Copper Mountain a takeover target, CIBC says

Copper Mountain Mining (CUM-T) and its pure-play copper mine in British Columbia could become a takeover target, Matthew Gibson of CIBC argues in a new research report.

The mining analyst initiated coverage of the company on Sept. 24 with a 12-month price target of $5.20 per share. At presstime Copper Mountain was trading at $3.40 per share within a 52-week range of $2.43-$6.39.

“With the most torque to prices in our copper producer coverage and generating free cash flow, we believe its pure-play nature will appeal to the more risk-averse,” Gibson writes. “While being acquired is a distinct possibility, we believe this is partially baked into the share price at its current valuation.”

The Toronto-based mining analyst reasons that a mid-tier copper producer may look to acquire the company and also believes there could be additional resources “in the form of satellite deposits or the potential for a higher-grade underground scenario.”

“Besides the possibility of a take-out there is also the blue sky potential of increasing production or mine life by including additional resources currently being defined by deep and step-out drilling,” he maintains.

Gibson points out that the company has defined “several interesting anomalies” near the main zone of mineralization.  

Copper Mountain built a new mill closer to the pit in the middle of last year and in the second quarter of this year reached a throughput of 26,000 tonnes per day — or 79% of its design capacity.

Once in full production the mine is expected to produce an average of 80 million lb. copper a year for 17 years at average cash costs of US$1.92 per lb. copper. This year the mine is forecast to pump out about 60 million pounds of copper.

Gibson forecasts the company will increase throughput to the 55,000 tonne per day level in 2013-2014 and says he believes recoveries will improve in 2015 “as mining activities reach depths below the historical workings in Pit #3.”

The mine, about 20 km south of Princeton, first went into production in 1923. It was shut down in 1996 due to low metal prices. Copper Mountain Mining redesigned a “super pit” that incorporates three pits into its new mine plan.

The company is expected to generate free cash flow in the second half of this year, Gibson says, and argues that Copper Mountain “will either have to go out and acquire some growth or define a use for the cash flow it will be now generating, or become a target itself.”

“The stock is currently trading at about US$0.18 per lb. of recoverable copper,” he adds. “Since the capital spend is mostly behind this project, based on spot copper prices of US$3.40 per lb., this leaves a lot of room for an acquirer to pay even more than average rates. Given current equity valuations, we believe that a 40%-50% premium over current prices would be where a transaction would take place.”

Copper Mountain Mining owns 75% of the mine and the remainder is held by Mitsubishi Materials Corporation.