Mercator Minerals Ltd MLKKF

National Bank bulletin-ML

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Title: Mercator Mineral Ltd. - ML (T) Cdn$2.42 Price: Cdn$2.42 StockRating: Outperform TargetPrice: Cdn$3.30 Headline: Mercator passes first test; Valuation rises on higher prices

August 18, 2009 The NBF Daily Bulletin

Diversified Metals & Mining

Mercator Mineral Ltd.

ML (T) Cdn$2.42

Stock Rating: Outperform

(unchanged)

Target: Cdn$3.30

(was Cdn$2.50)

Risk Rating: Above Average

Q2 Results – commodity prices updated

Mercator passes first test; Valuation rises on

higher prices

(unchanged)

HIGHLIGHTS (All dollar Stock Data: amounts in US$ unless specified)

52-week range (Cdn$) $0.29 - $8.40

Current Price (Cdn$) $2.42

Bloomberg/Reuters: Canada ML CN / ML.TO

(Year-End

December 31) 2008a 2009e 2010e

EPS (US$) N/A $0.01 $0.44

P/E N/A 218.6x 5.0x

CFPS (US$) N/A $0.09 $0.54

P/CF N/A 24.3x 4.0x

EBITDA (mln) N/A $27 $124

EV/EBITDA N/A 15.9x 3.5x

Copper Price (US$/lb) $ 3 .15 $ 2.20 $ 3.00

Molybdenum Price (US$/lb) $ 3 0.44 $ 13.00 $ 20.00

Financial Data: June 30, 2009

Shares Outstanding (mln) 146.6

Market Capitalization (Cdn$ mln) $354.77

Book Value per Share $0.59

Price/Book Ratio 4.1x

Net Asset Value per Share (Cdn$) $5.75

Price/NAV 0.4x

Total Debt (mln) $121.59

Total Cash (mln) $7.62

Industry Rating: Underweight

(NBF Economics & Strategy Group)

?? Q2 Results

Mercator reported a Q2 earnings loss of $4.4 million or

-$0.04/sh. This was slightly below our estimate of -0.03/sh

and consensus of -$0.01/sh. More importantly, the company

generated $4.9 million in EBITDA, ahead of the $3.45 million

required to pass its debt covenant that kicked in this quarter.

?? Operating Assumptions Updated

We have generally taken a more conservative view for the

company’s operating results in 2009, scaling back production,

but have gotten more aggressive in 2010 as we believe the

company will expand Mineral Park to 50,000 tons by mid-2010

(from the beginning of 2011).

?? Estimates revised

We have now factored in lower production in 2009, higher

production in 2010, and revised commodity prices over both

years. Our EPS/CFPS estimates increase to $0.01/$0.09 for

2009 and $0.44/$0.54 for 2010.

?? Target Increased; Rating Maintained

After updating our operating assumptions and incorporating

new commodity prices, our NAV increases to Cdn$5.75.

Based on a 40% discount to the non-cash portion of our NAV,

we are increasing our Target Price to Cdn$3.30. We continue

to apply a higher discount to Mercator than most of our

coverage space as the company is in ramp-up mode and

faces greater operational risk. The company would also face

significant financial risk should commodity prices turn lower.

Having said that, we believe the shares offer good value at

these levels and maintain our Outperform rating.

Stock Performance Company Profile:

Mercator Minerals Ltd. is ramping up production at its 100%

owned Mineral Park copper-molybdenum mine in Arizona.

Production is expected to average 10.3 million pounds of

moly and 56 million pounds of copper over the first 10 years

of operation.

Ian Howat - [phone]

[e-mail]

Associates:

Greg Chu - [phone]

[e-mail]

Brian Szeto - [phone]

[e-mail]

07/10/21 08/2/3 08/5/18 08/8/31 08/12/14 09/3/29 Daily

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data(ML-delay) LS: 2.42 Net: -0.21 Mercator Minerals Ltd-delay ma2(30)=1.791

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Page 2

?? Q2 Results

Mercator reported a Q2 earnings loss of $4.4 million or -$0.04/sh. This was slightly below

our estimate of -0.03/sh and consensus of -$0.01/sh. With the Mineral Park mine still

ramping up, earnings for the quarter were not significant. What was important for the

quarter was the company’s EBITDA figure as their debt covenant states that EBITDA

must be greater than interest expense kicked in this quarter. EBITDA for Q2 came in at

$4.9 million. Although this is higher than the required $3.45 million per quarter, it is lower

than the $5.7 million that the company indicated in its Q2 operating results press released

that was published on July 8, 2009. After speaking with management, the changes were

a result of how the accountants decided to handle the Silver Wheaton transaction.

At the end of the quarter, the company had $7.6 million in cash on its balance sheet with

much of the proceeds raised during the quarter going towards capital purchases related

to its second SAG mill and its Phase 2 expansion.

As a recap, the company produced 7.9 million pounds of copper in concentrates, 1.2

million pounds of copper cathode, 418,987 pounds of molybdenum in concentrates, and

56,441 ounces of silver during Q2.

?? Updating our operating assumptions

Within the quarterly release, no new production or cost guidance was released. However,

we are now updating our model to reflect year-to-date performance and management

comments. We have generally taken a more conservative approach for 2009, but have

gotten more aggressive with 2010.

For copper, we are lowering 2009 copper production to 33.3 million pounds (from 35.3

million pounds). For 2010, we are actually taking our production figure up to 42.5 million

pounds (from 37.8 million pounds) as we believe at current commodity prices, the

company will aggressively expand their operation getting to the 50,000 tpd level by

mid-2010 taking mill throughput to an average of approximately 40,000 tpd (from 30,000

tpd).

