Description

Lumina Copper—NYSE -$6.90

This write-up is going to be a little briefer than should ideally be the case. I am doing so because the stock seems ready to break out, and it is a bit of a concept stock anyway.

The bottom line is that it seems as if Ross Beaty has done it again. The founder of 4 companies that have already been a success, Lumina Copper seems on its way to being the 5th.

There is nothing in the finances to suggest that this is anything but another promotional Western Canada mining company that bought worthless copper mines for hundreds of thousands of dollars that now are worth hundreds of millions. I almost never get involved in “story stocks”, and this is a story stock. I also rarely get involved in stocks where what management says has a huge influence on my activity, which IS the case here.

So why this one:

First, second, and third, Ross Beaty is a bona-fide fellow, a great entrepreneurial success. He is the Founder of Pan American Silver (PAA CN), a company whose success speaks for itself. He has a great reputation, and this company is completely his creation and his baby. His track record and reputation says that this is a man who can be trusted, and he is open, available, and enthusiastic about speaking about Lumina.

Second, there is a lot of data, including studies done by reputable firms, suggesting that this company has substantial value. The company’s web sit, www.luminacopper.com has substantial data, including detailed engineering studies and reserve reports.

Third, word on Main street, which the company does not contradict, and in fact is happy to talk about, is that the company’s biggest property, Regalito, in Chile, is being shopped and looked at by a number of the majors. While not able to get any direct confirmation, the types of “no-comments” we have been getting with industry folks seem to suggest that this is a bona fide situation, at least in terms of people looking.

Finally, people in the mining industry tell us that while not the norm, the majors do miss out on opportunities and talented individuals are able to buy properties at pennies on the dollars.

Before going into the details, let me be very clear. This is an extraordinarily speculative situation. None of the properties are in production. Production cost estimates are not yet clearly projected. It is important to note that even if everything I believe to be the case and hope will happen, happens, the mines are high cost and will for sure have little but option value if copper declines below $1.00. Options on copper seem prohibitively expensive. So we are talking about a very high-risk/high reward situation. Even as I write, I still find myself skeptical. Nonetheless, I have a big enough piece of the company, to have my money where my mouth is.

Ross Beaty had a vision to go out and buy copper mines when prices were low in 2000-2003 and create a levered copper play. His plan was to 1) buy when prices were low, 2) buy mines where there were no obvious obstacles to development, e.g. lack of water, and 3) buy properties that had no work requirement obligating any expenditures or investment until he was ready. This meant that he could be patient, and the mines retained full option value. Now that copper prices are up, he intends to sell the mines. Reflecting this commitment and to try to optimize price and after-tax results, the company recently announced (February 2) that it was going to split into four pieces. The four pieces group the assets into logical packages: Regalito, the crown jewel; the remaining Chilean properties; the Peruvian properties; and the balance.

So what do we have here? We have a company with 20.8mm FD shares and no debt. After all options exercised (included in the above), the company will be debt free, having sufficient cash to operate each of the 4 companies, but none that I would consider excess. At $6.90 US, we have a $143mm market capitalization.

The company’s most exciting property is its Regalito property in Chile. Bulk column testing is now being done to confirm the cost of producing the property. This should be done by June. This will obviously be a key time for the stock, the big upcoming event. The company says that the mine is worth between $50mm-$250mm. Economic copper trades anywhere from $.015-$.03+ per pound. This mine has 8bn pounds of copper (no typo). We believe that the likely case is that this mine will by itself cover the current value of the company.

The other property that is worth specifically noting is the El Galeno Property in Peru. We believe that the company turned down a low to mid 8-digit bid for the company, deeming the bid inadequate.

These two assets alone probably in a low case, although not worst case, close to cover most if not all of the value of the company. The following is the link to a document that summarizes all of the properties.

http://www.luminacopper.com/i/pdf/LUM-PropertySummaries.pdf

The following document describes the resources of each property.

http://www.luminacopper.com/i/pdf/LUM-PropertySummaries.pdf.

The company suggests that across all of its properties, there are 14bn pounds of measured and indicated copper reserves, with an additional 8bn inferred pounds. Therefore, the company is valued at $.01/pound, not counting modest amounts of gold and other mineral by-products. If (repeat IF), the mines are viable and cost effective, this is way too low.

The company’s goal is to have Regalito sold this year and the other 3 companies sold in the next 18-months to 2 years as the productivity/viability of the assets are illustrated and confirmed.

Bottom line, there are execution, cost, and “story” risks. But we are in the hands of a credible entrepreneur with a strong track record who doesn’t need the embarrassment if this situation turns out not to be credible. Bottom line, (not without industry checks), I have chosen at this point to take the situation at face value, focusing my worries on the underlying price of copper and the inevitable risks that come with any exploration company--- namely, can the copper be mined cost-effectively, and will buyers of the properties believe this to be the case? At current market price, I feel well paid for the risk.

Catalyst

corporate split up, bulk column testing of the Regalito mine by June, asset sales.