| Investment thesis: We reiterate our BUY rating on CS, and are increasing our target price to C$6.50/sh (from C$5.25/sh) following the company's Q1 results (see below). We continue to like CS for its leverage to copper, improving operational and financial profile, its low jurisdictional risk and a series of catalysts on the horizon. Our revised target price is based on an equal weighting of 6.0x our NTM EBITDA forecast and 1.0x our NAVPS estimate (previously 5.0x and 0.9x respectively), both measured as at April 1, 2022. The revised multiples reflect current trading ranges. Our take on the Q1 results: An outstanding quarter on all fronts, highlighted by Pinto Valley. The asset delivered the best operating quarter we have seen from it in a long time, with record quarterly throughput, higher-than-expected grades, and C1 costs below $2.00/lb for the first time since Q1/19 (see Figure 2). Cozamin also delivered a strong operating performance; the net result was record operating cash flow in the current elevated copper price environment. We note that CS met or exceeded the high end of consensus estimates on every metric. All outstanding debt on the RCF has been repaid, and CS now goes forward with no debt for the first time since Q3 2013.
We present the company's financial and operating results vs. our estimates and history in Figures 1-2. Upcoming catalysts: Santo Domingo JV process: The JV process at Santo Domingo continues to progress, and management indicated they continue to expect a deal to be done by the end of June. Our understanding is that negotiations are down to an operating partner and a financial partner (a "dual-track" process, in management's words). We expect CS to sell ~50% of the project in the case of an operating partner, and ~30% in the case of a financial partner. Our preference would be to see an operating partner with solid mine building capabilities that would come in for >50% and take over primary responsibility for construction, leaving CS management to focus on its many optimization projects at the existing mines. In any case, the implied value associated with the transaction should serve to highlight the value of Santo Domingo to the market. Pinto Valley: Following a strong Q1, we believe operating performance at PV will continue to be a positive catalyst for CS over the rest of 2021, as the mine has historically been a "problem child". The PV3 technical report expected in H2 will highlight the longer-term implications of the optimization work done to date, and should serve to increase market expectations and valuation for PV. In addition to the optimization work at the current operation, management highlighted ongoing and frequent dialogue with "neighbors", whom we take to mean BHP's (BHP-NYSE | Not rated) Copper Cities mine, Freeport-McMoran's (FCX-NYSE | Not rated) Miami mine and KGHM's (KGHM-WSE | Not rated) Carlota mine (see Figure 3). We have previously highlighted the potential for Copper Cities ore to increase LOM grades at PV as well as backstop a potential expansion; we note here that the 70mlb SX/EW plant at Carlota that is currently processing end-of-life stockpiles could be a significantly accretive infrastructure addition to PV as it moves to deploy the Jetti sulphide leaching technology at scale (PV4). Cozamin: With the expansion at Cozamin now complete, the focus has shifted back to exploration, and we look forward to ongoing results. Management indicated slow progress at the moment given that all drilling is being conducted from surface; nonetheless, we expect a potential positive update sometime this year before drilling moves underground next year. |