For molybdenum, we are lowering 2009 production to 2.2 million pounds (from 4.0 million

pounds) as a result of weak H1 actual production results. We expect molybdenum

production to improve over the remainder of the year. For 2010, we are increasing our

production forecast slightly to 6.3 million pounds (from 6.0 million pounds) on the

increased throughput offset by a slightly lower grade assumption.

Revised Previous

2009 2010 2009 2010

Copper Production (millions lbs) 33.3 42.5 35.3 37.8

Molybdenum Production (millions lbs) 2.2 6.3 4.0 6.0

Source: NBF Estimates

?? Commodity Price Update

For Mercator we have highlighted revisions in our copper and molybdenum prices. For

full details of our commodity price changes, please refer to our note titled, “Commodity

Price Update: Price run forces our hand”, on August 6, 2009. We have raised our 2009

copper price to $2.20 reflecting an average of $2.60 per pound for the last 5 months of

2009. We have increased our prices going forward to reflect the higher than expected

prices for 2009. We have also taken our molybdenum prices higher. For 2009, we are

now forecasting a molybdenum price of $13.00/lb (up from $10.25/lb) which assumes a

molybdenum price of $18.00/lb for the last 5 months of the year. Since Mercator is in

ramp up mode for 2009 more of their production will come in the last half of the year.

Therefore, we have adjusted our 2009 realized commodity prices for the company to

reflect the fact that H2 commodity prices should be significantly higher than H1. For 2009,

we are using an average realized price of $2.30/lb for copper and an average realized

price of $16.00/lb for molybdenum. Beyond 2009, we are using our new commodity

prices in the following table:

Page 3

Forecasts

2009 2010 2011 2012 2013+

Copper US$/lb $1.90 $2.35 $2.80 $2.60 $2.25

New Prices US$/lb $2.20 $3.00 $3.00 $2.75 $2.25

Molybdenum US$/lb $10.25 $14.00 $19.00 $16.00 $14.00

New Prices US$/lb $13.00 $20.00 $20.00 $16.00 $15.00

Source: NBF Estimates

?? Liquidity

With the recent run up in commodity prices and our more bullish outlook on copper and

molybdenum prices, we do not think Mercator will breach its EBITDA debt covenant.

They must generate more than $3.45 million in EBITDA per quarter (i.e. EBITDA >

Interest Expense), but at our current prices, we estimate that the company will generate

in excess of $10 million per quarter for the remainder of 2009 and over $25 million in

EBITDA per quarter in 2010.

At current prices, the company should also be able to finance its expansion plans and be

able to pay off its $120-million in debt when it comes due in February 2012. Having said

that, the company has already obtained noteholder approval to redeem these notes early.

This would keep the company’s options open with regards to re-financing the debt at a

lower interest rate or possibly work out some sort of bank financing.

?? Estimates Revised

After factoring in the operating changes and commodity price updates detailed above, we

are revising our estimates. For 2009, the higher commodity prices more than offset our

production decrease and 2010 estimates increase on higher production and prices. Our

estimates have been revised slightly to include a slightly higher share count as we are

now assuming more of the options/warrants will be exercised given the current share

price and our higher valuation. Our new and previous estimates are tabled below:

Revised Previous

2009 2010 2009 2010

Copper Price (US$/lb) 2.20 3.00 1.90 2.35

Realized Cu Price (US$/lb) 2.30 3.00 1.90 2.35

Molybdenum Price (US$/lb) 13.00 20.00 10.25 14.00

Realized Mo Price (US$/lb) 16.00 20.00 10.25 14.00

EPS (US$) 0.01 0.44 -0.08 0.21

CFPS (US$) 0.09 0.54 -0.01 0.30

Source: NBF Estimates

The following table contains our EPS sensitivity for 2010 for both copper and

molybdenum based on our current operating assumptions:

Commodity Change EPS Impact EPS Relative Impact

Copper US$0.10/lb $0.02 $0.44 4.5%

Molybdenum US$1.00/lb $0.03 $0.44 6.7%

Source: NBF Estimates

2010 Earnings Sensitivity

?? Target Revised; Rating Maintained

The biggest driver of our valuation changes came from higher commodity prices. This

was partially offset by our production changes over the next two years and some minor

tweaking to costs. We have also factored in a slightly higher share count with the

assumption that more of the options and warrants will be exercised given the current

share price. The net result is that our NAV increases to Cdn$5.75/sh (from Cdn$5.40/sh).

We are also lowering the discount we apply to the non-cash portion of the NAV (as we

Page 4

have done with the rest of our companies) to 40% (from 50%). The discount we are

applying for Mercator is still higher than the majority of our coverage space as they are

still in a ramp up phase (i.e. more operational risk), and should the commodity prices turn

sharply lower, they would have greater financial risk with the high debt load on its balance

sheet. Based on our higher NAV and lower discount rate, we are increasing our target

price to Cdn$3.30 (from Cdn$2.50) and maintaining our Outperform rating as we believe

the shares offer good value at these levels. We would caution that Mercator shares are

likely to decrease faster on a commodity price pullback than the rest of our coverage

space.

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information and/or clarification; Tender - Our analyst is recommending that investors tender to a specific offering for the company’s stock; Restricted -

Because of ongoing investment banking transactions or because of other circumstances, NBF policy and/or laws or regulations preclude our analyst from

rating a company’s stock.

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