Copper Mountain sinks on $30M equity raise

Copper Mountain Mining (TSX: CUM) shares have been sliding since the company’s surprise move to raise $30.1 million in a bought deal to fund a secondary crusher and increase throughput at its eponymous copper–gold mine near Princeton, B.C.  

The Vancouver-based firm’s stock has dropped 16% since the Nov. 11 release to close Nov. 13 at $1.56. Under the deal, the producer will provide a group of underwriters — led by National Bank Financial — 17.7 million shares priced at $1.70 apiece, for gross proceeds of $30.1 million. The offer price is 8% below the Nov. 8 close of $1.85, the last trading day before the deal was publicized, much to the dismay of investors and analysts.

The underwriters also have an overallotment option to buy another 2.66 million shares, bringing total proceeds to $34.6 million if the option is fully exercised. The transaction is expected to wrap-up in early December, with the proceeds going towards building the secondary crusher at the Copper Mountain site and for general corporate purposes.

Analysts have had mixed reactions to the deal, with many noting they had expected Copper Mountain to fund its 75% share of the crusher’s estimated $40-million cost through debt. The company’s 25% partner, Mitsubishi Materials Corp., is responsible for the remainder.

“The equity issue represents significant dilution and was unexpected, as management had previously indicated the unit would be funded through debt,” wrote Desjardins Capital Markets analyst Jackie Przbylowski. Consequently, she has reduced her $2.75 target price to $2.25 and downgraded the stock rating to “hold” from “buy.” Przbylowski notes the equity raise, not including the overallotment option, increases the company’s 98.6 million shares outstanding by 18%.

Chris Chang, an analyst at Laurentian Bank Securities, comments that while the share dilution is substantial, it removes the financing uncertainty around the secondary crusher. He predicts the miner will take nine months to build the crusher — with commissioning starting in late 2014 — while the company is targeting a mid-2014 start-up. Once up and running, the crusher should gradually help increase throughput to 40,000 tonnes per day, up from the previously targeted 35,000 tonnes per day. Chang forecasts Copper Mountain will have enough capital to optimize its sole mine once the bought deal closes. He maintains a “buy” on the stock, while trimming his target price to $3.15 from $3.40.

But BMO analyst John Hayes argues the Vancouver-based firm will likely require more working capital to sustain its flagship operation “given the capital spend on low-grade stockpiles and the weak copper-price environment.” He says the current equity financing could strengthen the company’s balance sheet so that it can access more debt. Hayes rates Copper Mountain as “underperform speculative.”

Adjusted earnings for the September quarter were nil per share, below the consensus of US4¢ per share. Copper Mountain produced 17.7 million lb. copper, 6,400 oz. gold and 79,300 oz. silver during the quarter, with throughput averaging 29,130 tonnes per day. This brought copper output for the nine months ended September to 47.6 million lb. This year the company is guiding annual copper production of 65 million to 75 million lb. It ended the quarter with US$17.1 million in cash.