CIBC upgrades Imperial Metals with Newcrest investment in Red Chris

Imperial Metals ’ (TSX: III) deal with Newcrest Mining (ASX: NCM) to sell a 70% stake in its Red Chris mine in British Columbia averts a “liquidity crunch” for the Vancouver-based company and will improve execution at the mine, CIBC says.

The transaction prompted the bank to upgrade Imperial Metals to a neutral rating from underperformer and lift its 12-18 month target price on the stock from 60¢ per share to $3.50 per share.

News of the transaction on March 11 sent Imperial Metals’ shares surging 57% to $3.10 with nearly six million shares traded.

At press time in Toronto, Imperial Metals shares were trading at $3.40 apiece.

“We expect Newcrest’s experience in the operation and development of its Cadia (gold-copper) mine in Australia to benefit Imperial Metals shareholders with the turnaround of Red Chris’ current operations, and the development of Red Chris’ underground resource (potential block cave, similar to that of Cadia),” Oscar Cabrera, who covers the company for CIBC, wrote in a research note.

While the investment “should eliminate Imperials’ liquidity issues,” however, it does come at the cost of transferring “most of Red Chris’ mineral resource upside potential to Newcrest shareholders,” Cabrera pointed out.

“In addition, we see limited upside in Imperial Metal’s cash flow generation from its Mount Polley (care and maintenance) and Huckleberry (restarting in 2020) mines over the next two years. Importantly, the transaction is to close in Q3/19, requiring Imperial to postpone payment to creditors until then (~718 million in debt maturities in Q1/19).”

During a conference call to discuss the transaction, Newcrest’s CEO, Sandeep Biswas, outlined a two-stage transformation plan for the open-pit mine that he believes will deliver value and will capitalize on Newcrest’s unique technical expertise in block caving, operations optimization and selective processing.

In the first stage, Newcrest will focus on process plant optimization including debottlenecking, recovery uplifts, process control, and improving the quality of the concentrate; mine optimization by improving knowledge of the orebody, grade control, fleet management systems, and mine planning; and trim costs in the supply chain. It will also start an extensional drill program.

The Australian miner also said it will optimize Imperial Metals’ open-pit mine plan and improve production and mill recoveries. The current open-pit mine has an existing 11 million tonne-per-day processing plant and associated infrastructure that gives Newcrest brownfield expansion options, Biswas said.

During the second stage of the transformation, Newcrest will apply its expertise in block caving, coarse ore flotation, mass sensing and sorting, as well as continue exploration at the mine and on the surrounding tenements, Biswas noted, starting with a study on accelerating the development of a larger block cave at Red Chris.