Vicuna: At the End, Promise You’ll Leave Me Breathless
The endgame to the inevitable reunification, off the top of the marsupial's head
As I quipped on twitter Feb 13th, this has gone through many drafts because Vicuna is a multi-story saga whether its countries, assets, motivations, or potential end games. The truth is those who’ve followed it care about what comes next, while those who are new to the story need the context. But as the koala is thinking about the scope of global investors who would dare consider investing in an exploration & development copper district, you either already know how to play the scales or been told that touching a piano will get you punished. So if you are that rare exception, there are many presentations and videos from the companies in the Vicuna district or I, the koala, may be happy to do a poor man’s Vicuna 101 for you if you reach out directly.
And with that…let’s go hunting Vicuna…
There’s something magical about a site visit when you are in this industry. We for the most part all live in urban or suburban environments where mining is simply just not part of the equation of daily life. It’s a privilege when you consider how critical metals are to our modern way of life. But you end up occasionally getting a chance to see a part of the world you’d never take the family on holiday and learn something first hand you otherwise never would have. But you very rarely get a chance to go back a second time.
Can now say the Koala has been a repeat visitor to two world class mining projects – Oyu Tolgoi and the Vicuna district. Thinking about it over the past year but even more so internally while on site, the parallels about both the potential and the risks are so shockingly resonating it feels like a rapture is about to open.
Like Oyu Tolgoi, the Vicuna district will be a phased decade long development to full scale production, where execution of the development pathway will be critical to the economic returns even if over a century long mine life there will be multiple cycles to forgive transgressions or errors at the beginning. While there was political delays in Mongolia, there was also (depending on who you believe) geotechnical ground condition issues or Shaft 2 quality control issues that further delayed the ramp of the block cave. The end outcome of all that is in the interim 2023 results Rio Tinto said the Oyu Tolgoi business unit as “operating assets” of $14.3 billion. Which, for comparison, the entire Pilbara iron ore business unit has only $17.8 billion.
With all that said, there is a conversation we can discuss later about the importance of not being at the mercy of a major mining house as your majority/operating partner with a lower cost of capital.
It’s a funny experience going to a world class asset for a second time. These are multi-generational operations so there really isn’t much that should change even over the course of 4-5 years. Which is what ironically makes visiting these assets a little like watching the politics in academia. When nothing really is at stake, every little thing can have magnitudes more relevance than you’d ever think.
Which is why I found myself standing over the Filo de Sol deposit in January realizing after Oyu Tolgoi this was the second time I’ve had the privilege of visiting the same asset twice. OT was Oct 2016 and Oct 2019, but we don’t need to get into everything that happened in between or how July 16-17th 2019 is forever seared into my memory. The koala returned to the Vicuna district in January 2024 after first visiting January 2023 in order to see the usual suspects on the Argentinian side of the border along with Caserones in Chile.
A year ago the Koala came back from Vicuna saying “NGEX, LUN in that order, FIL amazing but dead money this year because election year”.
This year the Koala returns to the home eucalyptus tree saying “Filo and then can barely see LUN on the horizon wearing the silver medal”.
But this is not a piece about stock picking, this is a chance to work through both the Chilean and Argentinean sides of this geological district we’ve come to call Vicuna and how I envision it coming together.
The TLDR for those of you who are busy is that fiscal stability remains the first step in Argentina. We will see hopefully by early March progress on a bill in Congress that will be a great first step on the mining fiscal regime, but management of all three companies rightfully want a direct agreement on top of that broader reform bill.
If we were to speculate, fiscal stability probably takes 6 months. But then you have an image of Adam and Jack Lundin signing a document with President Milei that will give the old guard shades of prior family generations signing stability agreements for the first generation of Lundin Argentina projects – Veladero and Alumbrera.
With fiscal stability in place, the Lundin Group cannot leave the Argentinian government at the altar. That means it is time for a Josemaria partnership agreement. And after the trip, I come back only more resolute in my conviction that when I hear Josemaria partnership my brain should register “Filo & Josemaria unification”. In no small part because Filo is what makes this a district, we aren’t talking about Argentina today if it wasn’t for Hole 41.
