TSX: CMMC - Copper Mountain Mining Corporation

[ContrarianValue44]

Any thoughts on Copper Mountain Mining Corporation?

 

I believe that at today's copper spot prices the company can generate about 300M CAD of operating income per year with current production levels. This is more than a 25 percent yield on the company's 1.17B CAD Enterprise Value.

 

The company has a clear path to tripling 2020 production by 2025 (expansion of current mine and two new mines). New mines have strong unit economic and should repay the initial CAPEX in a span of about 2 years. All mines are in SAFE jurisdictions - current mine is in Canada, 2 new mines would be in Australia.

 

Also, if you believe like I do, that there is a structural deficit of copper supply (remaining average copper grade has declined rapidly during the last decade) and that demand for copper will boom from electric vehicles and renewable energy, it's not hard to see copper at $6.50 per pound by 2025 (Bank of America prediction). This should roughly double the company's profitability. 

 

Royalty hikes in Chile could also limit supply by discouraging foreign investment: https://www.reuters.com/article/us-chile-copper-idUSKCN2D82HC

 

Chile alone produced about 27 percent of the world's copper.

 

A doubling in profitability from copper's spot price going to $6.50 per pound and a tripling of production levels could allow CMMC to produce $1.8B of operating income by 2025. Not saying that this will necessarily happen, but even half of this happening is still tremendous upside.

 

And all of this doesn't even mention that CMMC's valuation multiples could double and still be less than the cheapest comparables. 

 

Thoughts? What am I missing here?

[RichardGibbons]

I kind of reached the same conclusion a few weeks ago, but have been sucking my thumb on it, waiting until it I had CAD cash. I think the easiest way for it to underperform is if the commodity rally is a head fake resulting from supply chains messed up by COVID.

[ContrarianValue44]

2 hours ago, RichardGibbons said:

I kind of reached the same conclusion a few weeks ago, but have been sucking my thumb on it, waiting until it I had CAD cash. I think the easiest way for it to underperform is if the commodity rally is a head fake resulting from supply chains messed up by COVID.

Makes sense, I think that people are focusing too much on the next year, rather than the long-term. Copper miners and copper have been crashing because China may release their copper reserves. This should only affect 2021. In the long-run however, demand can likely double and supply quality should diminish rapidly and already has been actually since the early 2010s

[DeepSouth]

Was working on a little note on this:

 

I'll caveat this with miners usually being poor investments with weak ROIC across the cycle helmed by poor capital allocators. Having said that, and despite a great run in the stock, I think this is a strong risk/reward given lower risk/higher ROIC growth opportunities & upside to a long-term copper deficit environment with limited fundamental downside risk to copper prices in the ~$3/lb range.

 

CMMC brought a defunct high cost mine site in Canada back online in partnership with Mitsubishi (25% owner of the min) as copper prices heated up pre-GFC as China gobbled up the world's metals. In the subsequent decade, the mine has been forced to worked out many kinks, improving processes and bringing cash costs down to stave off bankruptcy. With the mine now having decades of reserves, we can more easily put a multiple on EBITDA or FCF rather than a pure DCF/NAV approach. Given the pop in Cu prices to the $4s, CMMC is printing cash, generating $200MM+ FCF on a ~$2/lb all-in cost base and 90MM pounds of copper production. On a $725MM market cap, that’s under 5X FCF. There is less than $200MM of recently refi'd net debt. The company has purchased Cu puts @ $3.75/lb strike, locking in profitability, an unusual but welcomed action from a mining firm.

 

Growth:

CMMC has materially improved its Copper Mountain Mine, bringing down cash costs, proving out decades of reserves, and have set in place a facilities and mine plan to double annual production and bring cash costs down further.

 

CMMC bought an Australian junior copper miner with a similarly sized open pit resource, with mid-tier C1 cash costs, but low start-up CapEx intensity.

 

With higher prices driving 3rd world governments to consider expropriating more economics from miners, further showcases the value of anglosphere production.

 

With these two development plans together, CMMC has the ability to triple Cu production from ~80-90mm lbs to 250MM+ lbs by ~2025 at a cost of ~$400MM. This project cost can be absorbed with FCF and some project financing on the Australian asset.

 

Assuming the expansions and some multiple configuration, we can get to lofty upside at today's copper prices, with the equity currently implying a copper price south of $3/lb on a 2025 EBITDA multiple of 6X. At $4.50 long-term Cu price and 6X EBITDA on 2025 production, stock could be worth $18/share.

 

Given its strong growth opportunity, improving scale (going from sub 100mm to owning 2 medium scale mines), strong reserve base, and good geos (CA/AU), I think CMMC is in the sweet spot for story stock like multiple expansion and growth if the copper deficit story plays out (see GS bullish copper view of LT deficits and $6/lb copper).

 

In the end, returns will be driven mainly by copper price, but I think the company's assets, balance sheet, and valuation push a heavy thumb on a good risk/reward from here.

[ContrarianValue44]

2 hours ago, DeepSouth said:

Was working on a little note on this:

 

I'll caveat this with miners usually being poor investments with weak ROIC across the cycle helmed by poor capital allocators. Having said that, and despite a great run in the stock, I think this is a strong risk/reward given lower risk/higher ROIC growth opportunities & upside to a long-term copper deficit environment with limited fundamental downside risk to copper prices in the ~$3/lb range.

