Los Andes Copper Ltd. (TSXV: LA) – Solid PEA Shows ... · In June 2019, Los Andes Copper Ltd. (“Los Andes” / “company”) announced results of an update Preliminary Economic

Siddharth Rajeev, B.Tech, MBA, CFA

July 24, 2019

2019 Fundamental Research Corp. “15+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Los Andes Copper Ltd. (TSXV: LA) – Solid PEA Shows Attractive Economics Even at US$2.5 / lb

Copper

Sector/Industry: Junior Resource www.losandescopper.com

Market Data (as of July 24, 2019)

Current Price C$0.46

Fair Value C$1.31

Rating* BUY

Risk* 5 (Highly Spec)

52 Week Range C$0.15 – C$0.49

Shares O/S 271,658,136

Market Cap C$124.96 M

Current Yield N/A

P/E (forward) N/A

P/B 1.5x

YoY Return 53.3%

YoY TSXV -16.1% *see back of report for rating and risk definitions.

Highlights

In June 2019, Los Andes Copper Ltd. (“Los Andes” / “company”) announced results of an update Preliminary Economic Assessment (“PEA”) on its 100% owned Vizcachitas copper-molybdenum porphyry project located in central Chile.

Although the PEA was delayed by over a year, we were pleased with the results as the 2019 study showed significant improvements in all of the key metrics over the previous PEA completed in 2014. LA’s share

price is up 60% since release of the new PEA. The project’s total copper equivalent measured and indicated resource

increased 30% to 12.8 Blbs, and the total copper equivalent inferred resource increased 139% to 6.7 Blbs.

The base-case scenario showed an After Tax – Net Present Value

(“AT-NPV”) at 8% of US$1.80 billion, with an After Tax – Internal Rate of Return (“AT-IRR”) of 21%, versus the 2014 PEA’s US$274 million and 9.5%, respectively.

The initial CAPEX is estimated at US$1.88 billion versus the 2014 PEA’s US$2.9 billion for the base-case scenario.

The updated cash cost estimate is US$1.58 / lb (LOM - life of mine), and a much lower $1.36 / lb in the first 8 years versus $1.69/lb (LOM) in the 2014 PEA.

In the first half of 2019, the company restructured and strengthened its management team. The company appointed a new Executive Chairman, Project Director, and a Director of Corporate Affairs and Sustainability.

Management’s next goal is to complete a Pre-Feasibility Study

(“PFS”) by Q4-2020. Management, board members and key institutions hold

approximately 173 million shares, or 63.5% of the total outstanding

shares.

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June 2019 PEA

In June 2019, the company announced results of an updated PEA on its Vizcachitas copper-molybdenum project, located approximately 150 km north of Santiago, and 46 km northeast of the town of Putaendo, in the province of San Felipe, Central Chile. As shown in the map below, Vizcachitas is located in a highly productive mineral belt which hosts multiple producing mines, including the El Teniente mine (located 180 km to the south), the Los

Pelambres mine (located 75 km to the north), the Los Bronces mine and the Rio Blanco

mine (both located approximately 80 km to the south).

Project Location Map

Source: Company

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M&I Contained

CuEquiv.

Increased by

30%, and

Inferred

Increased by

139%

PEA Results

The updated PEA showed a measured and indicated resource of 1,284 Mt at 0.45% copper equivalent, and an inferred resource of 789 Mt at 0.39% copper equivalent, using a 0.25% copper cut-off grade. The previous resource (calculated in 2014), at the same cut-off of 0.25%, was 1,191 Mt at 0.41% copper equivalent indicated, and 404 Mt at 0.38% copper equivalent inferred. As a result of the increase in tonnage and grades, the total copper

equivalent measured and indicated resource increased 30% to 12.8 Blbs, and the total

copper equivalent inferred resource increased 139% to 6.7 Blbs. Also, the 2019 estimate includes 254 Mt of measured resource, while the 2014 had nil measured resource.

Source: Company

The 2014 estimate was based on a total of 146 drill holes / 40,383 m, while the 2019 estimate was based on a total of 165 drill holes / 52,256 m, which included additional drilling done in the project’s central core.

The 2019 PEA evaluated three production scenarios – 55 ktpd (thousand tonnes per day), 110 ktpd (base-case), and 220 ktpd. The 2014 PEA had evaluated scenarios ranging from 16 ktpd to the base-case of 176 ktpd. The following table summarizes and compares the results.

Source: Company (base-case scenarios highlighted in light blue)

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As shown above, the 2019 study showed significant improvements in all of the key

metrics.

Both PEAs were based on operations which primarily included materials from an open pit

operation to be crushed and grinded, followed by flotation, regrinding, and separation of copper and molybdenum through selective flotation. The 2019 study used overall recoveries of 91% copper and 75% molybdenum versus 2014’s 90% and 75%, respectively. The 2019 PEA also included silver credits. Copper and molybdenum concentrates will be shipped

by road, and then by rail to the port of Ventanas, located approximately 110 km from

the project. This port handles copper concentrate from other mining operations in the region. Approximately 60 km from the project runs a 120-km railway line, from San Felipe to Ventanas, that is currently primarily transporting Codelco’s concentrates shipments. This rail line passes two smelters – one owned by Codelco and the other owned by Anglo American (LSE: AAL).