And any partner will feel that way as well in order to pay the valuation required to make a partnership agreement happen. But with all that said, the koala would like to touch on a potential “go it alone” pathway if partners are intransigent or unreasonable.
Oh, also, at some point we will touch on Chile too.
But for those that want the simple takeaway, as much as all three companies (Lundin Mining, Filo, NGEX) are interesting, the one the koala thinks you need to own next 12 months is Filo and it’s just not even close.
But for now, let’s dwell on the end game for Vicuna Argentina.
The first immediate question is will the Lundin Group (stress GROUP, not MINING) get a fiscal stability agreement that the three companies exploring and developing in country can sign on to.
That could come anytime this northern hemisphere summer or autumn. If you subscribe to the koala’s thesis that fiscal stability is the spark for a sequence events that are already set into place with the appropriate contingencies, an Ocean’s 11 like plan if you will, you should expect to see Filo share price respond favorably because the window will be open for the unification deal.
What would that potentially look like?
Well we have to consider a few factors as the moons orbit around the star that is Filo de Sol.
1) Will the Lundin Group dare risk a shareholder vote at Lundin Mining?
a. Threshold there is ~25% share issuance
b. What will LUN CN shareholders think?
2) Will Filo shareholders ex-Group support a deal or do they want to keep going?
3) Will a potential “Vicuna Argentina” joint venture partner be willing to contribute cash to a unification deal?
Before we dig into these questions, just a fun little schematic the koala put together, including the possibility of a Filo Royalty SpinCo to give the Filo shareholders a piece of paper that would honestly be a never sell in 98% of outcomes (until there is a proper supercycle peak again and the koala sounds like a dark cynic and not a new age believer).
Want to be very clear these are illustrative figures (got other things to do then figure out the fully diluted share count versus the basic here). The Lundin Group stake in Filo is based on the pie chart in the corporate deck and in Lundin Mining based on the last Nemesia SEDI filing. Did not check these numbers to be precise because again, not the investment banking analyst on this deal.
Enjoy:
Apologies for the four different graphics, but figured best presentation to consider four structures:
LUN CN shares
LUN CN shares + Filo Royalty SpinCo
LUN CN shares + Filo Royalty SpinCo + Cash from JV Partner
LUN CN Shares + Cash from JV Partner
You’ll notice the koala goal seeked the cash components in scenario 3 and 4 to keep the LUN CN share issuance low enough to avoid a shareholder vote just for discussion purposes.
We can war game this whole set of proposals but simply put, between a royalty SpinCo, cash from a major (to channel Charles LeClerc asked last season about press speculation about his future teammate in 2025 “hello Mike Henry…”) and the brothers courage to face and persuade their fellow LUN CN shareholders to vote for a merger, there are many ways to get this done that’s a win win.
What path will be chosen, the koala has its own personal views and recommendations it has shared privately but will also share here.
1) Decide if you are prepared to face LUN CN shareholders with a shareholder vote
a. Frankly, anyone who doesn’t see this coming has been living under a rock, there probably will be a relief rally it is finally in the rearview mirror
b. If you pay C$40/sh for Filo you probably get asked if you are overpaying, but that’s something you can face post announcement
c. RECOMMENDATION: Just do it, family name is on the company, everyone can see this is clearly this generation’s mandate – deliver the 21st century Escondida over the next 15 years
For the Masters students confused by that 15 year point, not PhD, Josemaria has a 10 year high grade starter pit, expect during that time Filo is pre-stripped to open up a super pit with a mega plant expansion. Call it 3-4 years to build Jose, 1 to commission, yep, Filo de Sol is materially in the processing plant in ~2040
This is why said royalty multiple in the above scenario scratch pad is 5x
2) Will FIL shareholders who are not LUN shareholders go willingly?
a. As “interested parties” the 33% of the register controlled by Lundin Family & Lundin Trusts will not be relevant votes (unless the koala has forgotten something about M&A)
b. RECOMMENDATION: A royalty SpinCo will reduce the dilution to Lundin Mining while giving FIL shareholders continued direct exposure without capital calls
3) Do you ask the “Josemaria/Vicuna joint venture partner” to contribute cash to the takeover?
a. You can reduce dilution and the risk of a shareholder vote here but candidly, same way a major will pay a higher share price to invest primary proceeds into a company than to buy an existing shareholder out, it is better to put cash towards a higher valuation on a partner buying into “Vicuna Argentina”
Well, now that we’ve laid out the questions around the end game, let’s discuss the overall dynamics as to why the Koala think the end game is 2H24 or 1H25 at the latest.
