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The Copper Denominator: Gianni Kovacevic

Gianni Kovacevic Gianni Kovacevic, the author of "My Electrician Drives a Porsche?" and executive chairman of CopperBank Resources Corp., takes a scientific view of historical, social and environmental trends in energy usage and identifies copper as the common denominator. As global energy usage increases, most of that energy flows through copper. In this interview with The Gold Report, Kovacevic discusses how his book explains his approach in understanding copper's investment opportunity in a scientific context, and the role of the company he founded to take advantage of this secular trend.

Management Q&A: View From the Top

The Gold Report: You are the author of "My Electrician Drives a Porsche?," as well as the executive chairman and one of the founders of newly formed CopperBank Resources Corp. (CBK:CSE). How did you come to write this book and what it is all about?

Gianni Kovacevic: I've been a scholar of all things related to energy and electricity since I was a teenager, when I went to the British Columbia Institute of Technology at the age of 18 in the field of electrical studies. The facts are that oil is energy, energy without fossil fuels means electricity, and electricity demands copper. The 220 pages of the book, written as a novel, reinforces in layman's terms the science and facts behind that statement.

"CopperBank Resources Corp.'s mandate is to acquire high-quality copper projects that have been adequately derisked."

There are four types of investors the book could influence: the gray-haired group that has lived through four or five commodity cycles the past 40 years, then there are guys like myself who have followed the up and down wave since the early 2000s. The third type is the newer folks who started to follow these themes after the sharp rebound out of the 2008 financial crisis, but, most important, the book creates a sense of engagement and curiosity for the fourth type of investor, the 99% of the population that has never followed the commodity sector. They are the real target audience, those who have never been captivated by the theme of more people consuming more things.

TGR: Your book starts with a familiar investment concept, that an industrializing CHINDIA needs more commodities, and adds detail and context to that story. Can you give us an overview of your analysis?

GK: The investment community is polarized on the future of China and the emerging economies. Investors are hearing so much noise that they are forgetting to listen to the music. One group believes China and the emerging markets are a short- to medium-term bubble and there is an economic hangover that needs to take place, or is already taking place. By listening to the music through all the noise, investors need to ask themselves, "Why did I take interest in the first place and what has really changed?"

Using the music analogy, ask: Will there be more or less people on the planet in the next 10–20 years? Will their economic footprint for necessities and food be smaller or larger per capita in the future? Will the pace of technology continue to accelerate or slow down? Is energy the keystone to every economy? We know that the world's population will continue to increase, that the demand for necessities will continue to grow, that the pace of technology will continue to accelerate and that energy is the keystone.

In addition to being an investor, I consider myself a scientist. Growing up in the 1980s while other kids were playing video games, my brother and I were reading encyclopedias and National Geographic magazines. The beauty of science is that it is based on facts and not opinions.

I also became a student of the great economic historians of our time. The influence of people like Niall Ferguson, Fareed Zakaria and Don Coxe is throughout the book. By incorporating the collective logic of these great thought leaders into my book, I attempt to offer a broader view on what's happening in the global economy, how we got to this point, and give clues as to what should happen in the future, what I call ignoring the noise and focusing on the music.

Lastly, I'm also an environmentalist. I look at the supply and demand picture for a specific commodity from the vantage point of wants versus needs. We in the developed economies have wants; they, in emerging economies—now I'm talking about a couple billion people here—have needs, and there is a big, big difference between wants and needs. Let me be clear, there is no government, no army and no spiritual force that can stop people from needing the objects of basic progress, water, health and reliable energy. We used to hear a lot about the NIMBY brand of development, that is not-in-my-back-yard; now the uber greens have taken it one step further to the BANANA brand, build-absolutely-nothing-anywhere-near-anyone. Is that even a remotely plausible line of thinking? Good luck trying to tell someone in India or Africa that they can't have better health or basic energy.

We look at the future economic footprint of the next 500 million to a billion people who are going to become consumers like us. People need to appreciate that in the past 20 years, 500 million people have been taken out of abject poverty. For the 500 million people before them it took 100 years. Estimates now show that the next 500 million people will begin to participate in basic progress in the next decade.

Think about the impact that will have on all of our resources. All of these people live close to the equator. When they begin to have more wealth, they live in more comfort. One of the first things they acquire is an air conditioning unit, or a refrigerator as they eat a protein-based diet. However, whether it's a need or a want, the backbone of their future consumption footprint is energy, and, more specifically, electricity.

