CA - Western Copper and Gold: For Now It's Just Volatile Copper

2023-07-05 04:01:23 ET

Summary

• The share price of Western Copper and Gold Corporation has fallen sharply since I issued an earlier Sell recommendation.
• The company has a project to recover copper, gold, silver, and molybdenum from a mining property in the Yukon, Canada.
• Until Casino begins producing the commodities, the stock will be subject to the price action of the commodities and other uncertainties.
• Due to the strong positive correlation between the two assets, the copper price will be the main contributor to the stock price. A lower copper price is possible due to possible recession headwinds, but this should not lead to a significant decrease in the Western Copper stock price.
• The investor should not deviate from the Hold rating for the time being.

This analysis re-rates the stock in Western Copper and Gold Corporation (WRN) (WRN:CA) to a Hold rating from the previou s Sell rating as the shares are still under some negative pressure from mounting recession fears, but the extent of this headwind is very difficult to determine due to volatile economic conditions.

The Outlook for the Copper Price

Copper is essential in the transition from energy sources with high environmental impact to zero-emission renewable energy sources, and its availability will be crucial in building technologies that will allow humanity to continue conducting its activities without polluting the environment. The price will show an increasingly positive underlying trend over time, supported by solid demand due to the factors just mentioned.

In the near term, however, the price is unlikely to gain much momentum, facing some headwinds instead, as fears of an economic slowdown continue to mount since further rate hikes are deemed necessary to push inflation back toward the 2% median target. In addition, global demand is struggling with economic conditions in China, where the world's largest consumer of the commodity has been unable to spur growth despite stimulus measures implemented by the government with the help of the People's Bank of China's accommodative monetary policy.

Given the possibility of lower copper prices should the economy slip into recession, this analysis suggests not adding to positions in listed operators whose share prices are heavily dependent on changes in the red metal's price.

Western Copper and Gold Corporation Deserves a Hold Rating

Such stock is the one representing the equity in Western Copper and Gold Corporation, an exploration company engaged in the exploration and development of open pit copper, gold, silver, and molybdenum deposits on the Casino mineral property in the Yukon Territory, Canada.

The stock is traded on the New York Stock Exchange America under the ((WRN)) symbol and on the Toronto Stock Exchange under the ((WRN:CA)) symbol.

For both stocks, this analysis suggests that the appropriate recommendation is Hold as the shares could face some downward pressure in the coming months. While lower price levels are possible, the margin down is not seen today as an incentive to take profits. However, given all the headwinds mentioned, it's almost inconceivable that the stocks could recover significantly from current levels.

Western Copper and Gold Corporation Is Highly Exposed to Changes in the Price of Copper

Molybdenum will be the largest contributor to the company's future profitability once the Casino mineral area actually comes on stream as the metal is estimated to generate $40.5 billion in future revenue over the life of the mine, while copper will generate $16 billion, and gold will generate $13.3 billion at current commodity prices. In the meantime, however, this company's stock will mostly be driven by the price action of copper as it seems to have a stronger positive correlation with the red metal than molybdenum or any other commodity in development as illustrated in the chart below.

As of this writing, the curve describing the price development of the WRN stock (blue line) over the last three years shows a very strong positive correlation with the curve describing the development of the copper price (red line) over the same period. This is not so much because the value of the correlation coefficient is 0.722, higher than 0.464 for gold or 0.321 for molybdenum, but rather because the curve of the correlation between WRN and Copper Futures expiring on September 23 (HGU3) has always been in the upper part of the graph, as indicated by the red area above the zero line.

Similar conclusions were drawn for WRN: CA stock, which trades on the Toronto Stock Exchange, as shown by the below chart.

If we assume that the change in copper price causes the change in Western Copper and Gold Corporation's stock price based on a linear relationship, then it is also possible to determine to what extent the first variable affects the second variable.

This analysis tested the model on weekly returns over the past three years and found a slope of 1.11, meaning that for every $1 fall in the commodity price, on average, WRN's stock price falls by $1.11.

