Phoenix Copper Limited / Ticker: PXC / Sector: Mining

29 September 2022

Phoenix Copper Limited

("Phoenix" or the "Company", together with subsidiaries the "Group")

Interim Results

Phoenix Copper Ltd (AIM: PXC, OTCQX ADR: PXCLY), the AIM quoted USA focused base and precious metals emerging producer and exploration company, is pleased to announce its unaudited interim results for the six months ended 30 June 2022 (the "period").

Year to date Highlights

Corporate & Financial

·    Investment in Empire Mine increased to $29.73 million (2021: $18.61 million)

·    Net assets increased to $38.22 million (2021: $37.70 million)

·    Group reports loss of $1.052 million (2021: $199,481), after charging an unrealised foreign exchange loss on sterling denominated assets of $503,593 (2021: foreign exchange gain of $303,077)

·    Period end cash balance of $9.05 million (2021: $22.88 million)

·    Company loans to operating subsidiaries increased to $25.23 million (2021: $16.19 million)

·    Company acquisition of third-party royalties payable by Empire Mine

·    Issue of floating rate, listed, secured, non-convertible, minimum 8.5% copper bonds due 2028-2032 underway. Initial tranche currently under negotiation

Operational

·    Ongoing core drilling at the Empire open pit copper mine to support metallurgical recovery and process design using non-toxic, environmentally friendly ammonium thiosulphate

·    Ongoing feasibility engineering and environmental permitting at the Empire open pit copper mine

·    Further mineralisation encountered at both Red Star silver-lead deposit and the Navarre Creek gold project

·    Further exploratory drilling commencing at Red Star

·    2023 Navarre Creek drilling programme approved by US Forest Service

·    Local Community Advisory Team created as part of the Company's ESG Programme

Chairman's Statement

We entered 2022 optimistic that we were close to finalising our financial model and mine plan. We had already had very positive discussions with potential financiers seeking to fund construction of the Empire open pit mine. Our strategy of getting into early production of copper and using the proceeds to fund further exploration of the underground, high-grade sulphides that lie beneath the open pit, which have already given exciting indications of their potential, was well on track.

However, the outlook has deteriorated, at least in the short-term. Copper and sterling have both been extremely volatile, and currently sit at around 30% below their highs for the year. The aftermath of Covid and the war in Ukraine, with the associated effects on energy prices, reagent costs and steel supply, have made it nearly impossible to complete an accurate feasibility study, which needs stable and firm quotes in order to estimate operating and sustaining capital costs through the life of the operation. Less visible, but just as important, supply chain difficulties are having a hugely disruptive effect on the mining industry: damaged parts can take months to replace, a problem affecting everything from drilling parts to tyres.

However, this is not necessarily bad news for Phoenix Copper. As a company that is not yet in production, we are able to design our processes with an eye on these challenges. We are extremely confident in the long-term demand for the metals which will define the coming decades and which the Empire Mine holds in abundance.

Our activity in the past six months has focused on two areas: fundraising and optimising our plans to be as robust and profitable as possible. Our steadfast aim remains that of getting into production with no further equity issues, and we have embarked upon our corporate copper-linked bond issue, which, despite the current inflation and interest rate outlook, has attracted significant demand. We hope to update you more fully on this in the near future.

We have also used this hiatus in what we still believe to be a long-term bull market in copper and other critical metals, to optimise our mining and processing plans, and look forward to updating you with progress on all fronts in the coming months. We are refining our engineering plans and examining methods of improving cashflow through environmentally innovative ore haulage and recovery processes. If successful, this would significantly reduce our spend on diesel and reagents, which are typically in the region of 60% of the cost of metal production.

During the current state of volatility, and with the temporary weakness in the copper price, it makes sense to bide our time, refine our plans, and make sure that we can fully realise the value of the Empire Mine for our shareholders. Many market commentators predict a global recession in the near future. If a slowdown does occur, as we await permitting and prepare to go into production, this may ultimately work in our favour, leading as it should, to a sharp recovery in the copper price when the global economy rebounds.

The recent share price performance has mirrored the weakness in markets in general, and the mining sector in particular. Many funds holding small cap and mining stocks have faced a stream of redemptions, as investors worry about the ability of non-cash generating companies to continue to finance development. As I write, sterling is trading at $1.08, its lowest level for a generation. However, I am glad to report that, after our fund raise of March 2021, our cash balances remain healthy. We converted sufficient funds for our non-capex related US dollar requirements at a rate of $1.38. The vast majority of our assets are, and all our earnings will be, in US dollars.