TGR: Your book certainly makes the case that the driver of global growth in energy consumption is the emerging economies. When you step back and look at energy consumption, it appears that copper is the common denominator across all energy technologies.

GK: It is indeed and that is a scientific fact. Gold and silver are the best conductors of electricity but for the obvious reason of cost we don't use them. For large-scale use of electricity we use the infinitely recyclable material of copper. But getting back to your question about emerging markets, here is an astounding fact few people ever consider: Imagine you live in rural Africa for a moment with no running water and no household electricity. According to studies, 100% of people in poor communities are willing to pay for reliable access to running water and electricity. We take it for granted; however, for them receiving an electricity bill is an immense sense of citizenship and accomplishment, not to mention the convenience.

Hans Rosling, the Swedish statistician, gives a brilliant TED talk about the greatest invention in history, the washing machine. We press a button and get on with our day, while folks in poor countries toil for half of their day to get that simple task done, and it's not possible without access to water and electricity. In the coming decades every human being on the planet is going to have an electricity bill. We cannot prevent that. So if you stand for progress, humanity and green energy, you also stand for copper, because you should know it is irreplaceable in that equation. Remember another 500 million people will join our club of consumerism in the next decade and a couple of billion people will become holders of electricity bills by 2035.

TGR: What about one of the great new trends that is also a big user of copper, electric cars?

GK: People are buying electric vehicles (EVs) on a larger scale thanks to Mr. Elon Musk and his revolutionary company Tesla Motors. Soon, EVs will be a significant percentage of global automobile sales as they are no longer seen as a gimmick. In 2014, 84 million cars will be manufactured and sold. It's estimated that by 2020 some 6–7% of cars sold will be electric or hybrid and they take two to three times more copper per vehicle than internal combustion engines (ICEs).

When we look at the numbers of that degree of market penetration, it equates to hundreds of thousands of tons of copper. Going past that, the International Energy Agency estimates cost parity between EVs and ICEs in 2020, which lends to the greater implication of a potential 25% market share for EVs toward 2025. That would mean well over 1 million tons (1 Mt) of new annual demand for copper. All of these things will begin to take place in the next 5 to 10 years and much of it is owed to Mr. Musk. No copper, no EVs.

TGR: A million tons of incremental demand globally? Can you explain that in layman's terms?

GK: Understanding what a million tons of copper represent from a mining point of view is very important. About 15 or 16 of the largest copper mines produce just under 50% of global primary copper production. Some of the world's largest mines were discovered over 100 years ago; they are old ladies who can barely keep up. Much of the sustaining costs and new capital expenditures for these grandma mines simply keep metal yields static as they are facing falling grade, water and electricity issues.

The world's largest copper mine is Escondida in Chile, the world's largest copper producer. In 2014 Escondida will produce just over 1 Mt of copper—the same as the incremental demand we were just discussing. As an aside, it is far and away the largest copper mine; most large copper mines are "only" 200,000 to 400,000 tons per year producers.

Because of the nervous markets that we're in, there is a total lack of confidence from big mining companies, and, more important, from their investors, in building big new copper mines. These cost $5–10 billion, after all. These big producers, Freeport-MacMoRan Copper & Gold Inc. (FCX:NYSE), CODELCO, BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK), Glencore Xstrata (GLEN:LSE) and Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK), have all told the market that after 2018 there is no significant new supply coming on-line.

TGR: So, where will the new supply come from? Can you give us a Coles Notes version on copper supply and demand?

GK: From my calculations of every possible project that could be built in the next five years, and also factoring the depletions that will take place, we end up with approximately 2.7 Mt of potential new supply by 2020. Current global demand for copper is 21 Mt so if demand growth is 3%—it has been between 3% and 5% for decades—it would suggest that supply and demand is going to continue to be very tight. In 2015 and 2016 some delayed new supply should finally come on-line, so that could be the determining factor of some shorter-term copper price swings.

Now the reality check. Not all of those potential projects are going to be completed in the next five years, so we may not see 2.7 Mt of new supply. What about going past 2020? We need to remember the big producers have already told the world that there is nothing major coming on-line past 2018.

