Copper Mountain Tempts With Canadian Stability: Real M&A

Copper Mountain Tempts Buyers Seeing Value Sans Unrest
Peru’s mining industry, the world’s third-largest copper producer, will cut investment by 33 percent next year as social unrest delays projects. Photographer: Karel Navarro/Bloomberg

Copper Mountain Mining Corp. is offering buyers a potentially irresistible combination: the cheapest valuation in three years and the ability to extract metal without the threat of civil unrest in such places as Indonesia and Peru.

Lower-than-estimated copper production drove the company’s price-earnings ratio down to 16.7 in October, the cheapest since 2009, according to data compiled by Bloomberg. Copper Mountain has tumbled 43 percent since this year’s peak, giving the business the lowest price-sales multiple using estimated 2012 revenue among Canadian base metals stocks with a market value exceeding C$250 million ($252 million), the data show.

The location of Copper Mountain’s main mining project in British Columbia may prove alluring to acquirers seeking assets where there’s low risk of social disorder, Laurentian Bank of Canada said. While initial copper production levels were disappointing after extraction began in 2011, the Vancouver-based company seems to have turned the situation around and a buyer should strike now before Copper Mountain’s shares rebound, according to Haywood Securities Inc. Jennings Capital Inc. said companies such as Teck Resources Ltd. could offer C$8 a share in a deal, more than double yesterday’s close.

“There’s a lot of reasons why it would be attractive to potential acquirers,” Adam Low, a Toronto-based analyst at Raymond James Financial Inc., said in a telephone interview. “The valuation is attractive at current prices,” and “it’s in Canada, so it’s got low political risk, which in the mining world is an important attribute,” he said.

Restarting Production

Jim O’Rourke, the chief executive officer of Copper Mountain, declined to comment on whether the company has been approached by suitors.

Copper Mountain owns 75 percent of the namesake mine in British Columbia, while Mitsubishi Materials Corp., Japan’s third-largest copper producer, controls the rest. In June 2011, production resumed at the site, which was closed in 1996. Copper Mountain says the mine should produce 100 million pounds (45.4 million kilograms) of copper annually during its first 12 years.

Mining in Canada presents fewer challenges than those seen in other nations, where protests and rioting are more common and there’s greater risk that governments will nationalize assets or impose hefty taxes, said Christopher Chang, a Toronto-based analyst at Laurentian Bank.

‘Extensive Repairs’

Freeport-McMoRan Copper & Gold Inc.’s Grasberg mine in Indonesia was halted for more than two weeks in the first quarter and required what the company called “extensive repairs” after violence flared among employees in the aftermath of a three-month strike last year. Workers at First Quantum Minerals Ltd.’s Kansanshi copper project, located in Zambia, went on strike in January, barricading the entrance, halting production and demanding that their pay be doubled.

Peru’s mining industry, the world’s third-largest copper producer, will cut investment by 33 percent next year as social unrest delays projects, according to the National Society of Mining, Petroleum & Energy. Barrick Gold Corp. suspended operations in September at one of its Peruvian projects after villagers blocked a road and clashed with police.

The Fraser Institute Policy Potential Index shows British Columbia is more attractive to mining companies in terms of taxation, regulation and other public-policy factors than places elsewhere in the world. Its 2011 rating of 62.5 on a 100-point scale topped Indonesia at 13.5, Zambia at 46.1 and Peru at 43.4.

No Unrest

Copper Mountain’s “production is in a low-risk jurisdiction in Canada,” Laurentian Bank’s Chang said in a phone interview. “There’s tax risk and you also run into areas where there’s a lot of civil unrest and a lot of rioting,” he said. British Columbia “has none of that.”

Shares of Copper Mountain declined 35 percent this year through yesterday as the company struggled to ramp up production. Its price-earnings ratio fell to 16.7 on Oct. 2, the lowest since March 2009, data compiled by Bloomberg show. The C$358.7 million company traded yesterday for 1.4 times analysts’ revenue estimates for this year, the lowest multiple for similar-sized Canadian base metal producers, the data show.

“The stock has gotten beaten down given the operational issues” that are being resolved, Garnet Salmon, a Toronto-based analyst with Jennings Capital, said in a phone interview. “It’s definitely a likely takeout target because of the scarcity value of copper assets,” he said. “It would appear that the company has turned the corner.”

Potential Bids

Salmon projects Copper Mountain would be worth C$8 a share in a takeover. It closed at C$3.64 yesterday, down from this year’s peak of C$6.36 in January. Bids are likely at about C$7 a share, based on cash flow multiples paid in comparable mining deals such as KGHM Polska Miedz SA’s takeover of Quadra FNX Mining Ltd. this year, according to Laurentian Bank’s Chang.

Today, Copper Mountain shares fell 3.9 percent to C$3.50.

Teck, the Vancouver-based owner of Canada’s largest copper mine, may be a likely suitor for Copper Mountain, Salmon said. Teck’s Highland Valley mine has only about 10 years of production life remaining and an acquisition of Copper Mountain could help ensure output continuity, he said.

“Copper Mountain would provide an attractive asset to replace Highland Valley down the road,” Salmon said.

Chris Stannell, a spokesman for Teck, said the company doesn’t comment on acquisition speculation, when asked whether it’s interested in Copper Mountain. His company’s market value of C$19 billion is 53 times bigger than Copper Mountain’s.

Taseko, Capstone

Taseko Mines Ltd., which withdrew its C$2.20-a-share offer for Copper Mountain in 2009, may be interested in bidding again for the company, Chang said. Capstone Mining Corp. and Lundin Mining Corp. could also be drawn to Copper Mountain, he said.

Capstone, which has $509 million in cash and no debt, said last year that it wanted to boost production by purchasing a copper producer in the Americas.

Cindy Burnett, a spokeswoman for Vancouver-based Capstone, and Sophia Shane of Toronto-based Lundin declined to comment on whether their companies are interested in Copper Mountain. Brian Bergot, a spokesman for Vancouver-based Taseko, didn’t return a phone message or e-mail seeking comment. The three companies’ market values range between Taseko’s C$541 million and Lundin’s C$2.9 billion.

While production has shown signs of improvement, potential acquirers may wait to bid for Copper Mountain until the company has at least a “solid quarter or two of production growth and cash flow,” said Low, the Raymond James analyst.

Earnings Uncertainty

“There is still some uncertainty about the earnings and cash flow potential of Copper Mountain,” he said. “They haven’t had a solid quarter that really reflected the business operating at full capacity.”

Copper Mountain is nearing its goal of milling 35,000 tons per day of copper, which will become even more apparent once results for this quarter or the first quarter of 2013 are released, said Stefan Ioannou, an analyst with Haywood Securities in Toronto.

“It looks cheap,” he said in a phone interview. “It’s a large enough mine to attract attention, and it’s in a pretty safe mining jurisdiction. You can check off a lot of the boxes on it from a risk point of view.”

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