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Copper Mountain: New mine, growth likely to drive up prices

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Copper Mountain Mining Corp. ( OTCPK:CPPMF ) expects higher copper grades and a huge increase in new mine production in Australia. A fair price, in my view, considering the future free cash flow from gold and copper mining More than the market price. I certainly see risks from the failed assessment of reserves and the new regulatory framework. However, the work of other analysts and my own financial models indicate that the company’s share price is too low.

Copper mountain

Copper Mountain is a mining company that operates and develops assets in Canada and Australia.

A major asset of the company is the Copper Mountain mine in Canada, which produces copper, gold and silver. Management is also developing the Eva Copper Project in Queensland, Australia.

Investor presentation

Investor presentation

Let’s go straight to the point. I started researching Copper Mountain because in a recent presentation, management noted that production could increase significantly. Copper Mountain expects several plant improvements, including expansion of the flotation circuit, to help recover more copper. Furthermore, the company believes that the higher copper grade in the Stage 4 copper mountain could lead to higher production. Finally, the company can increase its total copper production thanks to the Eva Copper project.

Investor presentation

Investor presentation

Investor presentation

Investor presentation

In its latest quarterly report, CMMC reported a significant and promising production guidance increase. In Q2 2022, copper production comprised 13.3 million pounds and 5.7 koz. However, management expects a total of 65 to 75 million pounds of copper in 2022 and a total of 90 to 105 million pounds in 2023. In my view, manufacturing growth can lead to bigger revenue growth, more free cash flow, and higher share prices.

Quarterly report

Quarterly report

Quarterly report

Quarterly report

Balance sheet

As of June 30, 2022, the company reported cash of CAD85 million, total assets worth CAD1 billion, and total liabilities worth CAD541 million. The financial situation appears stable, but the capital expenditures required for the Copper Mountain Eva Copper Project require more cash.

Quarterly report

Quarterly report

The company has long-term debt of $284 million, which is no small sum. However, considering the future production of copper, the debt is small. In 2030, I believe the company could deliver more than $201 million in free cash flow.

Quarterly report

Quarterly report

Under the benefit-case, production of probable and proven reserves would result in a valuation of CAD2.9 per share.

In my best case scenario, I assumed that Copper Mountain would successfully measure all of its proven and probable reserves. This is an optimistic but realistic assumption. Bear in mind that previously the reserve volume increased from 1,066 million pounds to 2,331 million pounds. With more investment in exploration work, mining engineers measure more reserves.

Investor presentation

Investor presentation

For the evaluation of the Copper Mountain property, I assumed copper and gold production. As of December 31, 2021, proven and probable reserves include 1.617 koz of gold and 2,466 million pounds of copper.

Investor presentation

Investor presentation

In a technical report issued for the Copper Mountain property, engineers believe copper production will range from 110 million pounds in 2022 to 130 million pounds in 2032. Gold production for the year will range from 38 koz in 2022 to 131 koz in 2024. My numbers are not far off the production expectations given by management.

Extension Study and Life-of-Mine Planning NI 43-101 Technical Report

Extension Study and Life-of-Mine Planning NI 43-101 Technical Report

In this case, I have assumed copper production of 2465 million pounds and gold production of 1659 ounces. Assuming CAD4.36 per pound of copper and CAD1867 per ounce of gold, I got total proceeds of CAD283 million to CAD978 million.

Author's work

Author’s work

I predict an EBITDA margin decline of 29% from 2026 to 2033, from around 56% in 2023 to 10% in 2041. I used an effective tax rate of 22%, which resulted in an EBIAT between CAD52 million and CAD221 million.

Author's work

Author’s work

To derive future free cash flow, I added D&A and used working capital/changes in sales of 8% and capital expenditures of CAD610 million and CAD41 million. My results include peak free cash flow of CAD207 million in 2031 and FCF/sales between 11% and 21%. I believe my numbers are realistic and conservative.

