Fairholme – A Special Situation: Imperial Metals Corporation by Fairholme
Imperial Metals Corporation, founded in 1959 and listed on the Toronto Stock Exchange as “III”, is an atypical junior miner with a market cap of approximately US$700 million. Imperial explores for copper, gold, and silver mineral deposits, develops mining sites, and focuses on maintaining core ownership of assets with the mantra, “own what we operate”. Operations are focused primarily in British Columbia, Canada, where Imperial processes mineralized ore into concentrate, which is then shipped to Asia for refining.
Fairholme, as adviser to its clients, began acquiring Imperial Metals in 2006, and by 2014 was the second largest shareholder with 19.7% of shares outstanding. Imperial’s largest shareholder is Edco Financial Holdings Ltd, a Canadian holding company with significant investments in the natural resources sector. Edco’s longstanding involvement with Imperial has helped the company prudently allocate capital while avoiding equity dilution and other mistakes that commonly plague junior miners.
In August 2014, a media-sensationalized breach of the tailings storage facility at Imperial Metals’s Mount Polley Mine sent its share price tumbling approximately 40%. This created a buying opportunity despite the negative fanfare and Fairholme’s investment thesis remains intact.
Since its inception in January 2012, the long book of the Voss Value Fund, Voss Capital's flagship offering, has substantially outperformed the market. The long/short equity fund has turned every $1 invested into an estimated $13.37. Over the same time frame, every $1 invested in the S&P 500 has become $3.66. Q1 2021 hedge fund Read More
Our purpose here is to provide an orientation to Imperial using open source information, share highlights from our investment thesis, demonstrate the depth of our investment research, and provide resources to assist you in your own research. We purposely do not touch on our internal mine valuation models and intrinsic value as this is proprietary in nature. Not all information relating to Imperial Metals is included within our highlights. We welcome dialogue on Imperial Metals, or any of our portfolio holdings that have been publicly disclosed. As always, we recommend you do your own research and arrive at your own conclusions.
Please note that this website presentation does not constitute an offer to buy, sell, or recommend any securities.
Gearing Up
Imperial Metals’s long-awaited C$643 million Red Chris Mine is now commissioning for start-up. With a mill process rate of 30,000 metric tons per day and the capacity to expand significantly in the future, the Red Chris Mine ranks as world class. Most importantly, the mine now has the power it needs to operate.
Powering On
A lack of sufficient power was a major impediment to British Columbia’s energy-hungry mining growth, so almost C$800 million of public funds were invested in power transmission lines leading to Imperial Metals’s new mine, at a cost to Imperial of only C$50 million. Imperial now has access to clean energy and the ability to expand operations.
Bouncing Back
The price of Imperial Metals’s stock fell approximately 40% after an environmental accident involving the tailings facility at its Mount Polley Mine. The facts suggest that the long-term effects may have been overstated by media and environmental groups. Although there still remains risk of environmental fines and liability. We believe Imperial has managed the accident prudently, and look forward to the continued rebuilding of the tailings facility, and rehabilitation of the surrounding area.
Digging In
Management and Stakeholder focus on long term value
Canadian industrialist N. Murray Edwards, President of Edco Financial Holdings Ltd, is Imperial Metals’s largest shareholder with 36% of outstanding shares. Mr. Edwards has much of his fortune invested in Canada’s natural resources sector and is Chairman of the Board of Directors of Canadian Natural Resources (NYSE: CNQ) where he led exceptional growth in the company’s value.
Imperial Metals’s management, led by CEO Brian Kynoch, are known as capitally prudent, efficient operators. Executive management has an average of 20 years with the company and is incentivized through collective ownership of over 5% of outstanding shares, just as Fairholme employees are invested heavily in our products. We like when management and company interests are aligned.
Powering On
New power line gives Red Chris the energy it needs
British Columbia’s utility, BC Hydro, recently completed The Northwest Transmission Line (“NTL”), a 214 mile 287-kilovolt power line located in the northwest quadrant of British Columbia. The line provides Imperial Metals’s newly constructed Red Chris Mine the electricity it needs to operate, and at a very low cost. The C$746 million NTL project has been largely funded by the province of British Columbia and BC Hydro customers as part of a provincial effort to buttress the British Columbia’s mining industry while spurring additional economic development in that region.
Because the NTL line was just short of Red Chris, Imperial Metals contributed a net C$50 million to build a 60-mile extension that led directly to the mine. Red Chris now has the power it needs to begin commissioning, potentially reach economies of scale, and transition from diesel power plants to lower cost, cleaner electric powered mills and heavy equipment. Imperial is currently the sole beneficiary of this power line and can capitalize on additional capacity in the future.
Gearing Up
An exercise in patience, planning, and perseverance
After many years of planning and patience, the commissioning of Imperial Metals’s Red Chris Mine is now underway. For perspective, the Red and Chris mineral claims (later combined) have been in planning stages of development since the 1960s — power was the major factor in the lack of development.
The commissioning and subsequent mill start-up is vitally important to unlocking the Red Chris mineral resource which clocks in at 68 square miles containing deposits of highly mineralized ore. The deposit ranks as the 12th largest undeveloped copper deposit in the world, and the world’s 7th largest undeveloped copper mine when ranked by gold content.
A confluence of factors — from highly mineralized ore to cheap power, and its location — offers a competitive advantage and contributes to the mine’s low cost operations, enabling production of a pound of copper concentrate for only around C$1.22 with credits to gold and silver. Although this number is an estimate subject to fluctuation with items such as cost overruns, delays, and currency fluctuations, the low cost of production provides relief to the company in times of lower commodity prices.
Though Red Chris is located in northwestern British Columbia approximately 100 miles south of the Yukon Territory, it’s nestled within a micro-climate that allows year-round mining and trucking operations. Red Chris is only 11 miles from the nearest paved highway, and only 200 miles from a Pacific gateway seaport – affording it efficient logistics and reasonable transportation costs compared to most mines throughout Canada and the U.S.
Bouncing Back
The Mount Polley tailings facility breach
In August 2014 Imperial Metals’s Mount Polley Mine experienced a rare environmental accident whereby the contents of an enormous “tailings pond” containing billions of gallons of water and ore sediment rushed into nearby waterways. Media and environmental activists extensively covered the breach, and Imperial shares sank approximately 40%.
Fortunately, there was no loss of life, injury, no apparent impact on fish and wildlife, or direct damage to private property other than two small bridges which have since been replaced. The facts we’ve gathered indicate that environmental impact over time may be minimal, as the tailings pond waste water was nearly within potable guidelines to begin with, and the sediment itself was, comprised mostly of finely milled rock stripped of its mineral content. Although there is risk of further discovery leading to the environmental impact being less than minimal, it’s important to note the tailings are alkaline (average ph 7-8.5) and are not acid generating.
Still, investors hastily abandoned the company for fear of astronomical fines, lawsuits, and remediation costs. Even in worst-case scenarios we believe Imperial Metals retains its long-term value with only a “delay of game” cause by the tailings dam breach. The Mount Polley Mine page (under Highlights section) contains further information on both the mine and recent breach.