We have also been spending a great deal of time on optimising already strong relationships with the local community and other stakeholders. I draw your attention to Catherine Evans's report, and would like to thank her and Lenie Wilkie, and the rest of the team for all the hard work they have done on enhancing our ESG credentials.

In summary, your Company is well-positioned to weather the current crisis. I would like to thank you all for your support and perseverance and look forward to delivering good news, not only at Empire, but also at Red Star, where we are planning to drill anomalies revealed by last year's magnetics survey, at Navarre Creek, where we have been granted permission to drill, and from our cobalt joint venture at Redcastle.

Marcus Edwards-Jones

Chairman

Chief Executive Officer's Report

The Company entered 2022 encouraged by a bull copper market climbing through $5.00/lb and gold and silver topping $1,800/oz and $23/oz, respectively. Carrying on from a string of positive accomplishments in 2021, the Phoenix team constructed and executed robust work plans for 2022 that include continued feasibility engineering and environmental permitting on the Empire Open Pit Copper Mine, exploration at the North Pit/Red Star silver-lead deposit, Navarre Creek Gold Project, and the underground copper sulphides, as well as the advancement of the Company's ESG Program and PR and IR initiatives.  Work being conducted this year ties-in perfectly with the announcement of the US Defense Production Act, which provides for an increase in the domestic production of metals for national defense, electric vehicles, and the transmission and storage of renewable energy necessary to achieve these goals.  At the same time, media reports from the likes of S&P Global, Wood Mackenzie, and Goldman Sachs continue to highlight the effect of increased demand for metals like copper on dwindling global supply, with shortfall anticipated to exceed seven million tonnes by 2030.

2022-2023 Drilling Programs

Core drilling in the Empire open pit copper deposit was initiated in June for the purpose of collecting samples three-dimensionally representative of the oxide portion of the deposit for copper, gold and silver recovery testing using the environmentally friendly cyanide alternative, ammonium thiosulfate ("ATS").  The program anticipates the completion of 5,000 feet of core drilling and will run through November. The North Pit/Red Star project is also scheduled for approximately four weeks of drilling beginning in October.  Drilling will target magnetic anomalies identified in the 2021 ground magnetics survey. 

The Company completed a core drilling program in the Empire underground sulphides in 2021, encountering the first notable copper sulphide intercept of 8.3% in the sulphide horizon situated below the open pit.  That intercept provided us with valuable information regarding the "roots" of the sulphide system and will anchor future drilling programs targeting the deeper sulphides. The Company also completed ground magnetics and hyperspectral mineral geophysical surveys at Red Star, Horseshoe, and Navarre Creek. The results of those surveys were positive and have provided critical targeting information for future drilling programs, which are anticipated for 2023.

The Company's Navarre Creek drilling plan was approved by the US Forest Service in August, clearing the way for a 2023 drilling program comprised of up to 60 reverse-circulation ("RC") drill holes on 30 drill pads that will target geochemical and geophysical anomalies identified from surface sampling programs conducted over the past several years.

Additional long-term monitoring wells will be constructed in October and located northeast of the proposed processing facility.  These wells will expand the current monitoring well network completed in 2021.  Data from the monitoring wells will augment data collected in a Controlled Source Audio-frequency Magnetotellurics ("CSMAT") survey conducted in late summer and designed to identify geologic structures and rock characteristics that control groundwater movement, providing vital hydrological information for future operations.  

Open Pit Permitting and Feasibility Engineering

The environmental permitting process for the Empire open pit mine began in late 2017 with the initiation of environmental baseline studies, which have all been completed with no critical issues identified, and enabled the submission of an initial Plan of Operations to the regulatory authorities in 2021.  The mine and process design engineering necessary for completing a feasibility study is in progress and combines all the drilling, analytical, and engineering data collected on the project to date.  The Feasibility Study is designed to convert the existing Empire resource into a reserve category using average metal prices and current equipment, reagent, and supply pricing. The current preliminary economic assessment level cash flow model shows pre-production capital of $52 million with payback in less than two years; gross revenue of $836 million over 10 years of mine life, and $43 million post-tax cash flow in year one at a $3.60/lb copper price. These project economics are expected to improve significantly as a result of ongoing economic and environmental optimization.

