Imperial Metals Corp T.III

M Partners: Buy rating and $15 target for Imperial Metals

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According to M Partners:

https://personal.crocodoc.com/Dq6KX92

April 2, 2015

IMPERIAL METALS CORP. (III-TSX, $12.50)

Rating: Buy

New 12-Month Target: $15.00

Old 12-Month Target: $13.50

BALANCE SHEET TIGHTENING BUT RED CHRIS COMMISSIONING ON-TRACK

Commissioning at Red Chris appears to be on track. As part of the Q4 conference call the company provided a more detailed update on the commissioning progress to date at Red Chris. Despite only six weeks of commissioning to date the mill is already operating at ~70% utilization and has achieved or exceeded nameplate capacity on four days. In our view, this is very good progress and supports our current estimates. In Q1, we model 45 days of operations at 15k tpd, ramping up to steady-state throughput of 30k tpd by Q4 2015. We believe as the mine and the mill at Red Chris continue to operate, the social/political risk surrounding the project will likely be reduced, along with the financial risk. We model Red Chris generating positive cash flow as early as Q2 2015.

Balance sheet tightening, but Red Chris progress reduces risk. The company reported a cash balance of $19.9MM at year-end with available liquidity of ~$140MM (cash + undrawn credit facilities) which was ahead of our estimate for ~$126MM. However, during the call the company reported that the cash balance had declined and that available liquidity had been reduced to ~$50MM. While tighter than we would like to see, the progress to date at Red Chris suggests this asset is likely to be generating positive cash flow shortly which would reduce pressure on the balance sheet (Figure 1).

High grade core expected to be mined first at Red Chris. Management reported that in an effort to increase cash flow in 2015, the company plans to target the higher grade core of the deposit earlier in the mine life. We would expect this to help repair what is a currently stretched balance sheet. We now expect this high-grade period to extend longer and have increased our head grade estimates for Red Chris; we model 0.50% Cu and 0.45 g/t Au in 2015 (unchanged) and 0.48% Cu and 0.39 g/t Au in 2016 (was 0.46% Cu and 0.35 g/t Au). The impact is an increase to our cash flow and EBITDA estimates for 2016.

Permitting Mt. Polley progressing in line with our estimates. Management reported they are continuing to work towards the restart of Mt. Polley. While the permitting progress is taking longer than they originally expected (they were hoping to restart operation in Q2 2015), management continues to make progress. We continue to model operations restarting on a scaled back basis in Q4 2015, but may review with subsequent updates. As well, with respect to remediation the company reported they have spent $44MM of the planned $67.4MM, and do not expect a material increase to the planned spend. We continue to model $75MM in total reclamation costs.

We are maintaining our BUY recommendation and increasing our 12-month target price to $15.00 per share (was $13.50). Our target price is based on an EV/EBITDA multiple of 6.5x (unchanged) applied to our one year forward, next twelve months EBITDA estimate of $291.7MM (was $267.2MM). In our view, the progress made to date at Red Chris likely offsets a tightening balance sheet, and we continue to view Imperial to progressively re-rate as Red Chris ramps up and the balance sheet risk is reduced.

POTENTIAL CATALYSTS AND EVENTS

H1 2015 – Commercial production at Red Chris (M Partners est. Q3 2015)

Q2/Q3 2015 – Temporary restart permit received for Mt. Polley