Author's work

Author’s work

Now, adding up the future free cash flows and using a discount of 7%, I get a value of CAD1.1 billion. Copper Mountain has obtained a net present value of CAD1 billion for its project. I believe this figure is close to the reality of the project. With that said, let’s note that the company owns 75% of the project. Therefore, shareholders will enjoy about CAD890 million from future free cash flow.

With 75% of the net present value, I added CAD86 million in cash and spent CAD297 million in debt and CAD60 million worth of leases. Finally, when divided by the 214 million shares outstanding, the result includes a value of $2.9 per share.

Author's work

Author’s work

Risks: Lack of financing, decline in copper grades, failed reserve evaluation, and new environmental regulations

The company is mainly dependent on the development of the Copper Mountain mine. In my view, the lack of funding is the most worrisome. If management does not have cash on hand to make higher capital expenditures, production may be lower than expected. If a sufficient number of equity researchers and analysts discuss a decline in production, the stock price may fall.

I am very worried about an unexpected drop in ore grade or tonnage mined. A lower grade leads to a decline in proven mineral reserves, which in turn leads to a decline in the total amount of assets. Furthermore, investment analysts may lower their production expectations, which may cause some shareholders to sell their shares.

Inaccurate information about proved and probable reserves may occur. If mining engineers fail to explore the amount of copper or gold under the ground, future returns will be less than expected. Estimated increases in capital expenditures, OPEX or transportation costs may reduce future free cash flow.

Finally, the new regulatory framework, new laws and environmental regulations in Canada may increase the operating costs of the Copper Mountain mine. Furthermore, in Australia, the authorities may decide to stop the development of the Eva Copper project, which may affect the company’s total valuation.

Risks: Considering only adverse conditions and proved reserves, the company can 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 typically have a 90% chance of being economically profitable. At the last 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 extraction under current conditions and are economically viable.

Probable reserves are calculated as at least 50 percent of reserves recoverable by drilling. Probable reserve definition

Extension Study and Life-of-Mine Planning NI 43-101 Technical Report

Extension Study and Life-of-Mine Planning NI 43-101 Technical Report

With only the production of proved reserves, I got total revenue of CAD355 million and CAD137 million. Note that I assumed a price of CAD4.36 per pound of copper and CAD1867 per ounce of gold.

Author's work

Author’s work

44% in 2023, 29% in 2031, and 11% in 2038, and with an effective tax of 22%, I calculated the future EBIAT. This is considerably less than the previous cases.

Author's work

Author’s work

Lower production of metal requires lower capital costs. Keeping this in mind, my capex/sales ratio is slightly lower than in previous cases. Free cash flow results in less than $92 million per year.

Author's work

Author’s work

With a discount of 8%, 75% of the net present value of the property results in $496 million. If we add cash and subtract debt, the result is an equity valuation of $225 million and a fair price of $1.05 per share.

Author's work

Author’s work

In my view, it is difficult for CMMC stock to go that low. Keep in mind that I am not taking into account the production and possible mineral resources from the Eva Copper Project in Queensland, Australia. The Eva Copper Project is said to have an after-tax net present value of close to $622 million.

Investor presentation

Investor presentation

Most analysts believe a fair price should be close to CAD2-CAD4 per share

Investment analysts are more optimistic than I am. A total of 9 analysts gave the stock a valuation target between CAD2 and CAD4. The difference between the current price and their price target is significant.

Investment Analysts

Investment Analysts

In my view, most of them are mainly using both Probable and Proved Reserves and combining evaluation of Eva Copper project. Considering analyst expectations and the results of my financial models, the company looks like a buy at the current market price.

take

Copper Mountain recently announced a significant increase in production volumes at the Copper Mountain mine, and the Eva Copper Project may also contribute. Considering only the evaluation of the Copper Mountain mine and probable and proven reserves, I believe the stock price could reach CAD2.9 per share. Other analysts are discussing CAD4 per share. Yes, I see risks from environmental regulations, failed mineral appraisal or miscalculation of future capex or opex. However, in my view, the upside potential outweighs the downside risk.

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