Imperial Metals Corp T.III

Salman: Buy rating & $17.00 target price for Imperial Metals

[hockeyguy123]

According to Salman Partners:

https://app.box.com/s/fhxshsbfk148n01df6nn

Imperial Metals Corp. (Target $17.00; BUY) - 74.9M Shares Outstanding

Weaker outlook for copper scales back our target price

Background: Imperial Metals owns 100% of the Mount Polley copper-gold-silver mine in British Columbia, 50% of the Huckleberry copper-molybdenum-gold-silver mine in British Columbia, 100% of the Sterling gold mine in Nevada and 100% of the Red-Chris copper-silver-gold mining development project in British Columbia.

Event: As we reported yesterday, Imperial Metals’ “adjusted net income” in Q1 2014 had been Cdn$0.09 per share. Consensus expectations had been for EPS of Cdn$0.12. The company has held a conference call to discuss these results.

Technical hitch at Mt. Polley: Because of “record snowfall and mechanical issues in January,” Q1 production was below plan. However, in April, Mt. Polley ran well ahead of its rated capacity, so Imperial sees no need to lower its guidance for production in the full year 2014.

Technical hitch at Huckleberry: “Forecast production for 2014 from Huckleberry [B.C.] was previously estimated to be 42.0 million pounds copper and 200,000 ounces silver,” said Imperial. “As a result of the milling time lost [after the incident that we reported on April 14, 2014], the revised production estimate is approximately 36.0 million pounds copper and 175,000 ounces silver.”

Tough winter at Red Chris: At the Red Chris mine development in northwestern British Columbia, construction of power lines by BC Hydro, after a tough winter, “is now expected to be completed by the end of July 2014… one month later than the end of June 2014, as previously scheduled”.

"The projected overall capital cost of the [Red Chris] project has increased by approximately [Cdn]$30.0 million. The majority of the cost increase can be attributed to additional costs incurred in the construction of the … power line… we are now targeting starting commissioning of the Red Chris mill in the third quarter of 2014…The Company is targeting to commence commissioning of the Red Chris mine in August 2014 as soon as the site is connected to the BC Hydro grid, and is still planning to achieve full operations in the fourth quarter of 2014.”

Indeed, said Imperial Metals, we’ve lost a month, but we had a month’s slack in our plan. There’s no more slack left, so another day’s delay in the project would now mean a day’s delay in commissioning Red Chris.

Our own assumption continues to be that Red Chris attains commercial production on January 1, 2015.

Analysis: Updating our model of Imperial Metals, using the results and outlooks discussed above, and incorporating our forecasts for economic numbers and commodity prices that we published on April 17, 2014, here are the resulting changes in our forecasts for Imperial Metals:

Income, including that from Red Chris 2014 2015 2016 2017 2018
Cdn$/share, fully diluted (F) (F) (F) (F) (F)
Earnings, current $0.71 $2.31 $2.49 $2.09 $1.83
Earnings, previous. $0.65 $2.85 $2.90 $2.34 $1.85
Free Cash Flow, current -$1.94 $2.19 $2.41 $2.11 $1.83
Free Cash Flow, previous -$1.24 $2.73 $2.80 $2.34 $1.82

Most of the reductions in our forecasts of earnings and free cash flows come from our lower forecasts for the price of Imperial’s principal product, copper.

Recommendation: We consider an appropriate 12-month target for Imperial Metals’ shares to be 100% of NAV or, rounding, Cdn$17.00 per share. This is below our previous target, Cdn$19.15 per share; nevertheless, our recommendation remains BUY.