Cobalt

The Company's cobalt holdings at the Redcastle Idaho Cobalt Belt property in Lemhi County were signed to an earn-in agreement with Electra Battery Materials ("Electra") in 2021. Electra, the Toronto-based owner of the Iron Creek cobalt mine that shares a common border with the Redcastle property, initiated an IP Geophysical Survey and core drilling this year on an area of cobalt mineralization known as the Ruby Zone.  Redcastle is located 1.2 kilometers south of the Ruby Zone and shares similar stratigraphy.  Electra announced they will be conducting further exploration on the Redcastle property. The earn-in agreement includes an initial payment of cash and Electra shares to Phoenix, followed by two work commitments of $1,500,000 each over a five-year period, thereby earning Electra a 75% interest in the property.

Other Business

2022 also saw the formation of our Konnex Resources community advisory team, KCAT, which is comprised of citizens and business owners near our Empire Mine project in Custer County, Idaho.  The KCAT group was developed out of our ESG Program and has been promoted by Catherine Evans and Lenie Wilkie, our ESG Director and ESG Coordinator.  This group of liaisons provides a valuable link between the Company and the community, and an avenue for community input regarding the Company's proposed operations.

I have said this many times before, and I will repeat it again.  Phoenix has been provided a unique opportunity with the variety and grade of mineralization located on our Idaho properties.  The mix of "green metals" like copper and cobalt, and the prospective gold and silver targets, all residing within the Company's current claim holdings, puts us in an enviable position for near term production and years of exploration potential. 

2022 has not been without its challenges.  Equipment and supply shortages, contractor staffing shortages, and the wildly volatile metals and supply markets are presenting delays that are being shared by the industry as a whole and will likely not be resolved in the immediate future. However, the Phoenix team has the singular focus to accomplish the goals outlined for 2022 and beyond.  I fully expect that we will continue to encounter many of the same supply chain and staff challenges as we move forward, and I also fully expect that our team will continue to overcome those challenges as they are presented to us.   

Mineral Resources

An updated NI 43-101 compliant resource was completed by Hardrock Consulting in October 2020 and reported for the polymetallic Empire Mine open pit oxide deposit. The updated resource showed a 51% increase in the Measured and Indicated category from the previous year's resource. Including the Inferred resources, the Empire open-pit oxide deposit now contains 129,641 tonnes of copper, 58,440 tonnes of zinc, 10,133,772 ounces of silver and 355,523 ounces of gold.

Red Star is a high-angle silver-lead vein system hosted in andradite-magnetite and located 330-metres north-northwest of the Empire oxide pit. In early May 2019, the Company announced a small maiden Inferred sulphide resource of 103,500 tonnes, containing 577,000 ounces of silver, 3,988 tonnes of lead, 957 tonnes of zinc, 338 tonnes of copper, and 2,800 ounces of gold.

Outlook

We have seen significant volatility in the metals markets so far this year, with copper ringing in 2022 at $4.42/lb, rising to an all-time high of $5.03/lb in March, and retreating to $3.20/lb in September.  Gold has also seen fluctuations of $377/oz and silver over $8.50/oz since the beginning of the year.  We are seeing similar volatility in the pricing of leaching reagents, structural steel, heavy equipment, and fuel.  I am not surprised to see fluctuations in the price of metals so much as I am surprised at the wild fluctuation in the cost of equipment, supplies, and consumables required for constructing and maintaining a modern mining operation.  The volatility across all of these sectors creates challenges in estimating capital and operating costs, particularly when estimating future costs.  I think it is well understood that current market volatility has resulted from a combination of material and labor shortages in the manufacturing and fabrication sectors arising from Covid-19, the war in Ukraine, and global inflation.  While I am growing increasingly frustrated by using Covid as an excuse for manufacturing and delivery delays, it appears to be a reality that we must accept for the time being.

Despite all of this, the fact remains that copper is in the top three of the most consumed metals in the world, trailing only behind iron and aluminum.  The heavy focus on green energy metals for power generation, transmission, and transportation will increase demand, as we are already beginning to realize. Clean energy initiatives in the United States, Canada, and Europe have already begun to drive demand for copper, cobalt and lithium.  As other countries develop similar initiatives, demand will outweigh global supply.  Some analysts are estimating copper demand to exceed supply beginning as early as 2024.  Should the war in Ukraine begin to resolve, the reconstruction of the country will place an additional demand on metal resources. 

