we just talked to you about a month ago and boy a lot can change in a month. So I saw you at Beaver Creek and you were one of the few companies that was the talk of the town because of two different transactions you'd announced leading into the event. One of them you dropped the night before the event started and that is on the 21st of September you announced the acquisition of the Cozum and mine creating a polymetallic producer was the headline. You picked this mine up from capstone copper corp and it is a producing mine. I think it's going to be the biggest mine in the stable now. So why don't you walk us through the details of the transaction here with capstone what you see in the asset and the rationale for this M&A deal. Yeah, you bet Shad and thanks for having me on again and you're correct in pointing out that a lot has changed over the course of the last month. We couldn't be more excited about the two transactions that we've completed and how that repositions us as a company and how that puts us in a position to really lean into growth across the portfolio. As you mentioned capstone sold to us we announced that we'd entered into a definitive agreement to purchase Cozum in from them for $290 million up front. $30 million in deferred consideration and then $60 million in contingent payments. The 35 will pay 12 months after closing and that's just a deferral we pay that no matter what. And then the 60 is price participation linked to the copper price above certain threshold seven dollars seven seventy five and eight fifty. And there are a lot of analysts. I mean most people think we'll never end up paying the eight fifty milestone payments but there are a lot of analysts as you know that are very bullish on copper. And obviously we'd like nothing more than to pay the incremental 60 million dollars because that means that copper is above eight fifty and we're absolutely printing cash from Cozum in. So as you said transformational transaction really game changing cash flow profile for us we go from a company that had modest cash flow per share to now we're trading. We're going to have about a quarter 25 cents US a share in free cash flow which means that we're trading less than three times free cash flow on an annualized basis. So massively a creative transaction changes the scope in the scale of our company and we're very very excited to bring this asset into our portfolio. Well it is a transformational asset for the company does change the valuation metrics there's actually a couple questions I have around this that other investors have sent me so maybe we can rapid fire through a couple of these one the size of the deal relative to your market cap came up in a couple discussions when I was at beaver creek and since then. What would you say to those people surprised at the size of this deal compared to the size of your market cap. Yeah look it's a big deal for us it's massively a creative it changes the scope of the of the cash flow generation that we have we go from you know a company that maybe produces fifty million dollars and free cash flow from our two existing minds that we've talked about a lot on your program here in the past to a company that is capable of generating. You know in excess of two hundred million dollars a year free cash flow when all four of the assets or when three of the assets are up and running properly like we expect them to so just completely game changing yes it's a bigger asset but it's right on strategy I mean we've always talked about being underground polymetallic miners in Mexico so this is an underground copper silver mine in Mexico. It's about one and a half times larger than Campo Marado so it's not like it's ten times larger it's a bit bigger it's higher grade which means that it's more profitable one of the lowest cost copper producers on the planet and so that means it's it's highly profitable and so. We think that it's well within our capability and competency to to operate this mine it's been operated very well maintain very well capitalized very well by capstone so it's not like it's a project in the same way that. The towel wetto and Campo Marado have been this is a mine that's that's highly profitable it's operating well it's got a wonderful team in place all of those people are going to be joining Luca so it's something that we feel very confident in our ability to bring into the portfolio to integrate into our existing asset mix and to have become the flagship asset for the new Luca. I'm glad you covered the staff because I was another question is where the people going to come from but they're going to stay with Luca so that's a question ticked off there there are some people that wondered why capstone was getting rid of it if it's such a great mine and some people even voiced concern dancing well there's not very long mine life left so that's why capstones peeling it off but obviously you bought the asset because you see the potential to keep doing expiration and extended so maybe talk about where the mine life is and how you. And how your team views the possibility for expansion and extension. Yeah there was a lot to your question one was was the people going to come from there's I think it's important to recognize that this mine is just on the outskirts of a fairly large city called