Scotia Capital revealed Friday that it is recommending five companies in the copper mining sector, based on a review of a key cost measurement in relation to current stock valuations.
The 5 companies are
Nevsun Resources Ltd. (
TSX: T.NSU,
Stock Forum),
Lundin Mining Corp. (
TSX: T.LUN,
Stock Forum),
Copper Mountain Mining Corp. (
TSX: T.CUM,
Stock Forum),
Freeport-McMoRan Copper & Gold (
NYSE: FCX,
Stock Forum), and
Hudbay Minerals Inc. (
TSX: T.HBM,
Stock Forum).
They are part of a Scotia Capital coverage universe of 13 companies, the investment firm said.
“Based on our analysis, Nevsun, Lundin, Copper Mountain, Freeport-McMoran, and HudBay appear to have the most attractive trade-off between low
Fully Loaded All-in Sustaining Costs (FLAISC) and relative valuation,’’ Scotia analyst Orest Wowkodaw said in a research report.
Lundin and Nevsun also have the added benefit of a low development risk profile and a strong balance sheet, he said.
According to Scotia’s definition, FLAISC includes
All-in Sustaining Costs (AISC), which are defined as operating costs (such as on-site mining and processing, mine-level G&A, royalties and other associated production and related taxes, treatment and refining charges, freight, expensed stripping costs, net of by-product credits), plus corporate G&A, exploration, sustaining capital costs, and capitalized stripping costs.
FLAISC is defined as a measurement of AISC plus corporate interest (including capitalized interest) and debt plus corporate taxes.
Scotia says fully loaded all-in sustaining costs of the 13 companies named in the report are expected to average $2.37 per pound in 2015 and $2.18 per pound in 2016.
If development capital costs were added on, those numbers would jump to $3.04 in 2015, and $2.62 in 2016, the investment firm said.
On Friday, spot copper was priced at US$3.04 a pound.
All companies except
Imperial Metals Corp. (
TSX: T.III,
Stock Forum) and
Thompson Creek Metals Co. Inc. (
TSX: T.TCM,
Stock Forum) should be cash positive on a FLAISC basis in 2015 based on the spot price of copper, Wowkodaw said.
Scotia noted that Imperial Metals' cost position is currently inflated due to the shutdown and remediation cost related to the idled Mt. Polley mine, along with expected start-up and ramp-up associated with the Red Chris mine. Both are located in British Columbia.
However, he warned that six of the companies in Scotia’s coverage universe have 2015 FLAISC levels above $2.50 a pound, which suggests that significant financial pain for many producers would be in order if copper prices declined by more than 20%.
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