Although the copper price has decreased on the year, it remains significantly higher than in the few years preceding Covid, during which the average price was below $3.00/lb. Compared to those years, the copper market continues to perform well, with prices holding above $3.50/lb and cobalt above $55,000/tonne. I expect to see the metals markets, particularly copper and cobalt, continue to perform well as the EV and "green energy" initiatives continue to grow globally.  I also expect that the spending on the 10 year, $1.2 trillion US Infrastructure Bill and the recently introduced U.S. Defense Production Act will increase metal demand and boost pricing in the short term. The roughly $550 billion earmarked for the construction of roads, bridges, ports, power transmission, and large water projects, as well as the advancing EV initiatives, will require significant quantities of metal.

The mineralized systems at our Idaho projects contain a variety of EV metals, as well as precious and other base metals, all of which will feed the numerous infrastructure and green energy projects in the global pipeline.  This variety provides the Company significant optionality in a world of fluctuating prices. Our story becomes even stronger with the realization that these resources are all located in known mining districts in the geopolitically stable, pro-mining jurisdiction of Idaho, USA.   

While I fully anticipate further challenges as we move forward, I also fully anticipate that our talented and dedicated team of hardworking professionals, our supportive shareholder base, and our strong relationship with the local community will overcome the current market headwinds. My outlook for the Company remains positive and I am excited to see and report our accomplishments in 2022.

Key Performance Indicators ('KPIs')

To date the Group has focused on the delivery of the project evaluation work programs to assess the available mineral resources and the extraction methods to apply, each within the available financial budgets. This work will continue until the relevant feasibility studies are completed, and construction commences.

At that stage the Group will consider and implement appropriate operational performance measures and related KPIs as the objective of recommencing commercial production at the Empire Mine nears fruition.

Conclusion

We are well positioned to become a producer of metals that are vital to our everyday lives.  The transportation, manufacturing and energy sectors are dependent upon the suite of metals hosted by our Idaho projects, and in turn we are dependent upon the goods and services provided by those sectors.  We remain well funded and have the right team to move the Empire Mine into production and to properly explore the Navarre Creek, Red Star, and the Empire underground sulphides projects.

I would like to thank all our professional staff, consultants and advisors, all of whom work tirelessly to accomplish our common goal of metal production.  And I would like to thank our community liaisons, shareholders, and directors for their considerable support.  I look forward to reporting further positive news as we continue our exploration and development programs during 2022.

Ryan McDermott

Chief Executive Officer

ESG & Sustainability Committee Chairman's Report

It gives me great pleasure to report on the significant progress we have made with respect to ESG & Sustainability in the last six months. Our central aim remains clear: to build and run a clean mining operation with as low a carbon footprint as possible.

The new Phoenix website went live in August of this year, and we have placed a great deal of emphasis on providing clear information on metrics relating to ESG and Sustainability to interested parties. Konnex will soon have its own website, the key benefit being communicating ESG & Sustainability issues and local activities to those of our stakeholders who will be directly affected.

We regard gaining and maintaining the support of our community as the cornerstone of our success. As we reported in February 2022, we formed the KCAT, the Konnex Community Advisory Team, comprised of three representatives of Phoenix/Konnex, our Idaho registered operating subsidiary, and ten independent residents of Custer or Butte Counties with diverse experience from one or more of the following sectors: citizens, municipal, land-users, socio-economic (business) and research/training. We are highly fortunate to have such interested and engaged individuals with such a wealth of experience to facilitate open communication between the Company and the community. Since its formation, the committee has met four times, including a visit to the site of Empire Mine. As detailed on our website, the role of the KCAT is to finalise the formation of a Good Neighbour Agreement, to formulate a grievance process which will address concerns and complaints, and to be instrumental in their resolution. Further, we wish the KCAT to identify ways in which the Company can be of benefit to the community and to compile a local vendor/supplier list so that we can support local businesses wherever possible.

Drawing on SASB's (Sustainability Accounting Standards Board) Metals & Mining Standard 2021, the ESG Team has spent a great deal of time focusing on Materiality Assessments in order to determine what our current ESG risks are and what they will be when we are in production. We have determined these risks not only from our own perspective, but have also taken into account issues of concern to our stakeholders. The KCAT will be able to provide a great deal of qualitative input into this project, and will have an important role in refining and verifying this data.

In our ongoing effort to provide investors and stakeholders with transparent and reliable information on our activities, we have contracted with Digbee ESG, an ESG disclosure platform for the mining industry, offering 'a future-looking, right-sized set of frameworks, aligned to the key global standards.' We have supplied highly detailed information to Digbee via two questionnaires: one corporate and the other project-specific, focused on the Empire Mine. This information will subsequently be verified by Satarla, a risk & ESG training consultancy & research firm. For reasons of confidentiality, our responses to their questions will not be available for public view, but they will award us with an overall score which can be viewed and accepted by leading stakeholders. Each mining project is unique, and from an investor standpoint, Digbee allows fair comparisons between them from an ESG perspective.