First, Milei is not giving the Lundin Group fiscal stability on acceptable terms without a handshake on “Josemaria is a go”. Which leads to a very harsh thing to say, in isolation, Josemaria is not a very good project. As the starter pit (low strip, reasonable grade, flat land to put the plant at lower altitude than the pit) to a broader district end game it makes sense.
But in isolation you would not build Josemaria if you did not have Hole 41 proving out the high grade zone potential within the Filo de Sol porphyry system to back fill Years 11 onward of the Josemaria plant.
Now, students of Vicuna will ask “Koala why no love for Lunahuasi yet?” and the simple answer is that it’s not a porphyry system, it’s a sequence (unconstrained) of high grade veins. Could those veins be drilled out to a delineation acceptable of a potential underground mine where it could solve the Year 11-20 “grade problem” of Josemaria? Sure, but that will take several years to drill out and Josemaria was bought in 2021 and is costing $200+ million per year.
You step out 3-500 meters at Filo and hit under ~4-500 meters of cover a 1km intercept of 0.6-1% CuEq mineralization, the nature of the deposit suggests the area in between is very similar. While to mine it one day you will need to drill it more tightly, for the purposes of comprehension, that infill hole is low risk of surprise. On the other hand we already see that the Lunahuasi veins pinch and swell with true width changing by tens of meters. It’s brilliant mineralization but it’s going to require far more drill density to get partners comfortable modeling the tonnage to assign value.
As a result, the koala’s view is Lunahuasi isn’t going to be ready to backfill the internal unofficial “district mine plan” in time to get the valuation on a partnership transaction Lundin Mining will require to go ahead on Josemaria.
As for NGEX as an investment, the koala suspects share price purgatory awaits for that story specifically. And while I’m sure Wjotek will aim to hit the porphyry target before the end of this season, a very funny thing stands out to the koala as it was standing on the look out seeing how Josemaria was only 8 km from the high grade at Lunahuasi and the very obvious thesis a porphyry sits under those veins…
Toto, the Koala has a feeling we aren’t in San Juan anymore…
Reality is Josemaria just sits on the San Juan side of the provincial border from a province that does not take as favorable a view to mining. So as the Koala stood there huffing oxygen it thought “somewhere in that valley is the marker between dream and don’t dream.
For that reason and the point above about the need to drill Lunahuasi far more intensely than the Filo step outs to deliver tonnage with reasonable confidence, the Koala’s view is NGEX is not part of any unification deal that will enable Lundin Mining to FID Josemaria while bringing in a partner at a valuation that makes Josemaria capex make sense.
Also, given the need to properly drill out Lunahuasi for another couple seasons to properly comprehend the mineralization, why would the Lundin Group and NGEX shareholders want to monetize now?
Bottom line – Filo unlocks Josemaria.
Now, what does that deal have the potential to look like?
You could have above the potential for cash consideration to reduce the need for a royalty SpinCo but truthfully, whether Josemaria headline capex is $6 billion or $7 billion, after the drama of the last few major porphyry builds in the Andes, it makes more sense to take more dilution at Lundin Mining to get Filo absorbed and then get a higher valuation on a sell down of Vicuna Argentina.
Now for fun, knowing with Filo incorporated to Josemaria you have line of sight to an Escondida outcome over 15 years (you all saw the koala’s 6km x 1 km x 800 m tweet which implies 12+ billion tonnes of mineralization, we’re just debating is it 0.5 or 0.8% CuEq…it works either way), what would you pay for that?
Well, considering the koala already subtweeted QB2 a couple paragraphs ago, let’s talk about the inspiring Sumitomo – QB2 deal:
In a world where BHP and Rio seem afraid to go to Africa to look for the next great copper district/deposit (see Ivanhoe Mines still independent), and a desire for feedstock (yes arsenic but this isn’t the time for that discussion), Sumitomo has laid the frame work for a partnership in a world where there is both a scarcity of world scale & class projects AND then that are in the hands of those that need capital.