Infrastructure

Source: Company

The base-case 110 ktpd scenario showed an AT-NPV at 8% of US$1.80 billion, with an

AT-IRR of 21%, versus the 2014 PEA’s US$274 million and 9.5%, respectively.

The updated initial CAPEX is estimated at US$1.88 billion for the base-case (range: $1.30 billion to US$2.82 billion), including a 20% contingency. The key items included US$439 million for the plant, US$277 million for the mine, US$173 million for tailings, and US$124 million for power. The 2014 PEA showed a CAPEX of US$2 billion for the 88 ktpd scenario. According to management, CAPEX dropped because of an overall decline in most input costs, improved environment for contracting, as well as lower contingencies due to more

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Upcoming

Catalysts

accurate costing of mining equipment.

The updated cash cost estimate is US$1.58 / lb (LOM - life of mine), and a much lower $1.36 / lb in the first 8 years (due to higher grades in the initial years). This compares to $1.69/lb (LOM) in the 2014 PEA. Costs dropped due to an increase in grades, lower grinding costs, as well as a decline in power prices (from US$120/MWh to US$45/MWh, due to the significant increase in solar and hydro power generation in the country), offset by an increase in the strip ratio.

The AT-NPV’s sensitivity to copper and molybdenum prices is shown below:

Source: Company

As shown above, the project shows a high AT-NPV of $0.81 billion even at a copper

price of US$2.50 / lb.

Management’s next goal is to complete a PFS by Q4-2020. Their near-term plans are shown in the chart below:

Development Timeline

Source: Company

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Management

Changes

In the first half of 2019, the company restructured and strengthened its management

team. The company appointed a new Executive Chairman, Project Director, and a Director of Corporate Affairs and Sustainability. Brief biographies of the new members, as provided by the company, follow:

Fernando Porcile – Executive Chairman

Mr. Porcile is a Mining Engineer for the University of Chile and holds a Masters of Science in Mineral Engineering from Columbia University, New York and has over 50 years of

experience in the mining business. Mr. Porcile has been responsible for the development, implementation, commissioning and operation of several new mining projects as well as managing various world-class mining operations. During the period 2010-2014, he was Director of the Codelco Board and lately has been consultant for mining companies with developments of copper, iron and gold projects. Mr. Porcile was President of Compañía Doña Inés de Collahuasi in the period 2007-2009; he was also President of the Falconbridge

Copper Business Unit for five years. During his presidency Falconbridge was developing projects that included El Morro, Pachón and the expansion of Collahuasi. Prior to these responsibilities he was Vice President Project Development for BHP Billiton’s Base

Metals Division and before that President of Compañía Minera Cerro Colorado of Rio Algom. Mr. Porcile joined Rio Algom as Vice-President of Operations of Cerro Colorado in 1991 and later was promoted to Rio Algom Vice President of Engineering and Development, participating in the development of the Antamina and Spence projects. From 1989 to 1991, he was Operations Manager of Soquimich, responsible for the operations to produce nitrate and iodine in Chile’s Region of Antofagasta. Manuel Matta - Director of Vizcachitas Project

Mr. Matta is a Mining Engineer, graduating from the University of Chile. Mr. Matta has 30

years of varied mining industry experience, in operations, planning and projects. Mr. Matta has been working in management consultancy, focusing on M&A, Asset optimisation, Due Diligence for major projects worldwide and the development of concentrate treatment technology. Mr. Matta has worked for Falconbridge Limited and Xstrata as Vice President of Projects and Development where he led the expansion of the Collahuasi project and General Manager of the Altonorte Smelter for Antofagasta, Chile where he led the productive operation for the custom copper smelter, one of the largest in the world. In his early career, Mr. Matta worked at a number of mining projects in an operation capacity, conducting Pre-Feasibility, Feasibility Studies and Environmental Impact Assessments, developed the final exploration phase of the budget for Escondida and has held the positions of Operations Manager, Mine Supervisor and Mine Production and Development Chief.

