Los Andes Copper Ltd. (TSXV: LA) - Initiating Coverage ... · by Los Andes, with a Net Smelter Return (NSR) ranging between 0.51% and 2%. Eduardo Covarrubias, who runs Turnbrook,

Siddharth Rajeev, B.Tech, MBA, CFA

Anthony de Ruijter, BA

December 7, 2017

2017 Fundamental Research Corp. “10+ 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) - Initiating Coverage – Largest Undeveloped Copper Project in

South America Held by a Junior

Sector/Industry: Junior Resource www.losandescopper.com

Market Data (as of December 7, 2017)

Current Price C$0.33

Fair Value C$1.72

Rating* BUY

Risk* 5 (Highly Spec)

52 Week Range C$0.15 – C$0.47

Shares O/S 244,858,136

Market Cap C$80.80 M

Current Yield N/A

P/E (forward) N/A

P/B 0.7x

YoY Return 73.7%

YoY TSX 5.9% *see back of report for rating and risk definitions.

Investment Highlights

➢ Los Andes Copper Ltd. (“Los Andes” / “company”) is advancing the

100% owned Vizcachitas copper-molybdenum porphyry project located

in central Chile. The project is located in a highly productive mineral

belt hosting multiple world-class copper mines.

➢ A 2014 resource estimate showed an indicated resource of 1,038 Mt at

0.434% copper equivalent, and an inferred resource of 318 Mt at 0.405%

copper equivalent. A Preliminary Economic Assessment (“PEA”) was

completed in the same year.

➢ In 2015, re-logging of the core of historic drilling showed that the

previous geological model failed to account for the higher-grade

mineralization potential of the project. Since 2015, the company has

completed two drill programs totaling 19 holes / 11,872 m. The

programs not only extended higher grade mineralization by 250 m to the

north, but also confirmed near surface higher grades over an area of 400

m by 400 m, where all the holes drilled had grades higher than 0.5%

copper.

➢ An updated resource estimate is expected in December 2017, followed

by an updated PEA in Q1-2018. We expect a significant increase in both

tonnage and grade, which will positive impact the updated PEA.

➢ Management, board members and institutions hold 69% of the total

outstanding shares.

➢ We are initiating coverage on Los Andes with a BUY rating and a fair

value estimate of $1.72 per share.

Risks

➢ 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, the initial CAPEX is high, although it is relatively

low when compared to the other large copper projects in the Americas.

➢ Project development is contingent on availability of financings.

Page 2

2017 Fundamental Research Corp. “10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Background

Location and

Infrastructure

The company was formed in 1983 as Golden Thunder Resources Ltd. Its name was

subsequently changed to Consolidated Golden Thunder Resources Ltd. in 2001, to GHG

Resources Limited in 2004, and to Los Andes Copper Ltd. in 2007.

The last name change in 2007 was a result of the company’s acquisition of Global Copper

Corporation’s (a company led by Ross Beaty, and a successor company of Lumina Copper

Corp.) interest in the Vizcachitas property for US$10.40 million cash, 6.28 million shares,

and 3.90 million warrants. Since then, Los Andes’ sole focus has been on advancing the

Vizcachitas project. In 2010, the company acquired the remaining 49% interest in the central

core of Vizcachitas from Turnbrook Corporation for 35 million shares and 13 million

warrants. Turnbrook Mining Limited (a related entity of Turnbrook Corporation) currently

holds 59% of the outstanding shares of Los Andes. The project is currently 100% owned

by Los Andes, with a Net Smelter Return (NSR) ranging between 0.51% and 2%.

Eduardo Covarrubias, who runs Turnbrook, is a director of Los Andes, and a former

investment banker with a strong background in capital markets. Los Andes’ strong technical

team is led by CEO and President, Antony Amberg (a geologist with over 30 years of

international experience), and Consultant, Gonzalo Saldias (formerly with Codelco and

Antofagasta Minerals, and a specialist in copper porphyry projects in Chile).