I like to use the analogy of musical chairs. When demand legitimately outstrips supply, only then can there be a real premium, such as in October 2003 when the industry went into a panic after the pit collapse at Grasberg. It was the tipping point that made end users go into panic mode and caused copper prices to spike from $1 to $4/pound ($4/lb). We may see a similar price spike going into 2017 as end users of copper start to have a harder and harder time getting supply, and only a significantly higher copper price can entice the miners, and their investors, to build new production to feed global markets.

Building a copper mine is not the same as turning on a light switch. The permitting, power, water and all the local issues and the feasibility and environmental studies can take up to 10 years, and then another 5 to 10 years to get the mine up and running. We're going to have a very interesting scenario on our hands on a global scale some time in the not too distant future. I suspect 2017–2018 is when this will be clear in the market.

TGR: The copper story has been on an upward trend for at least 10 years, even though the last couple of years are a little off. Is it too late to get behind this trend?

GK: I believe this is an opportunity. Because of the nervousness, or noise in the market, and a lack of confidence, the market is presenting companies in the commodity complex at very attractive prices. Let's not forget that not all commodities are supplied and utilized equally. I like green energy metals and that means copper, platinum and palladium, and uranium. Gold and silver are grossly hypothecated; who knows the real value? Iron ore and coal? Controlled by a few big gorillas. Oil and natural gas? I love energy, but I'm sticking to copper and the green energy metals, and I like to play them in the torque offered in the baby companies.

By babies, I mean the juniors with established resources that are what I call the "research and development arm of mining." For now, the share prices and financing capabilities of the juniors are decimated—you can find value out there, shares that are down 97–99% from their highs. These are at literally throwaway levels. We are now trading at all-time lows based on the commodity price—copper is $3/lb—to the collective share prices of these companies.

When another 500 million to a billion people become consumers like you and me, in the next decade they are going to need the building blocks of consumerism. While they may not earn $50,000 a year, they will be a part of a spending class of consumers that has a significant economic footprint. The green energy and emerging growth story can be played as part of a responsibly balanced portfolio.

TGR: What are the different ways to play this long-term trend?

GK: Not only did I write the book on why copper is important, I am also doing something about it financially, putting my money where my mouth is. I am a founder, large shareholder and the executive chairman of CopperBank Resources Corp., so I am deeply committed. CopperBank is a publicly listed vehicle that is a low overheard transactional depository of copper projects created by a group of like-minded industry professionals who want maximum exposure to highly leveraged copper pounds in the ground. We are modelling CopperBank after the very successful Lumina Capital Partnership that invented the model when it acquired 10 or so "out of the money" copper deposits in the early 2000s and divested them in the boom years that followed for some 80X returns for their seed investors.

Our mandate is to acquire high-quality copper projects that have been adequately de-risked. We don't need a large administrative staff to do this and all of our projects are owned on a 100% basis. We raised CA$1.6 million (CA$1.6M) at $0.10 per share to support the initial idea from a pool of copper-focused investors. Now that we are quoted on the Canadian Stock Exchange under symbol CBK, global investors can follow what we are doing and participate in this master theme alongside our team.

We want to buy projects in places where we would be happy to have our children work so we're not so interested in exotic locations. Instead, we prefer to stick to our knitting with projects in locations like Nevada and Alaska, where our current project base is. For the future, we are assessing deposits in British Columbia, Arizona, Peru and Chile, which are the well-known copper mining camps.

We are acquiring pounds in the ground at a fraction of the cost of delineation. We say why take the risk of drilling when we can buy already drilled projects at pennies on the dollar; it just takes capital. Currently we have one of the lowest valuations in our peer group due to the fact we are starting from such a low base with our initial purchases. We only held our IPO on Nov. 7, 2014, and our attractive purchase price is reflected in our current valuation. CopperBank represents a lot of torque per share and maximum leverage to future confidence in the copper space and the copper price.

TGR: What's the first project in CopperBank's portfolio?

GK: Our most advanced project is our Contact copper project located in northeast Nevada. Contact is at a prefeasibility study (PFS) level, which was completed in 2013, showing a net present value (NPV) at $3/lb copper of $76M and a 21% after-tax internal rate of return (IRR). At $3.50/lb copper, however, the NPV is $167M and an after-tax 35% IRR.