Zacatecas. It's in the state of Zacatecas the city the capital city is called Zacatecas city and the beautiful thing about this mine is that it has been operating profitably for 20 years. It's a wonderful opportunity for people who work there very popular for employees because they can live at home right they can it's literally a 15 minute commute from somebody's front door and so there's very low turnover the senior management team has been in place for over a decade. And they're all coming to us because they think of themselves first and foremost as cosamine workers rather than capstone workers and so they're going to be pleased to come in and work with us. You asked about the mine life the mine life yeah we paid for for a five year mine life and it's important to remember that this mine was built in 2006 within eight year mine life fast forward 20 years. And it's still sitting there producing with a five year mine life one of the things that we found to be an extraordinary part of this opportunity is that capstone has not prioritized exploration and it goes. Obviously capstone's a ten billion dollar company this asset was three or four percent of their net asset value so obviously non core that's why they sold it because it was taking up a lot of management time. And it wasn't an integral part of the portfolio obviously capstone is focused on massive open pit mines in Arizona and in Chile this it was their only asset in Mexico they're only underground mine. And it just wasn't a priority so they made the determination to sell it they ran a process the hired an investment bank they went out far and wide and we were the we were the top bitter. We weren't necessarily the highest price but we were the highest certainty because of the blue chip financing partners that we have now again circling back to the mine life question. I gave you that context about where capstone was and and how they were treating this mine because it was non core we have a slide in our presentation that talks about exploration spend over the course of the last five or six years. Increasingly or they decreased the exploration spend significantly because this was not a core opportunity all of the money that capstone had was going to the integration in the in the development of their minds in Chile and in Arizona. So the exploration budget got spent the mine life shrunk we expect in the folks on site are very excited about this because we're going to go in we're going to spend seven to ten million dollars on exploration which is three or four times more than what capstone had been spending on an annual basis. We think that it's a virtual certainty that we will be able to extend the mine life through the investment of significant capital on exploration and that's obviously all going to come from cash flow that the mine generates at the present time. Well, I think another interesting aspect to this transaction was that you brought in some new strategic investors as part of this transaction would you like to flag a couple of the maybe the names that people will recognize. Obviously, like I said, one of the big parts of why capstone chose our bid was because we put together a blue chip financing package Wheaton is supporting us Wheaton is putting in 50 million dollars and interestingly part of that 50 million dollars half 25 million dollars is coming in pure equity, which is a bit rare for Wheaton. The reason why they're doing that is because they already have a stream on half the silver coming from Cozeman and by investing equity in us, they are increasing the value of their underlying stream because they know that this is going to become our flagship asset we're going to invest in exploration and so forth. So we brought in Wheaton we brought in McCory obviously an international mining lender we brought in tourists a mining fund out of Australia that has you know it's just a wonderful track record of deals that they finance. We brought in national bank letter. deal for us. And then we also brought in a group called Gold Group and they are a company that that also has operations in Mexico and they now have a strategic interest of 19.9 or they will, following the closing of this transaction, have a 19.9% interest in Luca. Well, and I was going to save that for a bit, but you went there. Let's go there now on the 28th, you announced that commitment from Gold Group mining. Some people may know that Javier is at the helm there and he also has some history back with Luca too. So maybe just unpack that a little bit further for folks that maybe saw that connection there. Yeah, that's right. So Javier is the CEO of Gold Group. Gold Group obviously raised some capital and they saw an opportunity with us to provide $75 million into our deal. So they flowed through some of the capital that they raised in their recent capitolories into our deal. So it's a strategic opportunity for them. And obviously Javier was one of the guys that recapitalized Luca. So he's obviously a successful mining finance here, Mexican national who very sophisticated in working in Mexico. And obviously he saw and Gold Group saw on the board of Gold Group saw etc. Just one extraordinary deal that we had struck and frankly the value that we have created through the acquisition of these two mines and they wanted to be a part of