Chile is the largest copper producer in the world. In 2016, the country produced 12.13 Blbs

of copper, or 28% of global production.

Source: USGS

According to the Fraser Institute’s 2016 Survey of Mining Companies, Chile was ranked the

second-best jurisdiction in the Investment Attractiveness Index in all of South / Central /

Latin America after Peru.

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Investment Attractiveness Index

Source: The Fraser Institute

The Vizcachitas copper-molybdenum project is located approximately 150 km north of

Santiago, and 46 km northeast of the town of Putaendo, in the province of San Felipe, Central

Chile. The project is well connected with Santiago, with approximately 120 km of paved

road, and 30 km of gravel and dirt road. The total driving distance is approximately 3

hours. The project consists of 38 mining claims covering 7,000 ha, and 81 exploration claims

covering 22,500 ha.

Page 4


Project Location Map

Source: Company

As shown in the map above, Vizcachitas is located in a highly productive mineral belt which

hosts multiple producing mines, including four of the largest copper mines in the world –

listed below.

➢ The El Teniente mine, located 180 km to the south of Vizcachitas, is owned by the

world’s largest copper producer, Codelco. The mine has been in operation since 1904,

producing copper and molybdenum, and is estimated to have a remaining mine life of over

50 years. El Teniente is estimated to host a resource of 189 Blbs (86 Mt) of copper at an

average grade of 0.56%.

➢ Los Pelambres, operated by Antofagasta Plc (LSE: ANTO), is located 75 km to the north

of Vizcachitas. The mine started producing in 2000, and is estimated to have a remaining

life of 21 years. In 2016, the mine produced 355,400 tonnes of copper, 57.8 Koz gold, and

7,100 tonnes of molybdenum, at a net cash cost US$1.06/lb. The average copper grade is

estimated at 0.65%.

➢ Los Bronces, operated by Anglo American (LON: AAL), is located 80 km to the south of

Page 5


Vizcachitas. The mine commenced production in 2011, and is estimated to have a mine

life of over 30 years. The average grade is estimated at 0.4% copper.

➢ The Rio Blanco mine, located 80 km to the south of Vizcachitas, is owned by Codelco.

This mine has been in operation since 1970, producing copper and molybdenum. In 2016,

Rio Blanco produced 193,341 tonnes of copper. Rio Blanco holds Codelco’s largest

resource with 299 Blbs of copper at an average grade of 0.61%.

Vizcachitas is in the same geological belt, and has very similar mineralization (copper-

molybdenum porphyry) as the above mentioned four large mines. These deposits contain

large masses of hydrothermally altered rock, sulphide bearing veinlets and disseminations,

quartz veins, and stockworks over a large area covering several square kilometres.

Vizcachitas’s porphyry copper-molybdenum system has an alteration zone covering 3 km in a

north-south direction and 1.5 km in an east-west direction.

Infrastructure is excellent in the region with access to power and water. There are large

electrical substations near the project, including the Nogales substation (105 km away) and

the Las Vegas substation (74 km away). An additional source for power is to build a run-of-

river hydro-electric plant that can be constructed in the Rocin River, which flows through the

project site. The company has non-consumptive water rights on a portion of the Rocin River.

The port of Ventanas is 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.

View of the Project Area

Source: Company

Page 6


History

The property was originally staked in the 1970s.

1980s

Geologic mapping, petrographic work and geochemistry programs confirmed the presence of

porphyry copper-molybdenum on the project.

1990s

Placer Dome completed six diamond drill holes totaling 1,953 m.

From 1995 to 1998, General Minerals Corporation conducted detailed mapping, sampling,

geophysics, and a drill program totaling 61 diamond holes / 15,815 m. A historic measured

and indicated resource of 645 Mt at an average copper grade of 0.45%, and an average

molybdenum grade of 0.014%, at a 0.3% copper cut-off, was estimated. A feasibility study

was also completed, which showed an after-tax Net Present Value (“NPV”) at 8% of US$201

million, and the Internal Rate of Return was 20%, based on a copper price of US$1/lb. The

project was subsequently put on care and-maintenance.