Why isn’t 30% of “Vicuna Argentina” for $3 billion cash and arranging a $3 billion project finance facility outside the realm of discussion? Give Japan/Saudi an offtake agreement so Saudi can build some smelters and diversify their domestic economy or Japan has incremental feedstock.
Adam and Jack Lundin can then literally look the market dead in the eye and say that barring a capex overrun, Vicuna “Phase 1 is fully funded”. And then Lundin Mining can use free cash flow to:
1) Deleverage the balance sheet to net cash
2) Exercise the Caserones option
3) Buyback stock
Dare we dream of a world where come 2030, Josemaria is in production, Lundin Mining has a net cash balance sheet, and bought back a material portion of the shares issued to acquire Filo? At $4-5/lb copper it’s not crazy to think about.
REAL TALK: the official Josemaria figure probably starts with $6 billion and as much as the koala begs Jack to give himself a cushion, I’ve spent just enough time with him to know he will insist on a figure that demands excellence and effort from his team. It’s frankly a good culture to instill even if it would be nice to just have the figure start with a 7.
Perhaps near 2029 there is a capital call to get Josemaria over the line (assuming 2025 FID, 4 yr build) but Lundin Mining will be in position to meet that.
The beautiful end game is you’ll have a base metal pure play with a world class asset stabilized at Phase 1 with a clear “free cash flow to be used to pre-strip Filo for a mega Phase 2” and while Lundin Mining will have issued ~24% (or more if Adam and Jack will risk a shareholder vote) shares outstanding to acquire Filo, will have effectively not sunk much cash into delivering an Escondida like asset that then self-funds its growth pathway.
And while Vicuna Phase 1 is being built to transform Lundin Mining from a mid-cap to a premier base metals producers, the market will have clear line of sight on the capital allocation strategy with free cash flow from the “legacy portfolio”.
Where the koala sits – it only owns Filo of the three companies right now. That is a statement how strongly it has conviction in the asymmetry of the situation. Frankly I’m surprised it isn’t sitting at the all time high of C$26, but perhaps there is a different theory for how Josemaria is unlocked?
Eucalyptus tree wisdom from leaves falling off the tree:
Lundin Mining management & directors: don’t be afraid of a shareholder vote, no one material will be surprised and if they hate this possibility they already sold. Wouldn’t be surprised to see stock rally in relief once this is in the rearview mirror
Lundin Mining shareholders: Nothing the koala wrote here should surprise you.
Filo shareholders: Recognize while you hold the trump card to unlock the district in Argentina, there is a question of overplaying the hand. Demand a royalty SpinCo so you have some tail exposure to the evolution of this district over the next several decades. Have faith the Lundin Group as a 33% shareholder (assuming similar shareholder pie chart to Filo) will not sell to Franco or Wheaton unless the valuation offered is incredibly generous. A major reason the koala is so excited is that this potential piece of paper is a “put in the drawer for your grandkids” possibility
Prediction:
Sometime 2H24-1H25, Lundin Mining bids C$30-35/sh for Filo with a 2% NSR SpinCo entity. The market is going to be gobsmacked there is no BHP partnership announced simultaneously. But Mike Henry will think the Lundin Group was bluffing they were ready to go it alone without a financial partner. Expect press articles talking about Manara (PIF/Maaden JV) and Sumitomo/JX Nippon (Lundin partners at Candelaria & Caserones) circling for a broader Argentine partnership deal.
BHP will then bid C$35-40/share cash even knowing Lundin Group 33% stake blocks that deal from actually happening. But it will set the stage for the final compromise deal.
We see a C$35-40/sh transaction where Lundin Mining will issue stock to FIL, a 1-2% NSR SpinCo will occur, and BHP will commit ~$6 billion of capital in a mix of equity and shareholder loans to get a 30-49% stake in Vicuna Argentina.
Most importantly, that will mean Lundin Mining will be in control of the build and construction not BHP. So the risk of becoming like the Turquoise Hill minorities at the mercy of a big major miner struggling to build a major project is off the table.
And Lundin Mining shareholders will celebrate because that means Josemaria and thus the Argentine free cash flow to finance the pre-strip of Filo will effectively be financed by BHP.