it. So they took 19.9% of our company through a $75 million participation in our financing. One damn one other name I see listed on this press release is Trafigura is in the mix and a lot of people will recognize them as a big metals reseller. You mentioned in the press release that you know this is creating a leading polymetallic producer. And it's funny to me that a lot of people said hey did you see that Luca shifted from precious metals to polymetallic. And I kept scratching my head because every interview we've done we've talked about you having five metals in the mix. You have sure a lot of gold and silver but you camp on Marata was initially a zinc mine. You got a lot of zinc. You got a lot of lead. You have some copper. So you've had multiple metals I would have described you as a polymetallic producer already but maybe speak to the mix of metals. Did that play into Trafigura's interest? Maybe just unpack the metals mix. Yeah and and again your questions are always multifaceted. So first thing Shann is in the original announcement Trafigura was there. Trafigura actually sold their backstop and that was how gold group ultimately came into the transaction was they stepped into Trafigura's shoes. Trafigura frankly did not want to be an equity investor. What they wanted to do was be an off-taker and so they backed off our deal for $75 million and then ultimately gold group expressed an interest and so that let Trafigura off the hook while they still managed to maintain their off-take agreements. So what Cozeman produces is a very very desirable copper concentrate. Obviously Trafigura is in the concentrate buying and selling business and so they took the opportunity they were able to maintain the off-take agreement that they had with us while at the same time eliminating their equity exposure. So Trafigura was very helpful to us in in backstopping that deal and then over the course of the the intervening period that's how gold group came in Trafigura ultimately wasn't part of the financing package in the end but they facilitated the deal by backstopping that that agreement. You asked about the polymetallic nature of the company we have made a decision as a company and as a board that we are metals agnostic okay for the last 25 years up until just recently gold and silver companies tended to trade a bit of a premium to to base metals companies with the rallying copper prices with the relative scarcity of junior base metals companies junior copper producers actually through the work that we did it turns out that actually junior copper companies traded a bit of a premium now to junior precious metals companies. So we've decided as a company that we are happy to be metals agnostic happy to acquire assets that are precious metals assets base metals assets obviously we're not going to go into the lithium space or the uranium space but just major metals focused in Mexico assets where we can bring our team our exploration team our operating team our finance team and create value through buying a creative opportunities at prices that are beneficial to our shareholders. So that's sort of that polymetallic feature and we do think it's a feature because they tend to be counter-signical and that tends to develop a built-in hedge for us as a polymetallic producer. Okay appreciate your buttons on color in both those comments on the polymetallic nature and also trafficker as role and they're still in there as an off-taker but gold group had taken there part of the equity so that clears that out of that confusion but another point that people had made is that in addition to this acquisition on the 17th of September you made another acquisition announcement where you're acquiring the L-barcano project from Agnico Eagle and then actually gives you four different provinces we'll dig into that transaction in a moment but the question being you've now diversified across four different jurisdictions in Mexico is that part of the intentional strategy or is that just how these M&A deals worked out? And I'd say it's probably more the latter shed. You know Mexico is a fairly large country and so being in Zacatechus and being in Guerrero there's not a ton of operational synergies but there are employee synergies purchasing synergies etc etc so we are we continue to be focused in Mexico there will I think over time develop as we integrate the assets into the portfolio expertise that we have at one mine that we can bring across to another mine etc but it's really we want to look for assets that as I said are creative that we can bring value that our team can bring value to there are some jurisdictions that we probably wouldn't be interested in operating inches from either attacks or a permitting or a security perspective but for the most part we're Mexico focused hard rock underground miners and we look in virtually all states where mining is permitted. Well almost every comment I heard we're positive that you'd add at halisco state and Zacatechus state to the mix so kind of a nice blend of regions in Mexico but Mexico focused polymetallic focused I guess let's dig into that transaction a little bit more for El Barcanio why the transaction what's the thought process maybe unpack this one for folks yeah and remember halisco is you know it's not as well known a mining state