2000s

The project remained relatively idle from 1998 until Los Andes’ acquisition of Global Copper

Corporation’s interest in 2007. Los Andes completed 63 diamond holes totaling 17,487 m

in 2007 – 2008. An NI 43-101 resource estimate was completed in 2008 (based on 131 holes),

which showed an indicated resource of 515 Mt with an average grade of 0.39% copper, and

0.011 % molybdenum, and inferred resource of 572 Mt with an average grade of 0.34%

copper and 0.012% molybdenum, using a cut-off grade of 0.3% copper equivalent. Los

Andes subsequently completed another 16 holes / 5,128 m in 2008.

2010s

After attaining a 100% interest in the project in 2010, the company compiled and documented

all the historical data in 2011 – 2012, in preparation for a PEA. The PEA, and an updated

resource estimate were completed in 2013 by Coffey Mining and Alquimia Conceptos S.A.

However, the PEA was subsequently updated in 2014 to reflect the (previously mentioned)

acquisition of water rights on the Rocin River. The PEA assumed that power will be supplied

from a hydro-electric plant, and the national grid (either from the Nogales or Las Vegas

substations).

2014 Resource Estimate and PEA

The 2014 resource estimate showed a measured and indicated resource of 1,038 Mt at 0.434%

copper equivalent, and an inferred resource of 318 Mt at 0.405% copper equivalent. The

estimate was based on a total of 146 drill holes / 40,383 m.

Page 7


2014 Resource Estimate

Source: 2014 PEA

The PEA evaluated a wide range of production scenarios, ranging from 16 ktpd (thousand

tonnes per day) to the base-case of 176 ktpd. Operations primarily included run-of-mine

(ROM) material from an open pit operation to be crushed and grinded, followed by flotation,

regrinding, and separation of copper and molybdenum through selective flotation. Copper and

molybdenum concentrates will be shipped by road, and then by rail to the port of Ventanas.

The following table summarizes the key parameters used in the various production scenarios:

Key Inputs

Source: 2014 PEA

The 176 ktpd scenario, which had the highest initial capital budget of US$2.9 billion, gave the

Page 8


New Geological

Model

highest NPV at 8% (US$746 million before tax / US$274 million after-tax) and IRR (11.4%

before-tax and 9.5% after tax). The after-tax NPV at 8% and IRR increased, when

leverage was assumed, to US$454 million and 11.5%, respectively.

The study used a copper price of US$2.75 per lb, and a molybdenum price of US$13.6 per lb.

The recovery rates used were 90% for copper and 75% for molybdenum. Revenues from

copper were estimated to account for approximately 87% of the total, with molybdenum

accounting for the remaining 13%. The following table summarizes the results:

NPV and IRR Estimates

Source: 2014 PEA

In 2015, the company re-logged all of the of the project’s core from historic drilling (40,000

m) – led by Gonzalo Saldias, who has a long track record, especially with copper porphyry

projects in Chile. This exercise was a major breakthrough for Los Andes as it indicated that

the previously estimated geological model overlooked the significance of early diorite

porphyry and hydrothermal breccias as carriers of higher grade mineralization on the

property. In other words, the previous model failed to account for the higher-grade

mineralization potential of the project as it had grouped all the dioritic rocks and the

Page 9


2015 – 2017

Drilling

breccias. The re-logging showed that the higher grade geological units extend over a distance

of 1,400 m north-south and 700 m east-west, and remain open in all directions. The study also

showed that there is a strong potential of higher grades (0.5%+ copper) at depth, which were

missed by the relatively shallow historic drill holes.

