Copper Mountain a target, CIBC says

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

The Toronto-based mining analyst initiated coverage of the company on Sept. 24 with a 12-month price target of $5.20 per share. At press time Copper Mountain was trading at $3.40 per share, within a 52-week range of $2.43 to $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.”

He reasons that a mid-tier copper producer may look to acquire the company, and 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 takeout, there is the blue sky potential of increasing production or mine life by including additional resources currently being defined by deep and stepout drilling,” he maintains. Gibson points out that the company has defined “several interesting anomalies” near the main mineralized zone.

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.

In mid-September the company acknowledged that ramp-up to full production “has been longer than expected, and very challenging,” but forecast that for the balance of the year, the mill would operate at an average 35,000 tonnes per day, with an average head grade of 0.35% copper. Full-year production will reach 60 million lb. (27,240 tonnes) copper.

Once in full production, the mine is expected to produce an average 80 million lb. (36,320 tonnes) 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 60 million lb. copper.

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

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, define a use for the cash flow it will be generating or become a target itself.”

“The stock is trading at about US18¢per lb. recoverable copper,” he adds. “Since the capital spent 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% to 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.