BMO Capital Markets: Underperform rating for Imperial MetalsAccording to BMO Capital Markets:
Imperial Metals
(III-TSX)
Stock Rating: Underperform(S)
Target Price: na
March 31, 2015
2014 Results - Weak Earnings, Outlook Uncertainty
Imperial Metals reported adjusted 2014 earnings of C$10.8M or C$0.15/sh (on a diluted basis), below BMO Research and consensus expectations of C$0.26/sh and C$0.23/sh, respectively. Production results totalling 41.5Mlb in attributable copper, 33.0koz in attributable gold and 166.4koz in attributable silver were previously announced (link). The results were impacted by lower metal production and remediation costs totalling C$67.4M following the tailings dam breach at the Mount Polley mine in early August 2014. Capital expenditures in 2014 totalled C$405M, largely related to the completion of construction at Red Chris. The company ended the year with US$55M in working capital deficiency and US$706M in debt. The company expects to produce an attributable 22Mlb of copper from its 50% share of the Huckleberry mine during 2015.Production guidance from Red Chris is expected to be available once commissioning is completed. In 2015, BMO Research forecasts production of 22.7kt copper and 35.7koz of gold from Red Chris and free cash flow contribution of C$125.6M. Production targets for Mount Polley are expected to be set once the restart of operations is approved. The company has scheduled a conference call for 1:00 p.m. ET on April 1 (416-764-8609).
Our View:
- Slightly negative. C$11M to the bottom line only covers a small part of the remediation expenditures at Mount Polley incurred to date (C$67.4M), while debt balances continue to grow.
- The company did not provide any further clarity regarding the timeline for commercial production at Red Chris (currently operating under an interim permit, valid until May 2015) or the re-start of Mount Polley, which is dependent on the receipt of regulatory approvals with no set timelines.
- The continued investigation at Mount Polley remains an overhang on the share price, with two more reports from the Inspector of Mines and Conservation and Environmental offices due in June 2015. The scope and costs of remediation at Mount Polley remain uncertain at this time, but could be significant, while the tail risk of litigation against Imperial by third parties also remains.
- In BMO Research’s NPV estimate of US$8.10/sh for Imperial Metals, the Red Chris mine contributes US$15.42/sh, which is offset by US$8.06/sh in debt. BMO Research currently assigns zero value to the Mount Polley mine (which was estimated at US$267M, or US$3.46/sh prior to the breach), and does not include a provision for remediation costs at that asset.