The re-logging exercise was immediately followed by a 3,600 metre / 8 hole drill program. As

expected, the program was successful as it demonstrated the presence of higher-grade

mineralization than previously determined. The following table shows a summary of the

results:

Key Results of the 2015 / 2016 Drill Program

Source: Company

The most noteworthy hole was V2015-08, which showed 502 m of 0.63% copper (0.70%

copper equivalent) at a depth of 130 m. In addition, V2015-05 showed 120 m of 0.54%

copper (0.60% copper equivalent).

These strong results allowed the company to raise $8.04 million in late 2016 (including

an institutional investment from Resource Capital Funds) to pursue a follow-up drill

program. In the first half of 2017, the company completed another 11 holes / 8,300 m. This

program also hit significant intersections in the early diorite porphyry and hydrothermal

breccias, and confirmed the new geological model.

Page 10


Key Results of the 2017 Drill Program

Source: Company

The following images show the locations of the key holes and their results:

Key Holes

Source: Company

Page 11


Source: Company

The 2017 program not only extended higher grade mineralization by 250 m to the north, but

also confirmed near surface higher grades over an area of 400 m by 400 m, where all the

holes drilled had grades higher than 0.5% copper. This is vital for the project’s economics

as it allows for the extraction of higher grade ore in the first few years of the operation.

Including the 2017 holes, a total of 165 diamond drill holes (52,256 m) have been drilled on

the property since 1993.

Historical Drilling Summary

Page 12


Catalysts

Drill Hole Locations

Source: Company

Tetra Tech is currently preparing a PEA and an updated resource estimate on the

project to include results from the drill programs since 2015. The estimate is expected to

be announced in December. Based on the drill results since 2015, we expect a significant

increase in both tonnage and grade. The updated resource estimate may also include silver, as

the historical metallurgical test work has indicated 70 gpt in the concentrates. The company is

re-assaying the historical samples to generate a silver resource model. In addition, the project

remains largely unexplored, as only 9 sq. km. of the total 250 sq. km concession area has been

explored to date.

The company is also conducting metallurgical testing to study the impact of recovery rates at

various grind rates.

Page 13


Management

An updated PEA is expected to be completed in Q1-2018. The updated PEA, which will be

based on the new resource estimate, will primarily evaluate a ‘starter-case’ scenario. This

scenario will test the viability of advancing the project to production quickly and at a lower

CAPEX. We expect this scenario to produce robust results due to the recent discovery of

higher grade near-surface material on the project. We also expect the updated PEA to

benefit from the drop in electricity prices in Chile since 2014, due to the significant

increase in solar and hydro power generation in the country. The PEA had used a price of

US$0.12/kWh. However, the current price in the country is US$0.08/kWh, reflecting a 33.3%

decrease. The long-term power purchase agreements issued in 2017 averaged US$0.033/kWh.

We estimate this will reflect a 20% decrease in the total operating cost estimate used in the

2014 PEA. Our discounted cash flow (“DCF”) models are presented later in this report.

Management, board members and institutions hold approximately 169 million shares, or 69%

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 59% of the outstanding shares. We consider the strong

management/board/institutional holding a major vote of confidence on Los Andes’

story.

Share Ownership

Source: Management Information Circular

Page 14


Brief biographies of the management team and board members, as provided by the company,

follow:

Antony Amberg, President and CEO

Mr. Amberg is a geologist who is a graduate of the Royal School of Mines, London, has an

MSc. from University College London and is also a Chartered Geologist with the Geological

Society of London. He has close to 30 years of diverse experience having worked in Asia,

Africa and South America for both multinational and junior companies. He began his career

in 1986 working with Anglo American in South Africa before moving on to an exploration

position with Severin-Southern Sphere. In 1990 Mr. Amberg moved to Chile where he first

worked with Bema Gold on the Refugio project before taking up a position with Rio Tinto. At

Rio Tinto he was involved in exploration programs in the Atacama and Magallanes Regions

and managed the Barreal Seco (now part of Las Cenizas) exploration program. In 1996 he

joined Kazakhstan Minerals Corporation in Kazakhstan setting up and managing offices for

the drilling and resource estimation for JORC compliant feasibility studies on three large

projects that are now operating mines. He became General Director for two joint ventures in

KazMinCo where he managed all technical and local issues. In 2001 he returned to Chile

where he started a geological consulting firm specialising in project evaluation and NI 43-101

technical reports. Mr. Amberg’s clients included Rio Tinto, Barrick, Codelco, Anglo

American, Pan Pacific Copper and various junior mining companies. He joined Los Andes

Copper in 2012.

