CPPMF - Why Copper Mountain Mining Could Perform Well

Summary

• Copper futures should trend higher on expected robust demand for copper versus tighter supply.
• Copper Mountain Mining Corporation could potentially be propelled higher by increased volatility relative to copper prices.
• While after some optimization work and a slowdown in inflationary pressures, Canadian copper mining is expected to improve production and particularly costs.

Copper Price Outlook

Copper futures due in March 2023 (HGH3) are up 11% year-to-date and are trading at $4.23 per pound at the time of writing.

This price level is the highest in the last 7 months, but the upward trend should continue, albeit not regularly, as that is the nature of commodities. This could be due to two factors, expected robust demand for copper versus tighter supply. An increase in demand for copper is expected , supported by higher industrial demand, as all economic activity in the People's Republic of China fully resumes after the world's second-largest economy and the largest consumer of copper lifts zero-tolerance measures against COVID-19.

On the supply side , Peru, the world's second -biggest producer, is embroiled in civil unrest, one of the worst in 20 years, leaving the huge Antapaccay mine running at limited capacity. Chile, the world's largest copper producer, expects production to fall slightly in 2023.

Copper Mountain Mining Corporation Is Poised To Perform Well On Copper Price Tailwinds

To benefit from the expected higher copper prices, investors should continue to hold shares in publicly traded copper mining companies.

To that end, the investor should consider holding shares of Copper Mountain Mining Corporation (CPPMF) ( CMMC:CA ), as this Canadian miner could potentially be propelled higher by elevated volatility relative to copper prices and expected operational improvements following certain optimization work.

To determine the volatility of the Copper Mountain Mining Corporation stock price versus the daily changes in copper futures, the following procedure quantifies the relationship between the two securities' prices whose lines are shown in the chart below.

If Copper Mountain Mining Corporation's daily returns are taken as the result of a linear relationship in which copper futures expiring March 2023 (HGH2023) is the input or independent variable, the equation averages that Copper Mountain Mining Corporation's daily return is 1.8 times the HGH2023.

So, if the price of copper increases by $2.5, the Copper Mountain Mining Corporation stock price per share increases by $4.5 (= 1.8 times $2.5). So, based on trailing 12-month prices, Copper Mountain Mining Corporation has a copper beta of 1.8x.

Copper Mountain Mining Corporation In The Copper Industry

Based in Vancouver, (Canada), Copper Mountain Mining Corporation is a mining company focused on the exploration and production of copper, silver and also some gold.

To get an idea of each metal's weight in determining miners' total sales, copper sales make up about 85% of total sales, silver 13.5%, and gold the remaining 1.5%.

Currently, Copper Mountain Mining Corporation is selling the metals thanks to production from its 75% interest in the Copper Mountain Mine in southern British Columbia.

The miner estimates that this British Columbia metals project is currently producing approximately 100 million pounds of copper equivalent per year with the potential to scale up to 140 million pounds of copper equivalent. Copper Mountain Mining Corporation believes the area's metal resources laterally and at depth lie untapped.

An extensive resource expansion drill program completed in early 2022 has increased the mineral resource and mineral reserve by 57% and the occurrence of copper-gold mineralization supports the potential to continue to expand these resources both laterally and at depth.

As of August 2022, total Proven and Probable Reserves were 3.732 million pounds of copper at a grade of 0.24% plus 2.313 million ounces of gold at a grade of 0.10 g/t gold and 16.01 million ounces of silver at a grade of 0.71 grams of silver per ton of ore.

Copper Mountain Mining Corporation had another mineral property in its portfolio represented by the Eva Copper Project, located northeast of Mt. Isa in Queensland, Australia, with an estimated annual production of 90 million pounds of copper and 19,000 ounces of gold.

The Canadian mining company has agreed to sell this property and its 210,000-hectare land package in Queensland, Australia, set aside for exploration activities. Copper Mountain Mining Corporation expects to close this sale transaction in the current quarter.

Ownership of the metal assets will be transferred to Harmony Gold Mining Company Limited ( HMY ) for an aggregate cash consideration of up to $230 million.

Of this, 74% will be paid upfront at closing, with the remainder being paid as a percentage of revenue or upon discovery of new resources on the property.

The Sale Of Copper Mineral Assets In Queensland, Australia Implies A Change In The Financial Position

Proceeds from the sale of assets, calculated at a copper price of approximately $3.83 (above the last 5-year average of approximately $3.4), will improve Copper Mountain Mining Corporation's net debt position by approximately 90%, from CA$348 million in September 2022 to approximately CA$40 million, with a strong positive impact on, but not limited to, the return on investment in the metals project. The company would have more financial resources to focus on its current business expansion and would currently avoid taking on very expensive forms of financing such as equity or debt issuance or loans due to higher interest rates.

