Mercator Minerals Ltd MLKKF

CIBC

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Institutional Equity Research

Change in Recommendation

July 8, 2009 Metals & Minerals

Mercator Minerals Ltd.

Mineral Park Finally Out Of The Woods, Expecting

Further Improvements In Q3

In Q2, Mercator shipped 7.8MM lbs Cu in concentrate, 1.2MM lbs Cu of

cathode, 418,987 lbs Mo and 56,441 oz Ag. Copper and moly recoveries

were 72% and 42% respectively prior to modifications that improved these

to 77% and 69% and were completed at the beginning of June.

Mineral park mined 1.84MM tons of mill ore, 698 thousand tons of leach ore

at a strip ratio of 0.43:1. The mill processed 1.79MM tons over the quarter

with head grades of 0.275% Cu and 0.026% Mo. This implies the mill ran at

about 20,000 tons per day with an availability of 88.8%.

While metallurgical improvements have increased recoveries for Cu and Mo

to 77% and 69% respectively, they are still well below designed rates. The

good news is that the company is in much better shape now and should

only need to tweak the system going forward.

Incorporating management targets for Cu and Mo recoveries of 80% and

72% into our model, which are slightly below our prior estimates, reduces

our PT to C$1.90 from C$2.00. Given the de-risking of the project and

current market valuation we are upgrading ML to SO from SP, as of July 8.

Stock Price Performance

Source: Reuters

All figures in US dollars, unless otherwise stated.(C$1.164:US$1) 09-97544 © 2009

CIBC World Markets does and seeks to do business with companies covered in

its research reports. As a result, investors should be aware that the firm may

have a conflict of interest that could affect the objectivity of this report.

Investors should consider this report as only a single factor in making their

investment decision.

See "Important Disclosures" section at the end of this report for important

required disclosures, including potential conflicts of interest.

See "Price Target Calculation" and "Key Risks to Price Target" sections at the

end of this report, where applicable.

Ian Parkinson Matthew Gibson

Stock Rating:

Sector Outperformer

Sector Weighting:

Market Weight

12-18 mo. Price Target C$1.90

ML-TSX (7/8/09) C$1.13

Key Indices: None

3-5-Yr. EPS Gr. Rate (E) NM

52-week Range C$0.29-C$11.08

Shares Outstanding 176.9M

Float 73.0M Shrs

Avg. Daily Trading Vol. 450,000

Market Capitalization $171.7M

Dividend/Div Yield Nil / Nil

Fiscal Year Ends December

Book Value $0.30 per Shr

2009 ROE (E) NM

LT Debt $129.0M

Preferred Nil

Common Equity $53.5M

Convertible Available No

Earnings per Share Prev Current

2008 ($0.38A)

2009 $0.01E $0.01E

2010 $0.64E $0.60E

P/E

2008 NM

2009 97.1x 97.1x

2010 1.5x 1.6x

Cash Flow per Share

2008 ($0.35A)

2009 $0.07E $0.06E

2010 $0.71E $0.67E

P/CF

2008 NM

2009 13.9x 16.2x

2010 1.4x 1.4x

Company Description

Mercator Minerals is focused on re-starting the Mineral

Park mine in Arizona and is staged to produce 43 mln.

lb. of Cu and 5.9 mln. lb. of Mo in 2009.

www.mercatorminerals.com

Mineral Park Finally Out Of The Woods, Expecting Further Improvements In Q3 - July 08, 2009

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Outlook Improving

Previously we had concerns over recoveries at Mineral Park and whether the

company would be able to generate enough EBITDA to satisfy its debt

covenants. It would appear that the tough Q2 we envisioned did materialize, but

the company generated more than enough cash to cover interest payments. In

addition, the implementing of the metallurgical improvements in the plant has

significantly reduced a key risk to the company. With this significant obstacle out

of the way, we see substantial upside in the stock as it ramps up its mill to

55,000 tpd in the next two years.

Exhibit 1. Production Profile

Mercator

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E

MM lbs.

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

US$ / lb

Cu Mo Cash Costs Cu Cash Costs Mo

Source: Company reports and CIBC World Markets Inc.

Recoveries Improving

Mercator (ML-SO) reported that its sales of copper over the quarter totaled

9.0MM lbs from both cathode and concentrate. Moly sales were 418,987 lbs, far

below what Mineral Park is designed to produce but signs of improvement were

reported for the month of June with recoveries for moly and copper both

improving from Q1 and Q2 but still below design spec. In the exhibit below, one

can see the current positive trend in recoveries. We expect the company to

reach target rates in 2010.

Exhibit 2. Mineral Park Metal Recoveries

Q1 2009A* Q2 2009A** Q3 2009E Q4 2009E 2009E 2010E

Copper Recoveries 40% 72% 77% 77% 67% 80%

Moly Recoveries 9% 42% 69% 69% 47% 72%

*CIBC estimate

**Recoveries up to beginning of June

Source: Company reports and CIBC World Markets Inc.