Escondida is worth at least $25 billion today (and if you don’t think 5x FY23 EBITDA isn’t conservative, go look at where copper producers are trading today). It’s several years away but 50-70% of Escondida is $12.5-17.5 billion USD. The market cap of Lundin Mining today is C$8.5 billion. You happily dilute the share count by ~46% or C$3.9 billion for a free carried shot on goal at that value accretion, especially if you are bullish copper prices.
And who are we kidding, who is long any of these public copper producers if you are not bullish long term copper prices relative to spot?
Before moving on though, the koala would like to touch on valuation, because I expect there will be questions as to why Filo is worth US$3-4 billion today in Argentina when you likely in an integrated Josemaria/Filo operation don’t see first ore until ~2040.
The answer is scarcity and optionality. Simply put, there are not any projects out there in places western mining companies are extremely comfortable operating that can be Escondida-type scale copper production for a century.
The napkin math there is 12 billion tonnes, 100 year mine life implies 325ktpd milled, 0.6% Cu, 80% recoveries, 576kt copper in concentrate.
For additional context, Josemaria (Vicuna “Phase I”) will do 150-170ktpd depending on ore hardness so basically there needs to be an expansion of the plant by ~2x after 7 years. It’s not insane, Escondida has three concentrators at this point.
Simply put even with the time value if you assume $4-4.25/lb copper and all free cash flow from the first decade of Josemaria goes toward pre-stripping Filo (or maybe it’s a massive block cave), you can see line of sight to a low teens IRR on the total Vicuna Argentina project while assigning no value to incremental expansion potential or higher copper prices. With all the major capital effectively sunk already and the cost structure likely first/second quartile of the cost curve.
A low teens unlevered IRR on a 100 year investment is how generational wealth is created. Maybe we see major technological innovation that resets or flattens the copper cost curve but even if something like say low grade sulphide leach kicks in, that will just effectively lower the cut-off grade and enable incremental expansions because the resource will expand.
But at the same time as mines get depleted (recall each Kakula, Kansoko, etc. in the Forelands are ~25 year discrete mine lives…Escondida needs to move a concentrator and solve for grade decline, etc.) a major open pit or block cave with a 100 year resource endowment will not require the same levels of reinvestment as others will, so over time the cost curve position should become even more defensible.
Or to put it succinctly – people rightfully pay a premium for timeless creations like Birkin bags, this is one of the Birkin bags in the mining industry.
So enough with Argentina, let’s talk Chile…
This isn’t the sexy part of the analysis so let’s keep it clean and simple.
Caserones…supercycle peaks must be like the greatest party in the world because someone thought actually building this up in that mountain valley was a good idea?
But that’s spilt milk under the bridge here.
The Japanese (same group that has ~30% of Los Helados, the Chilean resource deposit sitting in NGEX) thought it would cost $2 billion to build and it ended up costing $4 billion.
Now they’ve sold 51% to LUN CN for $800 million, $150 million of deferred, and given LUN CN an option to acquire another 19% for $350 million next 5 years or so. So $1.3 billion for 70% before considering time value of money.
Funny how those pro forma percentages sync up so nice with the Los Helados ownership split.
So first and foremost, immediate value opportunities.
The SX/EW plant could do another 10kt of cathodes per year, but need to find more oxides. Enter the Angelica prospect, best way can describe this is your standing at god only knows what altitude and you are pointed up at a peak surrounding the operation and explained there is known oxides there and they are drilling it further now before deciding if bringing that material downhill to the dump leach makes sense.
Look, just do the math given all the sunk costs, 10kt cathodes is ~$88MM at $4/lb copper ($8820/t) of incremental revenue and low incremental cost. Spot the koala some mental math and let’s call it $50MM incremental EBITDA. That’s a real uplift in valuation versus the current plan.
The big value proposition though is how to you find higher grade sulphides to displace the existing mine plan which is ~0.4% on its way to ~0.3% in the 2030s.
Los Helados has a 0.7-0.8% Cu (could I look this up to get this perfectly right? Sure but that’s not the point here) high grade resource within the broader resource that could be caved. It’s 10 kilometers from Caserones to the base/bottom of the Los Helados resource. It probably would take 6-7 years to do the ~50km of development (tunnel, all the caving, etc.) required which is notable since the Caserones mine plan in the early 2030s has a bit of a grade decline (reflected in valuations of course but hence the time table to solve the issue and make the acquisition a slam dunk).
