Small Copper Miners Become Prime Takeover Targets
The global copper market is feeling the pinch of ageing copper mines that are producing decreasing amounts of copper at increasingly higher costs. In fact, the metal content of copper ore has been falling since the mid-1990s. A miner now has to dig up an extra 50 percent of ore to get the same amount of copper. The skyrocketing cost of mining for copper, combined with the logistical challenge has major miners on the lookout for acquisitions, which opens up new opportunities for copper investors.
The time to bring online the next round of copper mines is right now; with major explorers already missing production targets for a few years now, while grappling with skyrocketing production costs to squeeze the most copper out of their mines. While production is declining; the demand for copper is only going to increase. For example, Rio Tinto (RIO) is calling for a doubling of copper demand in the next 15 years. Last year, RIO experienced a 16% drop in copper production and in order to meet the new demand RIO says it will spend $80 billion in expansion over the next five years.
With time of the essence, this expansion spending by RIO and other miners will center on the acquisition of smaller miners and exploration companies that hold "new" deposits or deposits that are soon to come online. It takes such a long time to find something, then permit it, then build it, then ramp it up and it's still much cheaper to buy existing production rather than try to build it.
For the investor, purchasing stock in a smaller company that is later purchased by a major can be a financial windfall for stakeholders and is the prime goal of many junior miners. Given the round of acquisitions that will l hit the copper market it is a good copper investing strategy to be on the lookout for companies that may be acquired.
Good acquisition targets are companies that hold projects that are online or close to being operational. Preferably, these projects are located in geopolitically stable regions (an increasingly harder challenge when looking for new targets), have low cash costs in terms of production. Companies that own valuable projects and are currently undervalued are prime takeover targets. Here are some potential targets that the major miners may be eyeing:
Capstone holds two producing copper mines, the Cozamin copper-silver-zinc-lead mine located in Zacatecas State, Mexico and the Minto copper-gold-silver mine in Yukon, Canada. In addition, Capstone has two development projects, the large scale 70% owned Santo Domingo copper-iron-gold project in Chile and the 100% owned Kutcho copper-zinc-gold-silver project in British Columbia. There are also other exploration stage projects in Capstone's portfolio.
The company recently reported its FY2012 results. For the year, CS's adjusted earnings per share were $0.20. Revenue was $305.5 million on the sale of 79.0 million pounds of copper, 13.2 million pounds of zinc, 2.6 million pounds of lead, 18,562 ounces of gold and 1,628,008 ounces of silver. Copper production for the year at Capstone's two operating mines, Cozamin and Minto, totaled 82.8 million pounds in concentrates (79.6 million pounds of payable copper) at a total cash cost of $1.50 per payable pound of copper produced. Capstone ended the year with cash on hand of $499.9 million, a $200 million credit facility and no long-term debt. Shares have a 52-week range of 2.03 - 3.17 - they last closed at $2.36 per share. RBC Capital has a $3 price target on the stock.
Mercator is a Canadian mining company the produces copper, molybdenum and silver. Mercator's mines are located in the U.S. and Mexico. While the company holds some impressive assets, shares are trading near their 52-week low, making the company a "cheap" acquisition target. Shares have fallen under pressure, recently; following the company's report that due to the decline in molybdenum prices
Separately, ML's El Pilar copper project in Mexico is progressing nicely. The company is currently performing metallurgical testing while completing the final environmental permits for constructing the power line to the Project. The Project has an expected average life-of-mine total cash costs of $1.34 per pound of payable copper. The project is expected to have an average annual production of 79.3 million pounds of copper cathode for its 13-year forecasted lifespan.
Copper Mountain Mining has a fully operational mine, the Copper Mountain Mine in British Columbia that commenced production in the summer of 2011. Its recently released results show a gross profit of $38.2 million for the year ended December 31, 2012, an increase of 137% over the prior year. Revenues for 2012 were $229.5 million from the sale of 59 million pounds of copper, 20 thousand ounces of gold, and 402 thousand ounces of silver. Adjusted earnings for the year were $0.28 per share. The Copper Mountain Mine is unique in the fact that it is not actually a new mine. The mine has already produced more than 1.7 billion pounds of copper, 700,000 ounces of gold and 9 million ounces of silver from five separate pits and an underground operation between 1927 and 1996. The mine was recently brought back to life after new technologies combined with prime market conditions made the property attractive, once again. CUM shares are currently trading around $3.00 apiece, at the low-end of their 52 week range of $2.43 to $4.88.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.