 

CMMC brought a defunct high cost mine site in Canada back online in partnership with Mitsubishi (25% owner of the min) as copper prices heated up pre-GFC as China gobbled up the world's metals. In the subsequent decade, the mine has been forced to worked out many kinks, improving processes and bringing cash costs down to stave off bankruptcy. With the mine now having decades of reserves, we can more easily put a multiple on EBITDA or FCF rather than a pure DCF/NAV approach. Given the pop in Cu prices to the $4s, CMMC is printing cash, generating $200MM+ FCF on a ~$2/lb all-in cost base and 90MM pounds of copper production. On a $725MM market cap, that’s under 5X FCF. There is less than $200MM of recently refi'd net debt. The company has purchased Cu puts @ $3.75/lb strike, locking in profitability, an unusual but welcomed action from a mining firm.

 

Growth:

CMMC has materially improved its Copper Mountain Mine, bringing down cash costs, proving out decades of reserves, and have set in place a facilities and mine plan to double annual production and bring cash costs down further.

 

CMMC bought an Australian junior copper miner with a similarly sized open pit resource, with mid-tier C1 cash costs, but low start-up CapEx intensity.

 

With higher prices driving 3rd world governments to consider expropriating more economics from miners, further showcases the value of anglosphere production.

 

With these two development plans together, CMMC has the ability to triple Cu production from ~80-90mm lbs to 250MM+ lbs by ~2025 at a cost of ~$400MM. This project cost can be absorbed with FCF and some project financing on the Australian asset.

 

Assuming the expansions and some multiple configuration, we can get to lofty upside at today's copper prices, with the equity currently implying a copper price south of $3/lb on a 2025 EBITDA multiple of 6X. At $4.50 long-term Cu price and 6X EBITDA on 2025 production, stock could be worth $18/share.

 

Given its strong growth opportunity, improving scale (going from sub 100mm to owning 2 medium scale mines), strong reserve base, and good geos (CA/AU), I think CMMC is in the sweet spot for story stock like multiple expansion and growth if the copper deficit story plays out (see GS bullish copper view of LT deficits and $6/lb copper).

 

In the end, returns will be driven mainly by copper price, but I think the company's assets, balance sheet, and valuation push a heavy thumb on a good risk/reward from here.

Couldn't have said it better myself!

[ContrarianValue44]

"The company has purchased Cu puts @ $3.75/lb strike, locking in profitability, an unusual but welcomed action from a mining firm." - This should lock in more than $80M of operating income for CMMC! For some perspective, the company's entire operating income for 2020 was $66.4M.

 

"CMMC has the ability to triple Cu production from ~80-90mm lbs to 250MM+ lbs by ~2025 at a cost of ~$400MM" - @DeepSouth Can you expand on how you got $400M? From my research this figure is about $800M.

 

Let's expand on 2025 targets for the company. From my findings, the total initial CAPEX (the majority of the CAPEX cost) for the company to triple production is $800M. Let's take the worst case scenario and assume that all of this is funded by debt (it absolutely will not be, it will probably a split between funding the projects with FCF and debt). This would increase the enterprise value of the company from 838M to 1.638B. I then did a sensitivity analysis based on various copper prices. Today's copper price is about $4.16.

 

1. In a very bearish scenario of a $3 stock price, 2025 and onwards annual EBITDA should be about $200M, about a 12 percent EBITDA/EV yield. 6x EBITDA/EV valuation is a price per share of $0.69 (75 percent downside) - I find this very unlikely. At 10x EBITDA the stock price should be $5.55 (200 percent upside).

 

2. In a base case scenario imo, with copper prices at $4.50 the 2025 and onwards annual EBITDA of the company is north of $600M. This is about a 35 percent EBITDA/EV yield. 6x EBITDA/EV valuation is a stock price of $9.37 (339 percent upside). 10x EBITDA/EV valuation is a stock price of $20.83 (755 percent upside).

 

3. Using Bank of America's copper price forecast, copper's 2025 spot price will be $6.50. This is the very bullish case and would result in an EBITDA of $1.1B per year starting from 2025. This is about a 65 percent EBITDA/EV yield. 6x EBITDA/EV valuation is a stock price of $23.69 (858 percent upside). 10x EBITDA/EV valuation is a stock price of $44.70 (1,620 percent upside).

 

That's my profile of the risk/reward ratio. I know that some of these seem far off, but look at the effect that the recent copper price rise has had on CMMC (stock increased by about 10x). 

[DeepSouth]

On project CapEx, that was my mistake. I only had the Australian CapEx in that figure, need to also include the Copper Mountain mine expansion.

 

@ContrarianValue44

 

Expounding on your scenarios: I'd rather add contingency on the AUS capex costs and delayed timeline of the development projects than give CMMC zero credit for FCF to 2025 (could be $700MM at spot), but all in, we're in close agreement.

[ContrarianValue44]

1 hour ago, DeepSouth said:

On project CapEx, that was my mistake. I only had the Australian CapEx in that figure, need to also include the Copper Mountain mine expansion.

 

@ContrarianValue44

 

Expounding on your scenarios: I'd rather add contingency on the AUS capex costs and delayed timeline of the development projects than give CMMC zero credit for FCF to 2025 (could be $700MM at spot), but all in, we're in close agreement.

Absolutely, makes sense, thanks!