We are confident that Digbee has been able to provide us with the larger part of a solution to a highly complex problem. ESG & sustainability disclosure requirements are becoming increasingly onerous, and we will continue to monitor the disclosure horizon carefully.

At all stages of our decision-making process, ESG & Sustainability considerations are awarded high priority. As reported in February 2022, we continue to investigate the feasibility of building an aerial tramway to transport ore from the mine site to the leach pads, instead of using trucks. The tram remains our preferred option for a large number of environmental reasons, including a substantial reduction in water requirement, and will considerably reduce operating costs over the life of the mine, thereby justifying the necessary upfront investment. The development of the Empire open pit mine will provide high quality employment opportunities, and will also generate business for local suppliers and entrepreneurs, but we remain mindful that we are operating in an area of outstanding natural beauty and are determined to make every effort to ensure that we are good neighbours and good long-term stewards of the environment.

We look forward to providing further updates on our progress in the near future.

Catherine Evans

Non-Executive Director

Financial Overview

The Group reports a loss for the six months of $1.052 million (2021: loss of $199,481). This includes an unrealised foreign exchange loss on sterling denominated assets of $503,593 (2021: foreign exchange gain of $303,077), and a charge of $36,623 (2021: $90,953) relating to non-cash share-based payments attributable to warrants or options extended or granted during the period, and which amount is simultaneously credited back to the retained deficit.

Net assets at 30 June 2022 totalled $38.22 million (2021: $37.70 million), including cash of $9.05 million (2021: $22.88 million).

During the period the Company raised a further $1.39 million through the issue of 5,055,942 ordinary shares pursuant to the exercise of warrants. Since the period-end a further 157,000 ordinary shares have been issued pursuant to further warrant exercises. The outstanding share capital of the Company is currently 122,628,622 shares.

During the period the Company charged its subsidiary entities $465,000 (2021: $405,000) in respect of management services provided, and $610,653 (2021: $361,678) in respect of interest at 6% per annum on the Company's inter-company loan to Konnex Resources Inc ("Konnex"), owner of the Empire Mine, the latter eliminating on consolidation. At 30 June 2022 the Company's loan to Konnex stood at $22.95 million (2021: $15.33 million). The Company has also advanced $2.28 million (2021: $859,900) to Lost River Resources Inc, a wholly owned subsidiary of the Company, to acquire real estate commercial and residential property and mining claim blocks to support the Empire Mine. These loans will be repaid from Konnex's operating cash flow in due course and are intended, together with royalties receivable from Konnex, to form a platform for a future proposed dividend policy to return money to shareholders.

During the period the Group acquired the remaining 1.25% royalty payable by Konnex Resources to Honolulu Copper Corporation ("Honolulu") for consideration of $450,000. The Group had previously acquired 1% of the 2.5% royalty payable to Mackay LLC, and 1.25% of the royalty payable to Honolulu, as well as Honolulu's underlying patented and unpatented mining claims, for consideration of $1.3 million. As a result, Konnex Resources will now pay a 1% royalty or a 2.5% royalty to the Company from future production at Empire, depending which claim blocks are being mined.

The Company is currently undertaking a corporate copper bond financing in order to accelerate the ongoing development of the Empire Mine and surrounding mineralised district. The bonds are non-convertible, and repayable after 10 years, unless the Company offers early redemption after five years, and the bondholder accepts, or the bondholder requests early redemption after six years. The bonds will pay a semi-annual coupon linked to the average monthly closing copper price on the London Metal Exchange during any given coupon period, subject to a minimum annual coupon of 8.5% at a $3.60 / lb or lower copper price, and a maximum annual coupon of 20% at a $11.26 / lb or higher copper price. The bonds will be secured on the Company's patented mining claims and listed on The International Stock Exchange in the Channel Islands. An initial tranche is currently under negotiation.

The Directors recognise the importance of sound corporate governance and have applied the Quoted Companies Alliance's Corporate Governance Code 2018. The Company's Corporate Governance Statement dated 25 March 2022 can be viewed on the Company's website at https://phoenixcopperlimited.com.

Richard Wilkins

Chief Financial Officer

The revenue, expenditures and operating result for each period is derived from acquired and continuing operations in North America and the United Kingdom.