Inca Pacific Resources (IPR.V)

A Highly Leveraged Copper-Moly Play

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Outstanding Share Count (O/S): 24.3 million*
Fully Diluted Share Count (F/D): 27.3 million
Cash: C$5.5 million
Website: http://www.incapacific.com/s/Home.asp

*Note: The current updated O/S and F/D counts have changed to 36.4 million and 40.0 million respectively. Thus, at C$1.80/share, Inca has a market capitalization of about $65.5 million. Also, Inca's cash position is now about C$8.8 million.

The History of Inca Pacific Resources and the Magistral Deposit

Inca was formed in 1994 as a grassroots explorer, and in the mid 1990s, prior to the Bre-X scandal that ripped the industry apart, Inca Pacific was trading at an equivalent of about $30/share. It wasn’t until 1999 after the market was smacked around that Inca made the major Magistral discovery in Peru. Soon afterwords, IPR.V quickly entered into a Joint Venture arrangement with Antofagasta PLC, a $10 billion copper major trading on the AIM exchange in London. However, Antofagasta soon found itself in trouble with the Peruvian government and had to leave the country in 2002, including Magistral. At that time, Inca was able to buy back the project and then create another joint venture with Quadra Mining. Unfortunately, Quadra (Inca’s partner) backed out of the project in October 2005 because of the location of the property. Magistral is located in a u-shaped valley, and it was stated by Quadra that it was uncertain of whether or not the mine could support steep enough slopes in excess of 45 degrees. They further reasoned that if the Magistral deposit could not support these steep slopes, then a large percentage of the resources could not be exploited, perhaps making the project infeasible.

At the time, however, Quadra was quite concerned about the uncertain political situation in Peru because of the then upcoming elections. Quadra couldn’t just back out of the project willy-nilly, meaning they had to provide a good reason to exit the joint venture contract. Thus, they chose to be rather narrow and conservative in their outlook in order to justify their decision. Since October 2005, when Quadra backed out of the arrangement, Inca has completed a pre-feasibility study, and this has shown that the angle of the pit walls is not a serious concern, and that prior expectations have been met. Also, the political situation in Peru is no longer of great concern; see Risks, Rewards, and Peru for a quick summary of what has transpired.

Highlights of the Pre-Feasibility Study

The Magistral property located in Peru was described in the recent pre-feasibility results announced on September 19, 2006 as having “robust project economics driven by a high grade starter pit, simple processing technology and excellent recoveries of copper and molybdenum.” This is a mid-sized project that will generate approximately 360 permanent jobs, and almost double that amount during the two-year construction period.

Most curious is the fact that Floyd Anthony, President and CEO, has been on a buying spree since September 19, 2006, the very day that the news of the pre-feasibility was released. He has made at least 56 purchases on the public market between then and now (December 1, 2006), acquiring an additional 138,000 shares of the company he manages. He now holds a total of 548,000 common shares along with 400,000 purchase options.

Project Details:

NI 43-101 compliant Proven and Probable* Reserves as reported in pre-feasibility study are as follows:

• 1.2 billion pounds copper (0.52%)
• 125.9 million pounds molybdenum (0.054%)
• 8.9 million ounces silver (2.58 g/t)

*Lowest risk categorization

Previously reported Measured, Indicated, and Inferred resource numbers:

Note: Here we are seeing the total defined resource, not just what has been deemed as Proven and Probable.

Mine Life: 16 years

Production Profile (Average):

• 68.2 million pounds copper per year
• 5.5 million pounds molybdenum pear year
• 350,000 ounces silver per year

Cash Cost (net of by-product credits): $0.77/lb copper

Capital Cost (Base Case): $259 million

NPV @ 8% discount: $319M* (after-tax)

*This is using the currently conservative prices of $14.0/lb molybdenum and $1.75/lb copper. The NPV @ 8% increases to 700.5M using $20.0/lb moly. and $2.50/lb copper.

A $5 million Final Feasibility Study (a.k.a Bankable Feasibility Study) has been contracted out, has begun, and must be completed by September 2007. More than likely it will be completed earlier, perhaps as early as July 2007. Additionally, a tentative production date has been set for Q1 2010. That’s a long way away, but the very steep discount afforded this company makes Inca Pacific Resources a very attractive speculation. The President of the company would seem to agree with us, as would RAB Capital.