Gonzalo Saldias, Geologist Consultant

Mr. Saldias is a geologist who is a graduate of Universidad Católica del Norte, Chile. He has

over 35 years of experience working within Chile and internationally; mainly on copper

porphyry, epithermal gold silver and iron-oxide copper gold systems. For the last seven years,

he worked for Antofagasta Minerals evaluating copper porphyry projects within Chile,

assessing their geological and economical potential. Prior to that he had worked for ten years

with Placer Dome Latin America, generating and evaluating exploration projects within the

region. Prior to Placer Dome, he worked for Codelco as head of exploration geology for the

El Salvador Division, developing the prospective areas near to the mine. He also worked for

Northern Resources, Homestake, Utah, Anaconda and as an independent consultant.

Ricardo Palma - Vice President of Development

Mr Palma is a Mining Engineer with over 40 years experience. Prior to Los Andes, he was

General Manager (Division CEO) of Codelco’s Andina Division, which is located in the same

region as Vizcachitas. Before joining Andina, Mr Palma was the Country Manager in Chile

for Yamana Gold, and worked on Barrick Gold’s Pascua-Lama and Veladero projects. He

also worked on Cia Minera Dona Ines de Collahuasi, the joint venture controlled by Glencore

and Anglo American, where he was tasked with completing construction, commissioning and

running of the original project.

Aurora Davidson, Chief Financial Officer

Ms. Davidson holds a Certified General Accountant designation from the Certified General

Accountants Association of British Columbia and a BSc in Business Administration from

Alliant International University in San Diego, California. Ms. Davidson has over 20 years of

Page 15


Board of

Directors

experience in financial and general business management having assisted private and public

companies in the roles of Chief Financial Officer, Vice-president, Finance and Corporate

Controller within the mineral exploration and high technology sectors.

Klaus Zeitler, Chairman

Dr. Zeitler received his professional education at Karlsruhe University from 1959 to 1966 and

obtained a PHD in economic planning. Dr. Zeitler is a member of the Canadian Institute of

Mining and Metallurgy and the Prospectors and Developers Association. Dr. Zeitler financed,

built and managed base metal and gold mines worldwide (Europe, Africa, North America,

South America, Pacific) with a total investment value of $4 billion. Dr. Zeitler was a

managing director of Metallgeschaft AG, a German metals conglomerate and in 1986 founded

and was a director and CEO of Metall Mining, later Inmet, a Toronto Stock Exchange listed

company with assets of over $1 billion and base metal and gold mines in different parts of the

world. After having been a director of Teck and Cominco for many years, Dr. Zeitler joined

Teck in 1997 as Senior Vice President and had responsibilities for the exploration and

development of mines in Peru, Mexico and the USA. Since his retirement in 2002 from Teck

Cominco and in addition to being President and a director of Amerigo, Dr. Zeitler has been

actively involved as a director in various junior base and precious metal companies.

Eduardo Covarrubias, Director

Mr. Covarrubias holds a degree in chemical and industrial engineering from the Catholic

University of Chile (1989), and a Master of Science in Management from the Massachusetts

Institute of Technology (MIT), Sloan School of Management (1993). Mr. Covarrubias has

been overseeing the mining interests of Turnbrook Corporation prior to the recent

consolidation of ownership of the Vizcachitas project. Mr. Covarrubias was a banker with the

Chase Manhattan Bank for almost a decade, covering the mining sector in Chile. He was

based in New York and Santiago and his responsibilities included project financing,

structured finance and mergers and acquisitions transactions.