Jose Tomas Letelier - Director of Corporate Affairs and Sustainability

Mr. Letelier graduated from Law School, University of Chile and has a Maters in International Public Policy from the School of Advanced International Studies, Johns Hopkins University, Washington DC. Mr. Letelier has over 15 years experience in the

mining industry, primarily working in corporate affairs, sustainability and external affairs focused on South America. Mr. Letelier was Vice President of External Affairs for South America for Kinross Gold, Vice President of Government Affairs for South America for Barrick and Vice President of Corporate Affairs and Sustainability for the Americas for

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Financials

Placer Dome. In these roles Mr. Letelier had responsibilities in countries including Chile, Colombia, Brazil, Ecuador and Peru. In his earlier career, Mr. Letelier worked at the Chilean Ministry of Foreign Affairs where he served postings in a number of countries around the world. His last diplomatic posting was as Ambassador of Chile to Canada (1997-2000). Additionally, Mr. Letlier worked in the Santiago Head Office of the Chilean Ministry of Foreign Affairs where he worked for various ministers. He also represented Chile in a number of matters including, APEC, the America’s Business Forum, negotiations of the area of free trade of the Americas and Binational Commissions. Management, board members and institutions hold approximately 172.6 million shares, or 63.5% of the total outstanding shares. Directors, Eduardo Covarrubias, Francisco Covarrubias and Paul Miquel, are also directors and shareholders of Turnbrook Mining Limited, the company’s largest shareholder, with 52.9% of the outstanding shares.

Share Ownership

Source: Management Information Circular

At the end of Q2-FY2019 (ended March 31, 2019), the company had cash and working capital of $3.19 million and $2.74 million, respectively. We estimate the company had a burn rate (G&A) of $49k per month in the first six months of FY2019. The following table summarizes the company’s liquidity position:

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Valuation &

Rating

Liquidity Position

Source: FRC / Company

We estimate the company currently has 1.43 million options (weighted average exercise price of $0.50 per share) and 13.40 million warrants (weighted average exercise price of $0.50 per share) outstanding. None of the options or warrants are currently in the money. The following table compares Vizcachitas to a few of the larger copper projects in the Americas. As shown, Vizcachitas has a higher than average grade, in-situ copper resource, and a lower CAPEX estimate.

Comparable Projects

Source: FRC

Los Andes’ shares are currently trading at an Enterprise Value (“EV”) to resource ratio of just $0.008 per lb versus the average of $0.025 per lb of companies with copper focused projects.

Page 9



Net Resource – 100% of measured and indicated and 50% of inferred

Source: FRC

Our DCF valuation on the Vizcachitas project is $1.13 billion, based on a 8% discount rate. In our previous report, we had valued the project at $571 million, which was the average of a 55 ktpd and a 176 kptd scenario. For our updated valuation, we have used 100% of the measured and indicated resource, and 50% of the inferred resource (implying a mine life of 42 years versus the PEA’s 45 years). Our long-term copper and molybdenum price forecasts are US$2.75/lb and US$10/lb, respectively, versus the PEA’s US$3/lb and US$10/lb, respectively.

Source: FRC

In order to be more conservative, we have decided to use a 11.6% discount rate this time, which is more in line with the expected return on equity we apply to most pre-production projects in stable jurisdictions. Our DCF model then gave a fair value estimate of $1.11 per

Page 10



share on LA’s shares.

The table below shows the sensitivity of our valuation to key inputs.

Source: FRC

The following table shows a summary of our overall valuation:

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Risks

Source: FRC

We reiterate our BUY rating and adjust our fair value estimate (having applied much

more conservative inputs) from $1.72 to $1.31 per share.

We believe the company is exposed to the following key risks (not exhaustive): The value of the company is highly dependent on copper prices. Share dilution through future financings. The project’s NPV and IRR are highly sensitive to the average copper grade in the initial

years. As the project is large, its initial CAPEX is high, although it is relatively low when

compared to the other large copper projects in the Americas. Exchange rate risks.

As with most junior resource companies, we continue to rate Los Andes’ shares a risk of

5 (Highly Speculative).

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Fundamental Research Corp. Equity Rating Scale:

Buy – Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold – Annual expected rate of return is between 5% and 12% Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events. Fundamental Research Corp. Risk Rating Scale:

1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt. 2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt. 3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage ratios are sufficient. 4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround situation. These companies should be considered speculative. 5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. These stocks are considered highly speculative.

Disclaimers and Disclosure

The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” does not own any shares of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the subject company. Fees were paid by LA to FRC. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct. Additionally, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability for negative reports are protected contractually. To further ensure independence, LA has agreed to a minimum coverage term including an initial report and three updates. Coverage cannot be unilaterally terminated. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time. The distribution of FRC’s ratings are as follows: BUY (68%), HOLD (8%), SELL / SUSPEND (24%). To subscribe for real-time access to research, visit http://www.researchfrc.com/subscribe.php for subscription options. This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these forward looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating may have no further or less frequent updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter. Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOUR UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is not intended as being a complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently prepared unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is available upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit, including citing Fundamental Research Corp and/or the analyst, when quoting information from this report. The information contained in this report is intended to be viewed only in jurisdictions where it may be legally viewed and is not intended for use by any person or entity in any jurisdiction where such use would be contrary to local regulations or which would require any registration requirement within such jurisdiction.

Documents

Los Andes Copper Ltd. (TSXV: LA) – Solid PEA Shows ... · In June 2019, Los Andes Copper Ltd. (“Los Andes” / “company”) announced results of an update Preliminary Economic