Seven Canadian Small Caps Worth Watching

by: FP Trading Desk

Scotia Capital will be shifting their gaze towards seven up-and-coming small cap copper and zinc mining operations with an impressive anticipated collective growth rate of 45% in 2009, the research firm said.

Scotia analyst Alex Terentiew and others have initiated coverage of six companies focused on copper and one focused on zinc. They expect big things from Mercator Minerals Ltd. (OTC:MLKFF), Sherwood Copper Corp. (OTC:SWOPF), and Capstone Mining Corp. (OTCPK:CSFFF), predicting all three will provide investors with significant growth at a discount.

Mr. Terentiew said:

With industry-competitive operating costs and favorable growth profiles, these three companies are expected to outperform their peers.

They will also be keeping an eye on Quadra Mining Ltd. (OTC:QADMF), Chariot Resources Ltd. (OTC:CHDSF), Breakwater Resources Ltd. (OTC:BWLRF) and Frontera Copper Corp (OTC:FRCPF). But Scotia's top pick is Mercator Minerals, a copper mining company with a new mine in Arizona.

He said:

We believe Mercator has an ideal production mix for a single-asset company.

The analyst predicts a one-year target price of C$11, almost double the C$6.92 (up C$0.17 or 2.52%) the company was trading at Monday morning.

Mercator's mine is forecasted to produce, over the 2009 to 2018 time period, about 56 million pounds of copper and 10 million pounds of molybdenum annually. Mr. Terentiew expects the company to generate about C$2.60 per share of net free cash flow in 2009 (C$194-million) putting Mercator in a good position to make an acquisition, and also an attractive takeover target.

Mr. Terentiew said:

With few exceptions, the companies on which we have initiated coverage are experiencing significant production growth, but many of these same companies have limited organic growth opportunities, leaving mergers and acquisitions as an attractive alternative. It's part of an anticipated trend as small-cap companies look to quickly ramp up production as a means for offsetting declining commodity prices.

Meanwhile, Scotia urges against investing in Breakwater (hurt by flat zinc prices) and Frontera Copper (too dependent on copper), predicting both will underperform in the coming year. Breakwater was trading down C$0.005 or -1.75% to C$0.280 per share while Frontera was up C$0.04 or 1.83% to C$2.22 per share on Monday.