Quadra's Mega-Project a Game Changer - Canaccord Adams

Mid-tier copper miner Quadra Mining Ltd. (QADMF.PK) can move to a whole new level with its Sierra Gorda project, analysts say.

Quadra released scoping study results for the project on Thursday, and they prove that Sierra Gorda can be a world-class mine. It is expected to produce 306 million pounds of copper, 16 million pounds of molybdenum, and 36,000 ounces of gold a year over a 25-year mine life. The cash cost is reasonable — just $.79 a pound after byproduct credits. And the internal rate of return is 16% based on $2.00/lb copper, $12.00/lb moly, and $800/oz gold.

Those are big numbers. They're so big, in fact, that Canaccord Adams analyst Orest Wowkodaw pointed out that Quadra would produce more moly than Thompson Creek Metals Company Inc. (TC), North America's biggest pure-play moly miner. He called the project a "game changer."

Mr. Wowkodaw wrote in a note to clients:

As one of the world's largest undeveloped copper deposits, Sierra Gorda has the potential to transform Quadra into a major industry player, significantly increasing the company's production profile [doubling the existing copper capacity] while markedly lowering its operating cost profile.

But it's never that easy. With an estimated capital cost of $1.7-billion for Sierra Gorda, Quadra will likely need a financial partner to move this project forward.

Tom Meyer, an analyst at Raymond James, suggested that the perfect model to follow is Antofagasta PLC (ANFGF.PK), another miner in Chile. To finance its $1.3-billion Los Pelambres mine, Antofagasta sold 40% of it to a Japanese consortium in the late 1990s. More recently, it sold 30% of a separate project to a Japanese group in order to fund a $2.3-billion development.

Mr. Meyer calculated that Quadra could sell a 40% stake in Sierra Gorda for about $290-million in cash. He also assumed that about 60% of the $1.7-billion project could be financed with debt, meaning Quadra would only have to come up with another $118-million on its own. That is a much more reasonable number.

Mr. Wowkodaw rates Quadra a "buy" with a target of C$11.50 a share, while Mr. Meyer rates it a "strong buy" with a way higher target of C$19.00 a share. And he thinks that even that may be too low.

"The importance of the Sierra Gorda project to Quadra specifically, and the copper industry in general, should not be underestimated, in our view," he wrote.

"Over time, we anticipate the value to further creep into Quadra's share price and prove our C$19.00 target conservative."

Comments

[Jason Hamlin:]

With the economy likely to be flat or declining for some time, I am staying away from base metal plays. We haven't seen inflation ratchet up yet, but this is due to the banks hording 90% of the TARP funds they have received and thus the cash has not flowed through the economy. At some point, the massive amount of the printing, borrowing and spending will debase the dollar and create inflation, if not hyperinflation. In the end, we are most likely looking at stagflation for a number of years.

Industrial metals are not the place to be in this environment. I believe it will be much more lucrative to own miners of monetary metals, such as gold and silver. While a falling stock market will crush copper miners, gold and silver provide insurance against the backdrop of a currency crisis.

Jul 26 01:35 PM

[FIFOkid:]

The only comment I will like to make here is Quadra IMO is the best run mining company in the world. They have been very effective at expanding assets at low points in the cycle and raising equity at highs.

Aug 15 02:40 PM