We all have different rules of thumb for what each meter of development costs but that’s a function of not just linear but cubic meter, but let’s just say acquisition and development took 7 years and ~$1.5 billion in total…0.8% Cu into a mill currently taking 0.4% and, having walked through it is massively overbuilt/capitalized, well you can see how the production out the back end could be a game changer for Caserones.
So why does the koala not sound so excited? Because the Caserones tailings facility reaches capacity at 2040 (says in tech report La Brea TSF to 2050 in Section 20.3.1 but working off what folks said informally on the site visit, either way the point stands). So even if Lundin Mining does some serious exploration on the Caserones land package to make sure Los Helados is the best high grade sulphide solution over the next 12-24 months, the logical question for the market will be “what is your plan to make sure this isn’t 7 years of development for a 7 year block cave?”
The TLDR here, Lundin Mining needs to get an extra 20-30 years of tailings capacity so that when they truly unlock the full Chilean side of the district the market appreciates the multiple decade runway.
Simply put, Caserones was an absolute steal. NGEX would probably love to get $2-400 million of cash for Los Helados (adjust it for 70% of course) to further drill Lunahuasi without more dilution, but the koala suspects it will take a few years to let the puzzle pieces fall into piece before the market appreciates this.
And frankly while this is all happening and value accretive, what is happening on the Argentine side of the border is higher stakes and just too sexy to share the market’s attention with Caserones value unlock.
But now let’s talk about the truly long term…
The reality is building incremental desalination capacity adjacent to the Caserones facility and running pipes up the same right of way to Caserones and then over the border into Vicuna Argentina makes simply way too much sense. And if Argentina approves, a concentrate pipeline may make sense versus trucking to the Argentine coast for export.
But thinking about all of this, it’s a district with two jurisdictions that probably will have shared infrastructure due to synergies.
It will be massive, and in the right cycle, a BHP CEO and board will want all of it. And they will happily pay for it. That’s just the way of the world and commodity cycles.
And that is why the royalty SpinCo is such a unique piece of paper to create in this broader end game.
As for NGEX, let’s see how the drilling progress next 1-2 years but when the koala went to Vicuna first in January 2023 it realizes 2023 was a dead year for Filo, and sitting there in January 2024 it realized it’s probably NGEX time for markets not to care about. Lunahuasi is not the unlock for Josemaria’s low grade after year 10, it’s simply not big enough (or can be drilled out in the next year to be) for a BHP to care.
With the election in the rearview mirror, the question is fiscal stability. If the Lundin Group can secure that for all three projects (Josemaria, Filo, Lunahuasi) in country. They cannot leave Milei at the altar.
That is the comet that sets things in motion and alters the gravitational forces in this district. And if it doesn’t happen this year there will be legitimate questions if Argentina is going to open up or not. And since Josemaria is basically the only permitted FID ready project in San Juan, if Josemaria doesn’t go, the koala doubts western investors will be keen to humor other projects in Argentina.
Let’s see what happens, I just hope that Adam and Jack have the courage to go it alone and face their shareholders if strategic parties both industry and financial/offtake don’t play ball on an appropriate valuation for a partnership. A partnership that will likely exist for a century barring a corporate M&A transaction on Lundin Mining several years in the future.
The industry needs to see some of the new generation stand up and “send it” with no fear. It’s the only way Rio and BHP will realize the refusal to reward exploration success with lucrative M&A is a long run path to irrelevance.
Just a few high altitude thoughts off the top of the koala’s head.
Outstanding
Honest question. If Lundin’s were to pursue the go it alone strategy…would it not be easier to go down that path via Luna, being you assume it’s a smaller bite to have to take compared to taking all of Filo?
I have not been on site…but from what I’ve seen…a conveyor from the base of the cliffs to Jose looks imminent doable. What does the path from FILO to Jose look like?
Would be interesting to look at the initial economics of a block cave setup at Luna exploiting very high grade veins compared to the expense of stripping the overburden for a FILO mega pit.
Again…this is simply on the go it alone possible angle…I have no arguments with your assessment of time being required at Luna if you want a Rio or BHP on board there.