Mineral Park Finally Out Of The Woods, Expecting Further Improvements In Q3 - July 08, 2009

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Major modifications that were made at the mill include:

• Rougher down draft tube extensions

• Redesigned Quinn moly cells

• Conditioning tank re-plumbing

• Reduced SAG discharge grate opening size

• Modified dart boxes on copper-moly feed cleaner cells

• Replaced tails thickener drive mechanism

• Recycle moly thickener into copper-moly thickener

• Added nitrogen system to moly rougher circuit

• Constructed dry nash mixing system

• Added moly column cell

Stage 2 Expansion Progress

Stage 2 expansion at the mill is continuing with the setting of the second SAG

mill into the bearings and the start of electrical runs. Other work completed to

date includes:

• Pouring of the bases for the second set of ball mills

• Reclaim tunnel completed

• Steel support and concrete for the second SAG mill

• Second stage tailings thickener tank

• Copper moly cleaner circuit is complete

• Drilling of additional water wells

Our production forecast for the year was also augmented through our analysis of

Q2 production figures. We now expect a slower ramp-up to a 37,000 tpd

throughput rate by the end of 2009. We then expect further ramping up of

production in 2010 before finally achieving a 55,000 tpd throughput in 2011.

Valuation

We have incorporated management’s recovery target into our 2010 estimates

and beyond, and as a result our NAV per share has dropped $0.10 to $1.90 per

share. This NAV represents the discounted cash flow of the Mineral Park mine as

well as the company’s net debt.

Mineral Park Finally Out Of The Woods, Expecting Further Improvements In Q3 - July 08, 2009

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Exhibit 3. NAV Calculation

Discount Value (US$ mln) Per Share

Assets

Cash $ 4.5 $ 0.03

Mineral Park 10% 415.9 2.35

Total Assets 420.3 2.38

Liabilities

LT Debt 129.3 0.73

Reclamation - -

Total Liabilities 129.3 0.73

Net Asset Value 291.0 1.65

Net Asset Value (C$) $ 1.89

Price Target $ 1.90

Assumptions Fully Diluted Shares Outstanding 176.9

US$/C$ 1.15

Target Multiple 1.0x

Long Term Moly Price (US$/lb) 12.00

Long Term Copepr Price (US$/lb) 1.75

Source: Company reports and CIBC World Markets Inc.

Mineral Park Finally Out Of The Woods, Expecting Further Improvements In Q3 - July 08, 2009

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Exhibit 4. Pro Forma Income Statements

in US$ MM

Dec 31st 2008A Q1 2009A Q2 2009E Q3 2009E Q4 2009E 2009E 2010E 2011E

Total Revenue $ 29.2 $ 6.3 $ 23.3 $ 28.8 $ 43.5 $ 101.9 $ 295.4 $ 337.3

Freight Smelting & Refining - 1.5 1.8 3.6 4.8 11.8 29.8 37.0

Mining and Processing Costs 27.9 8.9 10.8 16.6 21.8 58.1 127.4 137.2

Operating Income 1.2 (4.1) 10.6 8.6 17.0 69.9 138.2 163.1

Other Costs and Expenses

G&A 10.4 1.4 1.3 1.3 1.3 5.2 5.0 5.0

Stock Based Compensation 3.1 0.6 0.6 0.6 0.6 2.2 2.2 2.2

Depreciation and Amortization 1.9 0.5 0.6 0.8 1.2 3.0 8.0 9.0

Exploration and Development 0.4 0.0 - - - 0.0 - -

Accretion Expense 0.2 0.0 0.0 0.0 0.0 0.2 1.0 1.0

Interest Expense (Income) (1.5) (0.1) 0.2 0.2 0.2 0.4 0.3 0.1

Interest on long-term liabilities 15.1 3.4 3.4 3.4 3.4 13.8 13.8 13.8

Accretion of long term note discount 2.5 0.6 0.6 0.6 0.6 2.4 2.4 3.3

Total Other Costs and Expenses 32.1 6.5 6.7 6.8 7.2 27.2 32.6 34.5

Income (Loss) from operations (30.9) (10.6) 3.9 1.8 9.8 4.8 105.6 128.6

Total Non Operating Expenses (0.6) 0.1 2.6 - - 2.7 - -

Net Income (loss) before taxes (31.5) (10.7) 1.3 1.8 9.8 2.1 105.6 128.6

Total Taxes (3.1) - - - - - - 37.3

Net Income (loss) for period (28.3) (10.7) 1.3 1.8 9.8 2.1 105.6 91.3

Earnings (loss) per share basic (0.38) (0.10) 0.01 0.01 0.07 0.01 0.72 0.62

Earnings (loss) per share diluted (0.34) (0.08) 0.01 0.01 0.06 0.01 0.60 0.52

Shares Issued 74.7 108.2 147.6 147.6 147.6 147.6 147.6 147.6

Fully Diluted 84.2 139.8 176.9 176.9 176.9 176.9 176.9 176.9

Source: Company reports and CIBC World Markets Inc.

