Junior producers likely to benefit from China’s appetite for copper
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Simon Avery

From Tuesday's Globe and Mail

Posted on Tuesday, September 14, 2010

What are we looking for?

China has a voracious appetite for copper. Demand for the red metal is traditionally a harbinger of economic strength and is used extensively in construction, transportation, electronics, plumbing and even in the currencies of nations themselves. China consumes 39 per cent of global production but has only about 6 per cent of the world’s reserves.

CIBC World Markets analyst Ian Parkinson has done an extensive review of junior copper producers that trade on the Toronto Stock Exchange, combing through more than 160 companies and more than 200 projects to determine which players are most likely to draw the acquisitive eye of large mining companies and sovereign wealth funds in China, India, Brazil and other developing economies. He says merger and acquisition activity is set to ramp up in the space and investors who choose the most attractive junior players will see substantial returns. “In very simplistic terms, we believe if you’re long what China’s short, you’re in a good position.”

The screen

Mr. Parkinson zeroed in on junior copper producers with “pounds in the ground” that he calculated would be on the radar screens of international investors.

He created a weighting formula to capture how the market values these firms. In the process he looked at historical transactions and total acquisitions costs, and he weighed resource criteria, including deposit size and grade as well as mining methods and proximity to infrastructure and markets. He assessed the grade of projects with the assumption that higher-grade products typically carry lower operating costs, and he calculated cash costs of production as well as capital expenditure required on a per-pound basis.

In terms of valuations, he used enterprise value divided by the amount of reserves. He also looked at market capitalization relative to the required initial capital in an effort to gauge how the market is valuing the likelihood of the companies actually building their projects.

What did we find?

At the top of the list of 25 stands Duluth Metals Ltd., which is in the advanced stages of mineral exploration and has completed preliminary economic assessments on a large underground site in northeaster Minnesota.

Number two ranked PolyMet Mining Corp. is developing a copper-nickel-precious metals project in northeastern Minnesota and owns a crushing and milling facility and other infrastructure nearby. The state government is close to completing an environmental review and the company will begin project construction upon receipt of permits, Mr. Parkinson says.

The third ranked firm is Western Copper Corp., a Vancouver-based entity spun out from Western Silver Corp. in 2006. It holds significant gold, copper and molybdenum resources and reserves in four Canadian properties, he says.

“We would say this group [of 25] represents some of the best junior Americas-focused copper names currently listed on the TSX and a basket approach with the group could be advantageous for investors,” Mr. Parkinson says.

CIBC Junior Copper Rankings
Company	Ticker	CIBC Junior Copper Score	Market Cap ($-mln.)	Overall Ranking	Strategic Partnership
Duluth Metals Ltd	DM-T	4.95	218	1	Antofagasta has 40% interest in Nokomis
PolyMet Mining Corp	POM-T	6.75	225	2	Glencore owns 6.3% and Cliffs Natural Resources owns 6.1%
Western Copper Corp	WRN-T	7.65	105	3
Terrane Metals Corp	TRX-X	7.85	639	4	Proposed acquisition by Thompson Creek Metals
Augusta Resource Corp	AZC-T	8.75	360	5	HudBay owns 11% (13.6% fully diluted)
Antares Minerals Inc	ANM-X	9.55	251	6
Far West Mining Ltd	FWM-T	9.85	273	7	Quadra FNX owns 7.9% (14.64% fully diluted)
Copper Fox Metals Inc	CUU-X	10.05	211	8
Minera Andes Inc	MAI-T	10.85	262	9
Nevada Copper Corp	NCU-T	10.95	165	10	Capstone owns 11.1% (14.4% fully diluted)
Coro Mining Corp	COP-T	11.55	57	11
Redhawk Resources Inc	RDK-X	11.65	49	12
Candente Resource Corp	CDG-T	12.65	35	13
Baja Mining Corp	BAJ-T	13.55	136	14	25% partner on Boleo with a consortium of South Korean companies
Entre Gold	ETG-T	14.20	268	15	80% of Lookout Hill Project owned by Ivanhoe
Norsemont Mining Inc	NOM-T	14.45	166	16
International PBX Ventures Ltd	PBX-X	14.55	25	17
Abacus Mining And Exploration Corp	AME-X	14.75	31	18
Northern Dynasty Minerals Ltd	NDM-T	15.30	717	19	Partnered with 50/50 with Anglo American on Pebble
Copper Mountain Mining Corp	CUM-T	15.75	314	20	25% of Copper Mountain project is owned by Mitsubishi Materials
Pacific Booker Minerals Inc	BKM-X	15.85	87	21
Lumina Copper Corp	LCC-X	16.80	78	22
Explorator Resources Inc	EXO-X	17.35	34	23
NGEx Resources	NGQ-T	17.60	94	24
Panoro Minerals Ltd	PML-X	19.80	24	25
Source: Company reports and CIBC World Markets Inc.

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