TD UPDATEEvent We have updated our estimates to reflect Copper Mountain's Q1/23 results.
Impact: SLIGHTLY NEGATIVE Slow start to the year — Copper production in Q1 was 16.1mmlbs, 19% below our estimate of 19.9mmlbs from a combination of lower-than-expected throughputs, grades, and recoveries. The company noted the ransomware attack early in the quarter impacted recoveries and throughput was reduced for ten days due to a mechanical failure of a reclaim barge which limited fresh water to the mill. Throughput averaged 38,170tpd in the quarter well below design of 45,000tpd.
Earnings and FCF below expectations — Adjusted EBITDA of $17.1mm was below our estimate of $20.4mm and consensus of $22.4mm on the back of the weaker production and sales results. We calculate negative FCF of $9.6mm in the quarter, or a positive $2.6mm before changes to working capital.
Achieving 2023 guidance may be a stretch — Management remains confident in its ability to achieve its 2023 guidance stating that Q1 production was within plan. Guidance is set at 88-to-98mmlbs copper at C1 cash costs of US$2.00- $2.50/lb and AIC of US$2.45-$2.95/lb. Production was always expected to be back-end weighted with Q3 grades expected to be the highest for the year, as more ore is sourced from the higher-grade Phase 4 pit.
Recoveries are also expected to improve as mining moves deeper in the pit along with recent upgrades to the recovery circuit. Based on the results to date, and guidance for copper grades of ~0.31% for the year, we model production falling short of guidance at 85.9mmlbs at C1 cash costs of US$2.40/lb.
TD Investment Conclusion We are maintaining our $2.75 target price and TENDER recommendation. Our $2.75 target price is based on the implied valuation of the Hudbay offer (rounded). As a reminder, Copper Mountain shareholders will receive 0.381 Hudbay shares for each common share held. The transaction is subject to approval by Copper Mountain shareholders (66 2/3% approval of votes cast) and management continues to guide that the combination could close in late Q2/23 or early Q3/23.