Price Target Calculation

Our $1.90 price target is based on a 1.0x NAV multiple. Our NAV is based on the

discounted cash flows of the Mineral Park mine cash on hand less the face value

of the amount of debt outstanding.

Key Risks To Price Target

The key risks to our forecast include capex over-run for phase two resulting in a

dilutive equity issue, lower commodity prices and higher-than-anticipated

operating costs.

Mineral Park Finally Out Of The Woods, Expecting Further Improvements In Q3 - July 08, 2009

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Our EPS estimates are shown below:

1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Yearly

2008 Current -- -- -- -- ($0.38A)

2009 Prior ($0.10A) ($0.01E) $0.04E $0.05E $0.01E

2009 Current ($0.10A) $0.01E $0.01E $0.06E $0.01E

2010 Prior -- -- -- -- $0.64E

2010 Current -- -- -- -- $0.60E

Our CFPS estimates are shown below:

1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Yearly

2008 Current -- -- -- -- ($0.35A)

2009 Prior ($0.06A) $0.00E $0.05E $0.06E $0.07E

2009 Current ($0.06A) $0.02E $0.02E $0.07E $0.06E

2010 Prior -- -- -- -- $0.71E

2010 Current -- -- -- -- $0.67E

Mineral Park Finally Out Of The Woods, Expecting Further Improvements In Q3 - July 08, 2009

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Important Disclosure Footnotes for Mercator Minerals Ltd. (ML)

Mineral Park Finally Out Of The Woods, Expecting Further Improvements In Q3 - July 08, 2009

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CIBC World Markets Inc. Price Chart

No rating history data found for Mercator Minerals Ltd.

Mineral Park Finally Out Of The Woods, Expecting Further Improvements In Q3 - July 08, 2009

9

CIBC World Markets Inc. Stock Rating System

Abbreviation Rating Description

Stock Ratings

SO Sector Outperformer Stock is expected to outperform the sector during the next 12-18 months.

SP Sector Performer Stock is expected to perform in line with the sector during the next 12-18 months.

SU Sector Underperformer Stock is expected to underperform the sector during the next 12-18 months.

NR Not Rated CIBC World Markets does not maintain an investment recommendation on the stock.

R Restricted CIBC World Markets is restricted*** from rating the stock.

Sector Weightings**

O Overweight Sector is expected to outperform the broader market averages.

M Market Weight Sector is expected to equal the performance of the broader market averages.

U Underweight Sector is expected to underperform the broader market averages.

NA None Sector rating is not applicable.

**Broader market averages refer to the S&P 500 in the U.S. and the S&P/TSX Composite in Canada.

"Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues.

***Restricted due to a potential conflict of interest.

Ratings Distribution*: CIBC World Markets Inc. Coverage Universe

(as of 08 Jul 2009) Count Percent Inv. Banking Relationships Count Percent

Sector Outperformer (Buy) 113 37.4% Sector Outperformer (Buy) 103 91.2%

Sector Performer (Hold/Neutral) 148 49.0% Sector Performer (Hold/Neutral) 129 87.2%

Sector Underperformer (Sell) 29 9.6% Sector Underperformer (Sell) 19 65.5%

Restricted 11 3.6% Restricted 11 100.0%

Ratings Distribution: Metals & Minerals Coverage Universe

(as of 08 Jul 2009) Count Percent Inv. Banking Relationships Count Percent

Sector Outperformer (Buy) 4 57.1% Sector Outperformer (Buy) 2 50.0%

Sector Performer (Hold/Neutral) 3 42.9% Sector Performer (Hold/Neutral) 1 33.3%

Sector Underperformer (Sell) 0 0.0% Sector Underperformer (Sell) 0 0.0%

Restricted 0 0.0% Restricted 0 0.0%

Metals & Minerals Sector includes the following tickers: CS, GMO, ML, QUA, TCM, TKO, UEC.

*Although the investment recommendations within the three-tiered, relative stock rating system utilized by CIBC World Markets Inc.

do not correlate to buy, hold and sell recommendations, for the purposes of complying with NYSE and NASD rules, CIBC World

Markets Inc. has assigned buy ratings to securities rated Sector Outperformer, hold ratings to securities rated Sector Performer, and

sell ratings to securities rated Sector Underperformer without taking into consideration the analyst's sector weighting.

Important disclosures required by IIROC Rule 3400, including potential conflicts of interest information, our system for

rating investment opportunities and our dissemination policy can be obtained by visiting CIBC World Markets on the web

at https://researchcentral.cibcwm.com under 'Quick Links' or by writing to CIBC World Markets Inc., Brookfield Place, 161

Bay Street, 4th Floor, Toronto, Ontario M5J 2S8, Attention: Research Disclosures Request.

Mineral Park Finally Out Of The Woods, Expecting Further Improvements In Q3 - July 08, 2009

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