Gonzalo Delaveau, Director

Mr. Delaveau is a lawyer graduated from the Catholic University of Chile. He has been

professor of Modern Contracts at the Magister postgraduate program of the Universidad

Catolica de Chile and of Regulated Markets at the Magister postgraduate program of

Universidad del Desarrollo. He is also member of the International Bar Association and the

American Bar Association. Chambers and Partners has distinguished Mr. Delaveau in the

areas of Natural Resources, Energy, M&A and Capital Markets. Mr. Delaveau is a senior

partner at Honorato Delaveau & Cia. Prior to that he worked at Aninat Schwencke & Cía. for

two years. Before Aninat Shwencke & Cía, he was a partner for 12 years at Guerrero, Olivos,

Novoa y Errázuriz. He has specialized in complex and innovative corporate transactions,

finance and trade, both in Chile and abroad, and in the development of projects related to

energy, mining, natural resources and public concessions.

Francis O’Kelly, Director

Mr. O’Kelly is a graduate of the Royal School of Mines, London. He has worked in

metalliferous mining throughout the Americas, having previously being employed by Exxon,

Anaconda and Rosario Mining Co. He also has served as an officer of JP Morgan and a

Page 16


partner of Elders Finance and acted in the capacity of a director of Glamis Gold, Alamos

Gold, Northgate, Campbell Mines and Rayrock Resources. Mr O’Kelly currently is an

independent financial and technical consultant based in Santiago Chile.

Francisco Covarrubias, Director

Mr. Covarrubias holds a degree in Agricultural Engineering and a Bachelor of Science in

Agro Resources. He also holds an MBA from the University of Melbourne. Mr. Covarrubas is

an entrepreneur, founder and CEO of Hand, a moving and transportation services company.

Prior to Hand, he worked with Acfin, the largest master servicer for asset-backed securities in

Chile and a leading player in the Mexican market. Prior to Acfin, he worked with Australia

Trade Commission expanding and promoting Australian business interests in Chile. Mr.

Covarrubias began his career in the agri-business sector working with the Conosur winery and

Chiquita brands.

Paul Miquel, Director

Mr. Miquel holds a degree in Mathematics applied to Social Sciences, and a degree in

Economics from the Universidad de Chile. He has been working in international investment

banking since 1990. He has been Country Head for Chile, Peru and Colombia for Societe

Generale, Director for Sudameris (Intesa BCI Group), and Country Head for Venezuela and

Chile for BNP Paribas. During the last 15 years, Mr. Miquel has been working in structuring,

negotiating and distributing some of the major transactions in the energy and mining sectors,

for multinational and local groups and governments, in South America.

Our net rating on the company’s management team is 4.25 out of 5.0 (see below).

Souce: FRC

The company’s board has six members, of which, three are independent. We believe that

Page 17


Financials

Outlook on

Copper

the Board of Directors of a company should include independent or unrelated directors who

are free of any relationships or business that could materially interfere with the director’s

ability to act in the best interest of the company. An unrelated/independent director can be a

shareholder. Note that the three non-independent directors are also shareholders of

Turnbrook. The following table shows our analysis on the strength of the company’s board.

Board Rating

Source: FRC

At the end of Q3-2017 (ended June 30, 2017), the company had cash and working capital of

$3.88 million and $3.06 million, respectively. We estimate the company had a burn rate (cash

spent on operating and exploration / development) of $0.38 million per month in the first nine

months of 2017. The following table summarizes the company’s liquidity position:

Liquidity Position

We estimate the company currently has 1.43 million options outstanding (weighted average

exercise price of $0.50 per share) and 26.80 million warrants (weighted average exercise price

of $0.45 per share) outstanding. None of the options or warrants are currently in the

money.