as some of the others but endeavor silver just recently completed the construction and it's now operating caranera also you've got go gold developing their Los Rico's project in helisco so you know it's well it's not as well known as a sonora or even Guerrero it is emerging as a jurisdiction the opportunity at El Barcanio was I mean if you look at the price that we paid it's it's sort of a virtually no upfront risk and all upside reward we gave them or we will give them $10 million worth of our stock that's to be priced at closing we expect closing in the next two months and then it's milestone payments the acid is not currently permitted for drilling so the first milestone payment is going to be $15 million that we pay them once we are able to reinstate the drilling permit we have a high degree of confidence that we'll be able to do that over the course of the next 12 to 18 months but that's just sort of some legal maneuvering that we will undertake but even then if we if we spend $10 million to buy the acid $15 million as the first milestone payment we're into this extraordinary drill asset we're into it for $25 million Agnico bought the assets and they've they've completed 225 thousand meters of drilling over the course of the last 12 years so it is an asset that can be drilled and has been drilled in the recent past and it's just never amounted to being an Agnico size asset okay they bought it in 2014 right after they bought grade and the Lat India project then they bought this asset and thinking it was going to be a big underground opportunity oxide heap leech type opportunity like lay India turns out this is not that and you can't necessarily force an asset to be something that it isn't and so as part of our due diligence and the work we did with Agnico we re-scoped internally we re-scoped the project as an underground mine we think that will make it easier to permit it will make it less expensive overall to build and ultimately we we think that it's going to become a very attractive small gold silver mine that produces 50 to 75 thousand ounces of gold equivalent and it will cost us a couple of hundred million dollars to build so very manageable with the new cashflow profile that we have so that the portfolio now really fits together I think very very neatly and something that has assets and development stages across the across the spectrum yeah there's really expiration upside at all of your projects but definitely here if you get the permits to be able to move forward with more drilling it's interesting to note it is more precious metals focused than the other project we were talking about so you still have the precious metals in the mix for people that like the gold and silver exposure I guess that brings up the point of valuation you do have some good slides on this and you have talked about this and we even talked about this just chatting at Beaver Creek, but maybe bring up. just a valuation disconnect here compared to what the production profile will be and some of the metrics on a per share basis maybe highlight that for listeners. Yeah, Chef. We're trading at two to three times free cash flow, which is extraordinarily cheap. You look at the peers, you look at where guys traded on their pita nav, you look at where guys traded on the price to cash flow. We think that we're undervalued by about half. And that's even just in not getting a lot of credit for the improvements that we expect to make at Campo Marado in Tableau. So from a valuation perspective, we think that there's an incredible amount of upside. Our deal with Cozeman, the economic closing is October 31st. So the cash that that mine generates starts to accrue to us. We'll stay in the mine. And so when the deal closes, that cash flow generated starting on November 1 comes to us. So you know, we're going to start generating real free cash from Cozeman on November 1st. I don't think that the market quite appreciates how profitable that mine is at $6.66 and $0.70 copper. I mean that AISC at that mine is less than $2. So you're talking about a mine that produces 60 million pounds copper at less than two bucks a pound. So you're talking really four, if not close to $5 in margin per pound of copper produced. So I mean that the cash flow that this mine generates is extraordinary. And if we get to some of those price participation, I mean 850, you're talking about an incremental $120 million a year in revenue there. So obviously, we will be thrilled to pay capstone that incremental $20 million. So you know, what that does for us as a company is it just frees up so much cash flow to be able to go back and invest in all of the capital opportunities that we've been bootstrapping at Campo Marado and Tolowento as well as once we get into a position to develop Barcania. I mean, this is all going to be done from cash flow. In addition to, you know, we're going to look at obviously paying down the debt that we've taken on from Macquarie and Torres. But also returning capital shareholders is something I'm very enthusiastic about as a big shareholder myself. Well, there's a you put a couple interesting points in there to respond to Dan. So let me dig into a couple of those. That's an interesting point on the return of capital to shareholder idea. We'll maybe dive back into that. But you also