So in this way investors can at least roughly have an idea about the impact a bearish red metal can have on Western Copper’s shares.

About the Casino mineral property in the Yukon Territory, Canada

Western Copper and Gold Corporation is developing the Casino Project as the company intends to eventually establish more than 25 years of mineral activities there for exploration and production of copper, gold, molybdenum, and silver.

According to the project, the metal will be produced thanks to open pit mining activities located approximately 380 km northwest of Whitehorse, the capital of the Yukon Territory.

Western Copper and Gold Corporation is the sole owner of the Casino copper-gold-molybdenum-silver deposit through a subsidiary that has full local management responsibility for the property. The mineral asset is identified as one of the largest in Canada in terms of copper and gold resources hosted.

A feasibility study was released in August 2022 for the Casino copper-gold-molybdenum-silver deposit outlining the resource allocation as follows: based on a copper price of $3.60 per pound, gold price of $1,700 per ounce, silver price of $22 per ounce and molybdenum price of $14 per pound, Casino copper-gold-molybdenum-silver deposit contains 46% copper, 34% gold, 4% gold and 17% moly. Copper is hosted in measured and indicated mineral resources, accounting for 7.6 billion pounds, while gold is hosted in measured and indicated mineral resources, accounting for 14.1 million ounces.

Approximately 66.5% of the copper resources are in mineral reserves, most of them in ore sulfide grading 0.19%, while approximately 68.6% of the gold resources are in mineral reserves, most of them in ore sulfide grading 22 grams of precious metal per ton of ore.

The Casino project includes an open-pit mine and the concentrator that will process 120,000 tons of material per day to produce copper and molybdenum concentrate from sulfide ore using conventional flotation techniques, recovering gold and silver as a fraction of the copper concentrate. The Casino project also includes processing 25,000 tonnes per day of oxide and operating a heap leach facility and SART (Sulphidation, Acidification, Recycling and Thickening) technology to recover the precious metal for forging into doré bars and recover the copper contained in the oxide ore.

Assuming that gold will have an average price of $2,050 per ounce and copper will have an average price of $4,034 per pound over the next few years, the project should generate an internal rate of return of 24% and allow the company to recover its original investment within 2.5 years from the beginning of metal production.

While these metal price assumptions are well above current market levels (both up about 6%), Casino's IRR is below the minimum 25-30% IRR threshold that investors typically consider for a highly profitable mine.

The project has a net present value of CAD$2.334 billion (or ? US$1.761 billion), calculated with a discount rate of 8%. The stock has 161.83 million shares outstanding and there is no question that it is trading at a market price that today represents a huge discount to the NPV per share, which can be considered as the intrinsic value of the stock.

But that's not why the investor should make an investment decision regarding this stock. Because if that were the benchmark, not only would the investor not discover it today, but it would have been known since the company decided to release all data related to the Casino mining project, including cost-efficiency forecasts. It is therefore not possible that the market continues to make such an offer and that hardly anyone seems to want to listen to it.

Because given the speed with which any kind of information becomes public domain in a very short time due to the myriad of communication technologies on the Internet, the opportunity to buy a mining project and pay it many times less than it's worth would certainly have caused the share price of the stock to converge towards the NPV per share.

However, this has not happened. Thus, different are the considerations to be made for this stock, which are presented in the next section.

The Stock Valuation

Shares of Western Copper and Gold Corporation ((WRN)) were trading at $1.591 per unit at the time of writing, with a market cap of $247.6 million and a 52-week range of $1.16 to $1.98, as shown by the chart.

Shares are trading below the 200-day simple moving average of $1,623, the 100-day simple moving average of $1,675, and the 50-day simple moving average of $1,628.

Shares of Western Copper and Gold Corporation ((WRN:CA)) were trading at CA$2.04 per unit at the time of writing, with a market cap of CA$330.13 million and a 52-week range of CA$1.56 to CA$2.68, as shown by the chart.