Even though the project is attractive at current copper prices, it really starts to hum with even a slight move in the copper price and that is why we acquired it. The company presentation located at copperbankcorp.com highlights the returns based on differing copper prices. Including contingency, the capital expenditure is under $190M, so from a global copper mining perspective it's a very financeable project for someone who wanted to develop it.

TGR: How does a project like this come to you?

GK: We like to call our deals partnerships. Junior mining companies with decimated share prices have two choices. Drop or sell projects and forego all of their upside, or the junior can enter a partnership that preserves some hard work it has invested in over the past years. For Contact we partnered with the previous owners, a company called International Enexco.

TGR: What's the next step for the Contact project?

GK: We are a transactional holding company. By definition, we don't dilute our share structure by doing additional exploration or engineering on our projects, which is why our Selling, General & Administrative expense is so low. We don't even have a conventional office as we simply do not need that expense. We hold our projects in good standing, carefully take care of the nest and eggs, so to speak.

A project like Contact generally takes 15 years from the first reconnaissance work until the first pound of copper production. This project is already 10 years underway with approximately $16M spent to date. We offer a future developer a project that has a decade of de-risking, engineering and verification in the rearview mirror. The right partner can then take it the last two or three years through permitting and into full commercial production. This is the model we plan to use on all our projects.

TGR: What about your second project? Is it similar in size and scope?

GK: Our second project is located in Alaska in the Aleutian Islands. It's called the Pyramid copper project. CopperBank purchased the project from another junior called Full Metal Minerals Corp. (FMM:TSX.V). Pyramid is a large-scale porphyry deposit that is open in all directions and was drilled in 2011 and 2012 by Antofagasta Minerals S.A. (ANTO:LSE), which is also now one of our shareholders. Antofagasta had spent around $8M proving up the initial inferred resource of 190 Mt of 0.32% copper (0.46% Cu eq) or 1.3 billion pounds of copper.

We have the project in our inventory until we find the right partner that will perform further exploration drilling. This project is not engineered, and is at an earlier stage than Contact. The first two rounds of successful drilling are ready for follow-up drilling. After that, the next step would be a Preliminary Economic Assessment.

TGR: Any large copper deposit in Alaska is going to immediately draw comparisons to the permit-challenged Pebble deposit. How are the challenges or the permitting situation that you're facing at Pyramid different than Pebble's?

GK: The difference between Pebble and our project is our location on Native American-owned lands. It's the Aleut Corporation, which has a good working relationship with our team and is a partner and shareholder of the company. Pyramid doesn't have the same environmental sensitivities as Pebble. Access to the project is not bad as it is well situated for a remote location being near tide line. Despite the experience at Pebble, Alaska is a pro-mining state.

TGR: What are you looking for in the global copper market in the future?

GK: In the shorter term, copper could range $0.50 up or down of $3/lb and investors should almost consider that kind of price move a non-event. But the current copper prices are not indicative of the future of the copper market. If you believe that consumption will increase, green energy will continue to be adopted and environmental concerns will continue to be important in the future, then, as a scientist, economist or environmentalist, it is clear that copper offers a very compelling story to follow as an active participant. I encourage everyone to grab a copy of my book, "My Electrician Drives a Porsche?," or look for me at an upcoming conference and sit in one of my keynote presentations. Happy investing.

TGR: Thanks for speaking with us.

Readers can get more information about "My Electrician Drives a Porsche?" on Streetwise Reports' Bookshelf.

Gianni Kovacevic Gianni Kovacevic is a Canadian-Croatian investor in natural resources and an established author. He has been a speaker at industry-related conferences around the world on the themes of natural resources, demographics and green energy. Having spent the past fifteen years investing in natural resources, he documents his interests into a unique business model that caters to both businesses and investors. Over the past decade he has provided valuable assistance in negotiated financings well in excess of $250 million from a large pool of global investors. Kovacevic's new book titled, "My Electrician Drives a Porsche?" was released in the summer of 2014 and complements over a decade of blogging about his interests and adventures. Sharing his time between Vancouver and various European cities, he is fluent in English, German, Italian and Croatian.

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DISCLOSURE:
1) Alec Gimurtu conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) CopperBank Resources Corp. paid Streetwise Reports to conduct, produce and distribute the interview.
3) Gianni Kovacevic had final approval of the content and is wholly responsible for the validity of the statements. Opinions expressed are the opinions of Gianni Kovacevic and not of Streetwise Reports or its officers.
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