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Why Western Copper and Gold Stock Rallied 20% in Early Trading Today

What happened

Shares of Western Copper and Gold (NYSEMKT: WRN) rose a quick 20% at the open on May 17. The miner's stock was still holding onto much of that gain at roughly 10:30 a.m. EDT, with an advance of nearly 15%. You can thank mining industry giant Rio Tinto (NYSE: RIO) for the gain.

So what

Western Copper and Gold announced today that diversified miner Rio Tinto has made a 26.9 million Canadian dollar investment in the company. That money will go toward buying roughly 11.8 million shares of Western Copper and Gold at a price of CA$2.17 per share. The Toronto-listed shares are currently trading well above that figure, suggesting that investors see a worthwhile long-term benefit here. All in, Rio Tinto will end up owning about 8% of Western Copper and Gold.

Image source: Getty Images.

In addition, Rio Tinto will get the right to invest in future stock sales so it can maintain its ownership stake. Rio Tinto will also be getting a seat at the table (input on a key project committee and the ability to monitor board meetings) with the potential for even more input (a board seat) should its investment in Western Copper and Gold rise to 12.5%.

The cash infusion will help fund the development of Western Copper and Gold's key asset, the Casino Project. The project is still in the early stages, but the stated objective here is for Rio Tinto to "better understand the potential of the Casino Project."

Now what

Western Copper and Gold is a small company with big development plans. The Rio Tinto investment is a big vote of support, but mines are complex, expensive, and can take a long time to build. Indeed, there are still very real risks to consider here, including that development plans don't go as well as hoped; environmental, political, and legal headwinds cause delays (or worse); commodity prices fall (reducing the expected value of the project); or that funding costs prove increasingly difficult to cover. Most long-term investors should probably take a wait-and-see approach, even though some canny types might be thinking, perhaps not unreasonably, that Rio Tinto could end up buying Western Copper and Gold if the mine it is building turns into a big winner.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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