Mercator takes US$120M writedown on El Creston

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  write-down on its El Creston molybdenum-copper project in Mexico.  

The Vancouver-based firm notified the market in January that it would be taking a non-cash impairment charge at its El Creston development project in Mexico’s Sonora state during the fourth-quarter, revealing the amount in its 2012 financials this 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. Driving the steep decline was the El Creston impairment charge. But 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. That 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, explained the impairment charge at El Creston was primarily driven by the weakening in molybdenum prices seen since the Vancouver-based miner acquired the project through the June 2011 takeover of Creston Moly.

“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 shelved construction plans at El Creston for four years to 2018.

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

But he stresses 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 other 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 near Kingman, Ariz.

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

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

For the year, the mine generated 87.5 million lb. copper equivalent, comprising 40.9 million lbs. copper, 10.3 million lb. molybdenum 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 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.  

For 2013, Mercator is guiding output of 93 to 102 million lb. copper equivalent, comprising 41.5-46.5 million lb. copper, 11-12 million lb. moly and 600,000 oz. silver, at cash costs of US$2.25-$2.50 per lb. copper and US$8.55-$9.45 per lb. molybdenum.  

That said, it cautions output at Mineral Park in the first quarter should be lower than the last quarter of 2012 due to extra maintenance downtime and as it continues to mine harder ore sections.

But it anticipates production in 2013 to sequentially improve each quarter as it is looking to start mining softer ore from the Ithaca pit, which it is currently dewatering.  

“The operational turnaround at Mineral Park continues to progress as mining of the softer ore Ithaca pit in Q2/13 should help the company reduce its operating cost profile, increase throughput, and improve overall production,” Chris Chang, an analyst at Laurentian Bank, notes.

The miner is currently 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 to 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 should produce an average of 79 million lbs. 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 the construction of the power line.

BMO Nesbitt Burns analyst Stephen Bonnyman estimates a “timely” start-up of 2015 for the project but warns financing may 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 writes.  

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 towards Mineral Park for mill optimization, additional mining equipment and sustaining capital. The remaining US$2 million will be invested at El Pilar mainly for additional metallurgical testing.

Mercator exited 2012 with a stronger balance sheet, with 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 payables.

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

“We are concerned with the company’s unrestricted cash balance (of US$14.7 million) 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 molybdenum prices remain below US$12.00/lb. (spot is currently US$11.00/lb),” he argues.

That said, he’s maintaining his target of 75¢ and buy recommendation on the stock. Bonnyman at BMO also has a 75¢ target but rates the stock as “market perform.”   

Mercator closed March 21 flat at 37.5¢.