What we have just described, is the road leading to production, but there is also another road, the road leading to a buy-out. Looking at things from this angle, management at Inca is simply grooming itself to be taken out, with the final climactic step in the grooming process being the production of a final feasibility study. With this step expected to be completed by this coming September at the latest, we very much expect a buyout to occur by January 2008.

We’ve been told that RAB Capital expects no less than a C$4.00 tender offer for their shares. At today’s prices, we’re talking about 300% upside. Is this reasonable? We think so. First of all, Inca’s market capitalization is very small, especially considering the size and economics of their Magistral deposit. Even at C$4.00, Inca would still only command a market capitalization of $109M on a fully diluted basis. We know that Inca expects to complete one more round of financings sometime early in 2007 in order to sufficiently build the treasury so that expenses can be met. This will probably raise something in the order of $C5.0M. The company has adamantly stated that such a financing would have no warrants attached to it, so assuming an issuance of shares at C$1.00, this would dilute the F/D share count to 32.3M. Still, at a buyout price of C$4.00, Inca Pacific would again only be valued at about $128M, less than ½ the $319M NPV calculated using $14.00/lb molybdenum and $1.75/lb copper.

But there is a far more important reason why we expect Inca to stand an excellent chance of being bought out at a very nice premium to today’s price. This involves a bit of history.

Anthony Floyd, the President of Inca Pacific Resources, was also the President of the original Lumina Copper Corporation formed in 2003. Lumina Copper originally did their IPO at C$1.00.

About 2 years later, Lumina broke into 4 separate companies, and shareholders of Lumina Copper received 1 share of each of the newly formed companies, as it was announced per the May 16, 2005 news release:

“Vancouver, British Columbia - Lumina Copper Corp is pleased to announce that…shareholders of record at the close of trading on May 18, 2005 will receive, in exchange for their Lumina shares, an equal number of shares in the new entities: Regalito Copper Corp, Northern Peru Copper Corp, Global Copper Corp and Lumina Resources Corp.

At the opening of trading on the morning of May 19, 2005, Regalito Copper Corp will begin trading on the American and Toronto Stock Exchanges under the symbol "RLO." Northern Peru Copper Corp (symbol: "NOC") and Lumina Resources Corp (symbol: "LUR") will begin trading on the Toronto Stock Exchange. Global Copper Corp will remain a public, non-trading, company for the immediate future.”

Here is a breakdown of what happened to the four companies that shareholders of Lumina Copper would have received shares in.

1. Regalito Copper Corp. (RLO.TO)

Regalito was bought out for $6.00/share by Pan Pacific Copper, as was announced on May 10, 2006:

“Pan Pacific Copper Co., Ltd. ("PPC") and Regalito Copper Corp. ("Regalito") (TSX:RLO.TO - News)(AMEX:RLO - News) announced on May 9, 2006, that the conditions of PPC Canada Enterprises Corp.'s offer to acquire all of Regalito's issued and outstanding common shares have been complied with. The offer to acquire Regalito's common shares for cash consideration of US$6.00 per share was made by PPC Canada Enterprises Corp., a wholly owned subsidiary of PPC, pursuant to a take-over bid circular dated April 3, 2006.”

2. Lumina Resources Corp. (LUR.TO)

Lumina is being bought out by Western Copper for about C$1.30/share, as was announced on October 27, 2006:

“Western Copper Corp. (TSX: WRN) ("Western") and Lumina Resources (TSX: LUR) ("Lumina") today announced that they have signed a definitive Arrangement Agreement under which Western Copper Corp. will acquire, through a previously announced plan of arrangement, all of the outstanding shares of Lumina Resources."

"Under the agreement, each Lumina shareholder will receive one common share of Western for each issued Lumina share held at November 29, 2006."

Western Copper Corp. closed at C$1.33 and Lumina Resources at C$1.30 on December 1, 2006.

3. Northern Peru Copper (NOC.TO)

Northern Peru Copper closed at C$7.25 on December 1, 2006, and is likely to be bought out in the C$10-$14/share range.

4. Global Copper Corp. (GLQ.TO)

Global Copper Corp. closed at C$2.38 on December 1, 2006 and will likely be bought out in the C$5.00-C$6.00/share range.