In 2016, Nevsun Resources (TSX: NSU) acquired the Timok Copper Gold project in

eastern Serbia for effectively $500 million, through a $365 million acquisition of Reservoir

Minerals Inc, and a $135 million payment to exercise Reservoir’s option to acquire Freeport-

Page 18


McMoRan’s (NYSE: FCX) 55% interest in the Timok project. The project has an indicated

resource of 441 Mlbs copper (13.5%) and 0.6 Moz gold (10.4 gpt), and an inferred resource

of 2.2 Bls of copper (2.9%) and 1.9 Moz gold (1.7 gpt). We estimate that the acquisition price

reflected a valuation of $0.13 / lb of copper equiv, and is encouraging for juniors, such as

Los Andes.

Copper prices are up by approximately 50% YoY.

The following charts show dropping inventory levels - one of the primary reasons for the

surge in prices.

The following chart shows the expected increase in global Gross Domestic Product (“GDP”)

Page 19


growth through 2022. The positive near-term outlook for global GDP growth is based on

improving rates in the U.S. and India, and a relatively flat European Union, offset by a

slowdown in China.

GDP Growth Rates

3.4 3.5 3.4

3.1

3.53.6 3.7 3.7 3.8

3.7

0

1

2

3

4

5

6

7

8

9

2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F 2022F

G

D

P

G

r

o

w

t

h

(

%

)

China India United States European Union World

Source: IMF

The following chart shows that the global supply deficit of copper is expected to increase

YoY in 2017 and 2018.

Global Copper Supply / Demand

20,000

21,000

22,000

23,000

24,000

25,000

2016 2017F 2018F

-500

-400

-300

-200

-100

0

Refined Balance (RHS) Refined Production (LHS) Refined Consumption (LHS)

Source: ICSG

Another key factor that we believe bodes well for copper prices is declining global average

Page 20


grades. The following chart shows that the global average grade has declined from

approximately 1.6% in 1990, to the current 1.0%. The average grade is expected to continue

to decline as shown below.

The following table shows the very thin net margins of copper companies in the past few

years, indicating that current producers are finding it difficult to maintain profitable

operations at $2.00 - $2.25 per lb copper.

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. Note that these estimates do not include any upside from

the upcoming updated resource estimate and PEA on Vizcachitas.

Page 21


Valuation &

Rating

Comparable Projects

Source: FRC

Los Andes’ shares are currently trading at an Enterprise Value (“EV”) to resource ratio of just

$0.007 per lb versus the average of $0.024 per lb of companies with copper focused projects.

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

Source: FRC

The following table shows the key inputs of our DCF valuation on the Vizcachitas project.

Page 22


Source: FRC

Key Assumptions:

• The 55,000 tpd scenario assumed an average grade of 0.5% copper in the first five

years of production, 0.43% in years 6 to 10, and 0.37% in years 11+.

• We have assumed long-term electricity prices of US$0.05/kWh, which resulted in a

17.5% reduction in the total operating cost estimate used in the PEA.

• Our CAPEX and recovery rate estimates are in line with the PEA.

• Copper price of US$2.75/lb and molybdenum price of US$10/lb, with a long-term

C$:US$ exchange rate of 1.1.

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

Page 23


Source: FRC

The following table shows a summary of our overall valuation:

Page 24


Risks

We are initiating coverage with a BUY rating and a fair value estimate of $1.72 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.

➢ There is an outstanding notification from Chile’s Environmental Superintendency for not

obtaining an environmental license for the drill program conducted in 2015-2016. The

company is negotiating an agreement with the Superintendency. In the worst-case

scenario, the company would be subject to fines, and file an environmental permit for the

past drilling (which could potentially be combined or done in parallel with the

prefeasibility drilling).

➢ Project development is contingent on availability of financings.

As with most junior resource companies, we rate Los Andes’ shares a risk of 5 (Highly

Speculative).

Page 25


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.

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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

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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;

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Documents

Los Andes Copper Ltd. (TSXV: LA) - Initiating Coverage ... · by Los Andes, with a Net Smelter Return (NSR) ranging between 0.51% and 2%. Eduardo Covarrubias, who runs Turnbrook,