Mercator eyes better days ahead

Mercator Minerals (ML-T) had a difficult year in 2012, but one that ended with improved operations and a stronger balance sheet, despite taking a US$119.8-million writedown on its El Creston molybdenum-copper project in Mexico’s Sonora state.  

The Vancouver-based firm notified the market in January that it would be taking a non-cash impairment charge at El Creston during the fourth quarter, revealing the amount in March.

For 2012, Mercator reported a net loss of US$128.7 million, down 240% from the year-ago profit of US$91.7 million. El Creston’s impairment charge drove the steep decline. But after removing one-time items, adjusted losses were US$1.2 million, or nil per share, down 115% from 2011.

For the fourth quarter, Mercator realized a net loss of US$115.2 million, or adjusted earnings of US$4.4 million, which works out to US2¢ a share, slightly better than the consensus of US1¢ a share and last year’s nil per share.

On a March 21 conference call, Mark Distler, the company’s chief financial officer, said the impairment charge at El Creston was driven by moly prices, which have weakened since Mercator took over Creston Moly in June 2011.

“Average moly prices at the time of the acquisition were around US$16.50 per lb., as compared to our 2012 year-end average of US$11.17 per lb.,” Distler says.

Consequently, Mercator has postponed construction at El Creston until 2018.

That delay, combined with assumed cost escalations, have knocked off US$120 million from El Creston’s estimated present value based on future cash flows, bringing its current book value down to US$31.8 million, Distler noted.    

But he stressed that the non-cash charge “does not impact the inherent value we believe still exists at El Creston.”

With El Creston on the back burner and its copper development project — El Pilar, also in Mexico’s Sonora state — on hold, the company is focusing on increasing throughout and lowering costs at Mineral Park, its sole producing asset, located north of Kingman, Ariz., some 120 km southeast of Las Vegas.

Last year, the open-pit copper-moly-silver mine delivered quarterly improvements in production despite a string of operational hurdles, including mining harder-than-expected ore, increased maintenance at both semi-autogenous mills and temporary power constraints.

Mineral Park surpassed its fourth-quarter expectations, producing a record 23.8 million lb. copper equivalent of 10.9 million lb. copper, 2.9 million lb. moly and 157,000 oz. silver. Recoveries scored above design rates at 83.1% copper and 85.5% moly.

The mine generated 87.5 million lb. copper equivalent for the year, comprising 40.9 million lb. copper, 10.3 million lb. moly and 677,500 oz. silver, also at better recoveries and throughput.

The mill churned through an average of 45,570 tonnes per day, grading 0.14% copper, 0.039% moly and 0.09 oz. silver per ton.

Cash costs per pound of copper on a co-product basis in 2012 increased 6.8% to US$2.48, while moly costs dropped 10% to US$10.37. Revenues for the year remained flat at US$262.6 million.  

This year Mercator is guiding output of 93 million to 102 million lb. copper equivalent, comprising 41.5 million to 46.5 million lb. copper, 11 million to 12 million lb. moly and 600,000 oz. silver, at cash costs of US$2.25 to US$2.50 per lb. copper and US$8.55 to US$9.45 per lb. moly. 

It cautions that Mineral Park output in the first quarter should be lower than the last quarter of 2012, due to extra maintenance downtime as harder ore is mined.

However, it anticipates that production in 2013 will improve each quarter, as it mines softer ore from the Ithaca pit, which is being dewatered.  

“The operational turnaround at Mineral Park continues to progress as mining the softer-ore Ithaca pit in the second quarter of 2013 should help the company reduce its operating-cost profile, increase throughput and improve overall production,” Laurentian Bank analyst Christopher Chang notes.

The miner is revising its resource model to reflect the harder ore and varying grades in the transition copper zone, with an updated reserve and resource estimate expected out shortly.

At the El Pilar copper project in Mexico, the company plans to carry out more metallurgical testing this year and explore financial options that would reduce the amount of capital it has to raise.

While development is on hold, the construction-ready project is estimated to take US$280 million and 15 months to build. Once up and running, it would produce 79 million lb. copper in cathodes each year over its 13-year life.

The company has all the construction permits for the project in hand, and is waiting for the final environmental permits for building the power line.

BMO Nesbitt Burns analyst Stephen Bonnyman estimates a “timely” start-up in 2015 for the project, but warns that financing could be hard to secure. “While El Pilar remains a potentially attractive, low-capex and short construction project, Mercator’s ability to independently finance the project in the near-term is doubtful, and the smaller scale of the project makes a partnership more challenging,” he says.  

Meanwhile, to preserve cash, the junior producer has revised its 2013 capital expenditures from US$15 million to US$13.7 million, of which US$11.7 million will go to Mineral Park for mill optimization, more mining equipment and sustaining capital. The remaining US$2 million will be invested at El Pilar, mainly for more metallurgical testing.

Mercator exited 2012 with a stronger balance sheet and a working capital of US$2 million, up from a deficit of US$116 million in 2011, as it restructured its debt and paid off its outstanding accounts payable.

That US$2 million includes a current liability of US$15.2 million for the company’s 2013 copper-forward sales and US$27.7 million in cash and current restricted cash, Chang says, explaining that while the balance sheet has improved, it still appears stressed.  

“We are concerned with the company’s unrestricted [US$14.7-million] cash balance, given the recent decline in metal prices. Despite reducing its capital expenditures budget at Mineral Park, we estimate that the company could seek additional capital by year-end, should moly prices remain below US$12 per lb. [with spot at US$11 per lb.],” he argues.

Chang is maintaining his 75¢ target and “buy” recommendation on the stock. BMO’s Bonnyman also has a 75¢ target, but rates the stock as “market perform.”   

Mercator closed March 21 flat at 37.5¢.