talked about the fat margins there at copper prices just where they are. God help us if they get up to the 850 zone. But even at $7 or seven and some change, it's going to be a cash machine. And that cash allows you to reinvest in the rest of the business organically instead of having to borrow more money. So does that mean for people that are wondering, well, the days of kind of bootstrapping it with small raises be over. Can you just do it through only organic production and growth moving forward? Yeah. Well, Shatway is, you know, one of the things I'm very proud of is we actually didn't do a small raise or a big raise anytime in 25 or 26. But we did a small raise in 24 back on the market. It was very tough. We raised $11 million and we subsequently haven't raised any money. There were a few investment bankers at the Beaver Creek conference that reminded me that I turned down bought deals at $1.50 or $1.75. And we as a company had a strategy to bootstrap to basically make these improvements at our existing portfolio through cash flow generated from operations. The problem with that is it's slow. And so the opportunity now with the cash flow that we're going to have from Cozamin, we're going to be in a position to be able to really let Tauoweto and Campo Morado remove the capital constraints. Allow these mines to see what they can be, to invest what they need in operations, to invest what they need in exploration. And really, like I said, we're removing the capital constraints from these two operations. And we're putting the mines in a position to really see what they can be, right, to invest the capital that we've known we'd wanted to, but we just didn't have that free cash kicking around. So we will have that. And it's going to be an exciting time at all four of our assets because we're going to remove the capital constraints. And we're going to have an opportunity to invest in these mines and to see what they can be. And our expectation is that the mines are really going to start to deliver not just Cozamin, but the balance and the portfolio. Yeah, that's a good answer. And I think Cozamin is really the ATM machine that funds the rest of the company now as far as the other projects. And they can finally start to stretch their legs and show the market their potential. I guess just as we wrap up in, the future looks bright for the company. It's going to have a lot different production profile. Q4 is going to be kind of a hybrid quarter where you have part of the old world, part of the new world in the same quarter than Q1 will be the first full quarter together. But what catalyst do you want investors watching out for? What's the batting order? What are the main things you want? Not just to the year end, but maybe through Q1 of next year. Yeah. So I mean, the first thing that we're going to be watching for is Capstone actually puts out their Q3 on October 29th. You're going to see what Cozamin was able to do in Q3. And I think that that's going to be able to help investors draw some conclusions. The financing that we did closes next week. And so that's going to free up a lot of research analysts to start to incorporate what Cozamin looks like in their models. Could yield some new target prices from the research community. So those two in October moving to November towards the end of November, we're targeting a new teleweto technical report by the end of November. That's going to synthesize a ton of the drilling that we've done over the course of the last two years there that I think that the drilling results haven't really moved the needle. They've always been consistent with the historical, but there's been a lot of it. And what that's going to do is it's going to demonstrate a new extended mine life and costs that we think are pretty reasonable. And so you're going to start to get a little bit more color on towoweto. And then I cap a marano technical report by the end of the year. And that's going to give some color around these metallurgical questions that you and I've talked about at length on previous appearances here. So information at all three of our operating assets. As we close on El Barcano, the idea is that we're going to try and come out with a new PEA that outlines what we are thinking on the underground opportunity. And so that also will outline what we think will be a very attractive smaller i.e. non-agneco size type of mine that is the mine that we would intend to bring to market after we get through these permitting hurdles. So lots going on at the company obviously. Okay, so there'll be news from all four projects over the course of the next few months to quarters. So we'll definitely keep our eyes peeled for that. Dan, I'm sure we'll be talking again. But for those of you listening in, if you want to follow along with the news flow, definitely click on the link below down in the show notes. It takes you right over to the Luca Mining website, straight to their news section. You can sign up for updates that hit your email inbox. You don't miss a moment or just follow along with the news as it drops. Dan, let's circle the wagons back up again when you get some of those technical reports out and we'll dive into the other projects. And as always, looking forward to our next conversation. Likewise, Chad. Always appreciate being on.