Another hill to climb for Copper Mountain

Operational issues at the Copper Mountain mine in B.C. are hounding Copper Mountain Mining (CUM-T).

The latest technical glitch involved a failed transformer — one of the two that power the semi-autogenous grinding (SAG) mill motors at the mine. The company said on May 16 that coils in the transformer had broke down, although why they failed isn’t clear.

To try to minimize the impact on production, a transformer from a ball mill was transferred to the SAG mill to get it back into production. But production will be somewhat muted for a few weeks.

The damaged transformer was trucked to ABB in Edmonton for rebuilding, which will take several weeks. During this time production will be cut to 25,400 tonnes per day. The mill has the capacity to process 35,000 tonnes per day.

Using the ball mill transformer is already a small victory for the company, because it had designed the plant with SAG and ball mills that had interchangeable motors and transformers in case of failure.

Up until the malfunction, the company had been making strides towards bringing the SAG mill to full capacity after a series of issues with the concentrator, which led some to question the quality of the equipment used to build the mine.

“Frustrations among existing shareholders continue to grow, given the company’s disappointing operating results,” Christopher Chang, an analyst with Laurentian Bank, wrote in a mid-May research note. “With 2013 production guidance already at risk, a greater level of uncertainty now overhangs the stock, as investors anxiously await for more clarity on what the company believes is an achievable production target.”

The Copper Mountain mine went into production in 2011 and reached design capacity a year later. The open-pit mine has a 17-year mine life and proven and probable reserves of 232.8 million tonnes grading 0.36% copper, 0.09 gram gold per tonne and 1.25 grams silver per tonne.

But with this hit to production, the company may need debt to get all that ore out of the ground.

“With a cash balance that is ­already relatively low, and plans to finance a secondary crusher later this year, this untimely event will put further pressure on Copper Mountain’s balance sheet,” Jennings Capital analyst Garnet Salmon wrote in a mid-May research report.

Salmon said the transformer failure and reduced production could result in the company using equal parts of debt and cash to fund the $35-million capital expenditure associated with the secondary crusher.

Jennings maintained its “buy” recommendation on the stock, but dropped its 12-month target price to $3.60 per share from $4.60.

Raymond James analyst Adam Low, however, argued that in the context of total-year production, the latest setback wouldn’t have a big impact. Raymond James cut its full-year production estimate for the mine to 61.6 million lb. copper from 64.2 million lb.

“Given the number of issues that Copper Mountain has experienced with both its SAG mill and ball mills over the past eighteen months, we expect the market will view this announcement more negatively than just the minimal financial ­impact,” he wrote. “We view this malfunction instead as an unfortunate blip in an already bumpy path to reaching targeted production. It is an example of the types of risks all mining companies face in their day-to-day operations.”

Raymond James maintained its $5 price target for the stock.

The Copper Mountain mine sits in southern B.C., 20 km south of Princeton. Copper Mountain has a 75% stake in the project, while Mitsubishi Materials owns the remaining 25%, and has a strategic alliance with Copper Mountain.

As trading resumed on May 17, the company’s shares were off 13¢ to $1.55 on 2.8 million shares traded. By press time, shares had rebounded to $1.66.