Putting the Pieces Together

As one can easily see from the above charts, there is an obvious trend here that recurs. This is an increasing share price leading to a buy-out offer. Doing the math, one finds that $1 invested in Lumina Copper in May 2003 would have grown to $16.93 today, for an AMAZING annual rate of return of 221.89%. Anthonly Floyd, former President of Lumina Copper and current President of Inca Pacific Resources, is buying lots of stock in his own company on the open market, likely in anticipation of similar returns. This man knows how to make deals, he’s done it before. With Lumina Resources (not Lumina Copper) now being bought out by Western Copper, 100% of his working efforts will be spent on Inca Pacific Resources (Mr. Anthony was a director of Lumina Resources). Also interesting is the fact that the office of Inca Pacific Resources is in the same building with both Northern Peru Copper and Global Copper Corp. Given that these two are becoming sweet buy-out targets, Inca is associating itself with the right group of people.

One other common denominator amidst all of this is a man by the name of Ross Beaty, perhaps best known for being the Founder and Chairman of the very successful silver giant, Pan American Silver (PAAS). Mr. Beaty also founded Lumina Copper, which as we all should now know, also did quite splendidly for shareholders.

Subsequent to the breaking up of Lumina Copper, Mr. Beaty became the Chairman and Director of Lumina Resources, Northern Peru Copper, and Global Copper. Although Mr. Beaty is not directly involved with Inca Pacific Resources, he and Anthony Floyd know each other quite well given their close ties both historically (management teams) and proximally (same corporate office). Both of their track records are superb, and great management will make great companies.

Given all of this information, we feel confident that a mid-tier corporation will tender an offer for the shares of Inca Pacific Resources by January 2008, making this a buy and hold stock with a potential 300%+ return in one year. That being said, there does not seem to be a need to immediately rush out and buy Inca within the next few days as is arguably the case with the next company we will be profiling below, but we don’t expect the price to get much better than C$1.00/share going forward barring a severe correction in the price of copper*, so we plan to accumulate a position fairly soon.

*Incidentally we believe the copper market will remain very strong with supply-side tightness through at least 2007. We plan to discuss our thoughts on the overall copper market in a future issue of RF Premium.

In concluding, we would think it pertinent also to mention that Inca Pacific and its team working in Peru are well liked by the community. Not only should their hard work pay off by providing over 300 well paying long-term jobs for the locals in the future, but in the past and present Inca has already involved itself through the voluntary construction of greatly needed schools and roads. This is yet one more synergistic part working to give Inca incredible value and a bright future.

Technical Analysis of Inca Pacific Resources

*Please Keep in mind that these charts are from December 2006. If you would like to view the latest TA charts on Inca updated just last weekend, you will simply need to sign up for the $2.99, 30-day trial subscription offer and read the latest June issue of the Resource Fortunes Premium Newsletter. To do so, simply visit: www.resourcefortunes.com/payment.htm

Weekly TA Chart

IPR is working off a very long bottoming process, a saucer bottom. These patterns are mostly very reliable and they typically act as a prelude for a very strong rise once the bottoms are set.

It looks like IPR is getting ready for the final attack on the resistance zone, although the volume is still a bit weak. If this rises strongly with a breakout we’ll have a perfect set up for a quick rise towards the $3 tot $3.25 area, with only minor resistance levels at $1.50 and $2.00.

Daily TA Chart

The daily chart confirms our expectations of a successful break to higher ground.

Before this break occurs, however, we could see another minor correction back to the red rising trend line. Such a correction would be a nice entry point to get on board for the big jump.

The indicators composed of the RSI, Buying power, and MFI, are all signalling a high possibility of an upcoming correction. However, if this correction does not take place, a break of the resistance zone will trigger a new major buy signal. 

I hope that you have enjoyed this issue of the Silver Stock Investment Newsletter.  Please remember that most of my investment analysis is now being published within the Resource Fortunes Premium Newsletter, and that this is the reason why so few Silver Stock Investment Newsletter have been sent since September of 2006.  If you would like to be among the first to know of these magnificent investment opportunities, I offer you to test out my new service for only $2.99, where I have partnered with a brilliant Technical Analyst living in the Netherlands, Roy Martens, and an equally talented Chinese Entrepreneur living in Shanghai, Ming Guo.

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Information contained on the Silver In Scripture web site and published in both View My Portfolio and the Silver Stock Investment Newsletter is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained from these sources is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed therein are those of the publisher and are subject to change without notice. The information therein may become outdated and there is no obligation to update any such information. David Zurbuchen, entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. PLEASE SEEK THE ADVICE OF PROFESSIONALS, AS APPROPRIATE, REGARDING THE EVALUATION OF ANY SPECIFIC SECURITY, REPORT, OPINION, ADVICE, OR OTHER CONTENT. We do not in any way warrant or guarantee the success of any action you take in reliance on the statements of the designated subsidiary.