Copper Mountain Mining Corporation T.CUM

Raymond James downgrades Copper Mountain to Market Perform

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According to Raymond James:

https://personal.crocodoc.com/raaLTzH

Copper Mountain Mining

Market Perform 3 ↓ old: Outperform 2

C$1.50 target price ↓ old: C$1.90

Downgrading to Market Perform on Lower CuEq Grades

Recommendation

After reviewing the latest Copper Mountain Mine technical report, which was filed on SEDAR yesterday (June 17), we have reduced our rating on Copper Mountain Mining to Market Perform (from Outperform) and cut our target price to C$1.50. The reduction in our estimates is driven by lower than expected copper and CuEq grades, and our assumption for more mining costs, which have reduced our near-term cash flow estimates and NAVPS by 18%.

Analysis

- The NI 43-101 technical report included a new 10 year mine plan and discussed some exploration upside, but contained limited cost information.

- Our CuEq grade estimates have been reduced by 11% and 14% in 2016 and 2017, respectively, with CuEq grades down an average of 4% over the next 10 years and down 6% over the next 9 years (a high grade bump is guided for 2024). Relative to our prior estimates, the new mine plan calls for slightly higher gold and silver grades, but lower copper grades, resulting in an overall CuEq grade reduction (Exhibit 1).

- Copper Mountain Mining is targeting 40 ktpd to be mined after 2015, leaving upside to our 38 ktpd forecast. As the company has yet to deliver a quarter at the 37.5 ktpd design target, we are hesitant to incorporate the additional upside in our estimates. If we assume 40 ktpd is reached and sustained in 1Q16, however, we estimate upside of +5% to our NAVPS, +6% to our 2016E CFPS and +7% to our 2016E EBITDA forecasts.

- We have also added additional mining costs to our estimates, raising our all-in mine costs for 2016–2018 by 9%, to an average of US$2.55/lb CuEq. While we understand the LOM strip ratio to be unchanged at 2:1, we believe that a total mining rate of ~175 ktpd will be maintained for the next few years, leaving 60–65 ktpd of capitalized stripping and low-grade material that will be stockpiled for processing at the end of the mine life. At a mining cost of $1.75/t, we calculate this additional cost to be ~$10 mln/Q and have included it in our capital cost estimates for 2016/17.

- As we expect copper prices to improve in 2016, we forecast Copper Mountain Mining to have sufficient liquidity to meet its operating and financial needs. However, should copper remain at spot ($2.60/lb) for the rest of 2015, we forecast a negative cash balance to result in 1Q16 as annual debt repayment requirements increase.

Valuation

Our C$1.50 target price applies a 50% weighting of 1.0x multiple to our 8% minesite NAV estimate (see Exhibit 2) and 5.0x multiple to our NTM EBITDA forecast, below its larger mid-tier base metal piers at 1.1x and 6.0x, respectively. In our view, these lower multiples are appropriate given the low-grade, single-asset nature of the company and its high debt load.