Copper Mountain: new mine, growth likely to drive prices up
Copper Mountain Mining Corporation (OTCPK: CPPMF) expects a massive increase in production thanks to richer copper grade and a new mine in Australia. In my view, looking only at future free cash flow from gold and copper mining, the fair price is higher than the market price. I obviously see risks associated with the failure of the reserve assessment and the new regulatory framework. However, the work of other analysts and my own financial models indicate that the company’s stock price is simply too low.
Copper Mountain is a mining company that operates and develops assets in Canada and Australia.
The Company’s flagship asset is the Copper Mountain Mine, located in Canada, which produces copper, gold and silver. Management is also developing the Eva Copper project in Queensland, Australia.
Let’s cut to the chase. I started researching Copper Mountain because in a recent presentation, management noted that production could increase significantly. Copper Mountain expects several plant upgrades, including expansion of the flotation circuit, to help recover more copper. Additionally, the company believes that higher copper grade in Copper Mountain Stage 4 could lead to increased production. Finally, the company could increase its total amount of copper production through the Eva Copper project.
In the latest quarterly report, CMMC reported a significant and promising increase in production forecasts. In the second quarter of 2022, copper production included 13.3 million pounds and 5.7 koz. However, management expects a total of 65-75 million pounds of copper in 2022 and a total of 90-105 million pounds in 2023. In my opinion, production growth will likely lead to greater growth revenue, more free cash flow, and stock prices go up.
As of June 30, 2022, the company had reported CAD 85 million in cash, total assets worth CAD 1 billion and total liabilities worth CAD 541 million. The financial situation appears stable, but Copper Mountain will need more cash for the capital expenditures required for the Eva Copper project.
The company has long-term debt of $284 million, which is no small amount. However, given future copper production, the debt appears low. In 2030, I think the company could generate free cash flow of over $201 million.
In a favorable scenario, the production of probable and proven reserves would lead to a valuation of 2.9 CAD per share
In my best case scenario, I have assumed that Copper Mountain will successfully measure all of its proven and probable reserves. This is an optimistic but realistic assumption. Keep in mind that the amount of reserves has increased from 1,066 million pounds to over 2,331 million pounds in the past. With more investment in exploration work, mining engineers will likely measure more reserves.
For the Copper Mountain asset valuation, I assumed copper and gold production. As of December 31, 2021, proven and probable reserves included 1.617 koz of gold and 2,466 million pounds of copper.
In the technical report submitted for the Copper Mountain asset, engineers estimate that copper production would range between 110 million pounds in 2022 and 130 million pounds in 2032. Gold production per year would range between 38 koz in 2022 and 131 koz in 2024. My figures are not at all far from the production expectations given by management.
In this scenario, I assumed 2465 million pounds of copper production and 1659 oz of gold production. Assuming CAD 4.36 per pound of copper and CAD 1,867 per ounce of gold, I got total revenues ranging from CAD 283 million to CAD 978 million.
I also assumed a decline in EBITDA margin from about 56% in 2023 to 10% in 2041, and an operating margin of 29% from 2026 to 2033. I used an effective tax of 22%, resulting in an EBIAT between CAD 52 million and CAD 221. million.
To get future free cash flow, I added D&A, and used changes in working capital/sales of 8% and capital expenditures of around CAD 610 million and CAD 41 million. My results included a maximum free cash flow of CAD 207 million in 2031 and FCF/Sales between 11% and 21%. I believe my figures are both realistic and conservative.
Now, adding up future free cash flow and using a 7% haircut, I got a valuation of CAD 1.1 billion. Copper Mountain has obtained a net present value of almost CAD 1 billion for its project. I believe that this figure is close to the reality of the project. On this note that the company owns 75% of the project. As a result, shareholders will benefit from approximately CAD 890 million of future free cash flow.
With 75% net present value, I added C$86 million in cash, and subtracted C$297 million in debt and C$60 million worth of leases. Finally, dividing by 214 million shares outstanding, the result includes a valuation of $2.9 per share.
Risks: Lack of funding, declining copper quality, failure to assess reserves and new environmental regulations
The business is primarily dependent on the development of the Copper Mountain mine. In my opinion, the most worrying thing would be the lack of funding. If management does not have the cash to make more capital expenditures, production may be lower than expected. If enough researchers and stock analysts are discussing the decline in production, the stock price will likely trend lower.
I would also be very concerned about an unforeseen drop in the grade or tonnage of ore mined. A lower grade would also lead to lower proven mineral reserves, which would lead to lower total assets. In addition, financial analysts could lower their production expectations, which would encourage some shareholders to sell their shares.
Erroneous information on proven and probable reserves could occur. If mining engineers failed to find the amount of copper or gold underground, future revenues would be lower than expected. An increase in estimated capital expenditures, operating costs or transportation costs could also result in lower future free cash flow.
Finally, the new regulatory framework in Canada, new laws and environmental regulations could increase the operating costs of the Copper Mountain mine. In addition, in Australia, the authorities could decide to stop the development of the Eva Copper project, which could have an impact on the total valuation of the company.
Risks: Prejudicial conditions and only taking into account proven reserves, the company could be valued at $1.05
In this scenario, I tried to be as conservative and pessimistic as possible. I have only included production from proven reserves, which generally have a 90% chance of being economically viable. In the latest technical report, management included proven reserves of 612 koz and 1.125 million pounds of copper.
Proved reserves are classified as having a 90% or greater probability of being present and economically viable for extraction under current conditions.
Probable reserves are reserves calculated as being at least 50% likely to be recovered by drilling. Definition of probable reserves
With production from proven reserves only, I achieved total revenues close to CAD 355 million and CAD 137 million. Note that I assumed a price of 4.36 CAD per pound of copper and 1867 CAD per ounce of gold.
With an operating margin close to 44% in 2023, 29% in 2031, and 11% in 2038, and an effective tax of 22%, I calculated the future EBIAT. It is significantly lower than that of the previous cases.
Lower metal production will most likely require less capital expenditure. With that in mind, my capex to sales ratio is a bit lower than the previous cases. Free cash flow is less than $92 million per year.
At an 8% discount, 75% of the net present value of the asset translates to $496 million. If we add the cash and subtract the debt, the result is an equity valuation of $225 million and a fair price of $1.05 per share.
In my opinion, it will be difficult for CMMC’s stock to go that low. Keep in mind that I am not taking into account production from the Eva Copper project in Queensland, Australia, and probable mineral resources. The Eva Copper project is said to have an after-tax net present value of nearly $622 million.
Most analysts believe the fair price should be close to CAD2-CAD4 per share
Investment analysts seem to be even more optimistic than me. In total, 9 analysts gave a valuation target between CAD 2 and CAD 4 per share. The difference between the current price and their target price is significant.
In my opinion, most of them mainly use probable and proven reserves, and incorporate the valuation of the Eva Copper project. Given analyst expectations and the results of my financial models, the company looks like a buy at the current market price.
Copper Mountain recently announced a significant increase in the amount of production from the Copper Mountain mine, and the Eva Copper project could also contribute to this. Considering only the valuation of the Copper Mountain mine and the probable and proven reserves, I think the stock price could reach 2.9 CAD per share. Other analysts even speak of 4 CAD per share. Yes, I see risks related to environmental regulations, failure of mineral valuation or miscalculations of future capex or opex. However, in my opinion, there is much more upside potential than downside risk.