Mid-cap Copper Mountain Mining (CUM-T) and its majority-owned copper-gold-silver open-pit mine near Princeton in southern British Columbia, is a potential takeover target, says Orest Wowkodaw of Canaccord Genuity.
The Toronto-based mining analyst has initiated coverage of the company with a buy rating and a $5 target price on the stock. (The company is currently trading at $3.65 per share within a 52-week range of $2.43-6.39.)
“Copper Mountain is a relatively attractive takeover target given its long mine life, good exploration potential, attractive valuation, and low-risk political jurisdiction,” he writes in a note to clients.
Next year, the Copper Mountain mine should produce 85 million pounds of copper, a year-on-year increase of 38%, he forecasts, adding that “after struggling with its initial ramp-up” the fourth quarter of this year will be a “turning point” and “lead to a share re-rating.”
Copper Mountain owns 75% of the mine, with Mitsubishi Materials Corp. owning the remaining 25%.
The Copper Mountain mine started production in the summer of 2011 and has a resource of about 5 billion lb. copper.
In the first nine months of 2012, the mine produced a total of 45.9 million lb. copper, 14,700 oz. gold, and 330,000 oz. silver.
On Nov. 14, the company posted its quarterly results. For the three months ended Sept. 30, the mine produced 12.5 million lb. copper, 4,300 oz. gold and 77,200 oz. silver, and the company completed three shipments of concentrate containing 12.1 million lb. copper to Japan for smelting.
Revenues net of smelter charges and pricing adjustments totalled $46.6 million for a gross loss of $1.5 million. Total cash costs of copper sold came in at US$3.25 per lb. copper after gold and silver by-product credits.
Mill production was adversely affected during the quarter due to a continuing failure of SAG mill grates, ball mill motor modifications and tailings line maintenance, Jim O’Rourke, the company’s president and chief executive, outlined in a news release announcing the results.
The interruptions affected production in July and lead to higher costs for repair items, which were expensed in the quarter. But unscheduled downtime was reduced in the final two months of the quarter and management says in the fourth quarter it will focus on optimizing mine and mill operations to incrementally increase the daily tonnage and sustain the concentrator at or above the design capacity of 35,000 tons per day.
After the third quarter results were announced, John Hayes of BMO Capital Markets reduced his target price from $4.50 per share to $4.00 per share, citing higher than anticipated cash costs, among other reasons.
“Improvements leading to the mill achieving design capacity have been overshadowed by the poor quarterly results, the lack of clarity and detail on guidance, combined with increased estimated operating costs,” he wrote in a Nov. 15 research note to clients. “Based on the changes made to our assumptions, our 10% NAV estimate [has] decreased by 24%.”
Hayes forecasts the mine will produce 85 million lb. copper next year at co-product total cash costs of US$1.87 per lb. of copper. Life-of-mine attributable production he estimates will reach about 1.1 billion lb. copper and 305,000 oz. gold at average co-product total cash costs of US$2.42 per lb. copper and US$1,228 per oz. gold.
In terms of exploration potential, the deposit is open laterally and at depth. Currently there are two diamond drills on the property that are focused on mineralization at depth in the southern end of the third pit and around the second pit.
Wowkodaw of Canaccord believes the current drill program will “materially increase the size of the deposit.”
He argues that the company is currently trading at a 2013E and 2014E enterprise value/EBITDA of 6.6x and 4.3x, and a 42.6% discount to his 8% NPV estimate of $6.79 per share. “This compares favourably to our mid-tier producer coverage universe at 7.7x and 5.7x, and a 35% discount,” he writes.
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