Shares are trading below the 200-day simple moving average of CA$2.19, the 100-day simple moving average of CA$2.26, and the 50-day simple moving average of CA$2.18.

These market valuations for both WRN stock and WRN:CA stock are not at all high compared to recent stock prices. But the project is not yet yielding the metal as it is currently under construction. In the meantime that Casino will become a prolific mine by all means, the share price will be exposed to the fluctuations in the price of copper and other metals as well as some of the risk factors associated with the project.

Volatile Factors Weigh on Western Copper and Gold Corporation Shares

As seems to be the case now with regard to this particular phase of the economic cycle where, with the arrival of further interest rate hikes, the likelihood of an economic recession between late 2023 and early 2024 is gaining traction. According to statista.com , the difference between 10-year and 3-month Treasury yields suggests that the US economy is becoming more likely to enter a recession by 2024, with a greater than 70% chance of recession for the US within 10 months.

Negative investor sentiment towards the Chinese economy will also not have a positive impact on copper demand due to the flagging manufacturing and construction industries. In fact, the latest PMI survey revealed slower growth in China's manufacturing sector, while capital misallocations combined with catastrophic demographics are at the root of China's housing crisis.

Supply-side constraints due to significantly lower levels of total copper inventories held in bonded warehouses around the world should instead put some upward pressure on the metal price. However, as future copper price developments remain difficult to predict, it is evident that concerns about weak demand are having a slightly larger impact on market valuations than supply-side constraints.

Furthermore, it could also be the case that something does not go as planned for Casino multi-metallic property or the company is unable to raise funds in time to bring the mining project into production.

The presence of strategic partners such as London-based metals and mining giant Rio Tinto ADR ( RIO ) and Japanese cement maker Mitsubishi Materials Corporation ( OTCPK:MIMTF ) as well as a net cash (not debt) position of $20 million reduce the investment risk but do not eliminate it entirely.

However, the investor must assess every aspect of the current state of the economic cycle and its impact on the development of the project.

The company may delay the start of production because borrowing today entails higher interest costs or if the start of production coincides with the recession.

In the latter case, Casino wouldn't get the momentum it deserves if it can’t capitalize on the early stages of the production ramp-up.

Also, Western Copper could try to avoid as much as possible the inflationary pressures that will still be felt on the availability of raw materials until the impact of monetary policy has been fully passed on to the economic system.

Then there is the higher labor cost variable to consider going forward as wages slowly adjust to the rising cost of living due to rampant inflation and labor costs tend to account for the bulk of total production costs.

But during a Hold stance, uncertainties can quickly turn into opportunities. So be prepared to snag them.

Essentially, this analysis also encourages the investor to consider the impact of various factors on Western Copper's stock price, with an aim to take full advantage of this stock's exposure to cyclical commodity prices, especially copper, rather than being fooled by the significant difference between the stock price and the NPV of the Casino mining project as if no one had noticed such a difference until now.

Attention should be paid to the development of the copper price, the economic situation, the high cost of borrowing, inflationary pressures in the procurement of raw materials and the dynamics of the workforce.

Conclusion

The share price of Western Copper and Gold Corporation has fallen sharply since I issued an earlier Sell recommendation. The share price is likely to face more downward pressure from some headwinds, but volatility makes it difficult to predict what impact these will have on the stock price.

Probably not as such to support a take-profit activity today.

The company has a project to recover copper, gold, silver, and molybdenum from a mining property in the Yukon, Canada, but until the project begins producing the commodities, the stock will be subject to the price action of the commodities and other uncertainties.

Due to the strong positive correlation between the two assets, the copper price will be the main contributor to the stock price. The demand for copper seems weak in the short term, but the global supply of the metal is also sub-optimal. A lower copper price is therefore possible, but this should not lead to a significant decrease in the Western Copper stock price. While a significant rebound from current levels is all but unthinkable given all the headwinds mentioned.

Therefore, the investor should not deviate from the Hold rating for the time being.

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