Higher and more efficient mineral resource operations allow for the production of metals at lower costs, which goes a long way in offsetting the uncomfortable fixed-price terms of copper sales contracts when they miss an opportunity to capitalize on the commodity's skyrocketing market prices.

This risk, which essentially consists of missing a statistically significant increase in the price of copper, arises from the high volatility of the commodity markets caused by the combination of several macroeconomic and geopolitical factors. And over time, markets tend to become more and more volatile.

Operation In The Third Quarter Of 2022 Has Highlighted Various Problems But All Solvable

Q3 2022 was not as good as the company would have liked due to a few operational issues primarily consisting of lower quality and throughput of material delivered to the plant and a decline in copper recovery rates.

Mill feed grade declined 13 basis points year over year to 0.37% Cu [copper] in Q3 2022 as the higher-grade tonnage [?0.28% Cu] resulting from the Phase 4 operations of the Copper Mountain Mine was less in volume (approximately 40% of total throughput) compared to the lower grade tonnage (?60% of total throughput at 0.21% Cu) coming from the mine's North Pit.

The total tonnage of ore processed was 3.4 million tonnes in the third quarter of 2022, but this quantity should have been higher and not the same as last year. Performance was hampered by an issue with the quality of the steel balls used in the Semi-Autogenous Grinding Mill [SAG], which did not provide enough support to break and grind the stones.

The copper recovery was also not as good as in Q3 2021, as rates averaged 74.4% in Q3 2022, down 530 basis points year-over-year, due to a problem with the North Pit's oxide material, which turned out to be unreasonable compared to expectations.

Therefore, the presence of more copper oxide ores compared to the most productive copper sulfide ores (more copper in the mineral) has made the process of separating the red metal from the unwanted minerals more difficult, especially in the latter part of the quarter.

Operations were also impacted by plant availability, which was lower year-over-year. It stood at about 89% in the third quarter of 2022, down from 92.2% in the year-ago quarter. This plant was temporarily shut down, the largest suspension of the year, but was scheduled for maintenance by the company.

Relevant Financial Results For Q3 2022

Operating issues resulted in a year-on-year decline in metals production (copper down 41.1% to 13.2 million pounds; gold down 18.7% to 6,053 ounces; silver down 52.3% to 64,331 ounces) and metals sales (copper down 49.5% to 12.3 million pounds; gold down 41% to 4,902 ounces; silver down 58% to 59,790 ounces).

This, coupled with a lower quarterly average copper price ($3.52 in Q3 2022 versus $4.27 in Q3 2021), resulted in a 57.5% year-on-year decrease in revenue to CA$ 58.26 million.

Copper Mountain Mining Corporation reported a 1.6% year-on-year increase in the cost of sales to CA$69.4 million in Q3 2022, mainly reflecting inflationary pressures on input costs such as fuel and explosives for blasting activities.

Higher sustained capital costs were also reported during the quarter, reflecting expenses incurred by the company for some work on the environmental water management systems that should have been completed in the final quarter of 2022.

The lower production of the metals resulted in the Canadian copper miner incurring an all-in-sustaining cost of $4.5 per pound of copper, more than double the level of the same quarter last year.

As such, the miner suffered a gross loss of CA$ 11.1 million in Q3 2022 but achieved a gross profit of CA$ 66.6 million in Q3 2021. On a pro forma basis, the company suffered a net loss of CA$22.9 million, or a net loss of CA$0.11 per share in Q3 2022 but generated a net income of CA$41.4 million or a net income of CA$0.20 per share in Q3 2021.

The Company Expects A Better 2023 From An Operational Perspective As Many Of The Issues Of Q3 2022 Are On Track To Be Resolved

With Copper Mountain Mining Corporation scheduled to begin mining most of the deposit, higher-grade ore from Phase 4 operations should replace the North Pit mine in British Columbia as the main ore supply for production in 2023.

The impact on production in 2023 should be significant, as the mineral material collected in Phase 4 is characterized by an average grade much higher than that of the North Pit, and the company estimates it at 0.33% Cu (versus 0.25% of total proven and probable reserves).

Optimizing the crushing circuit, which now supports over 45,000 tons per day at the mill, is also expected to provide strong support for operations in 2023 and enable more stable production. Optimization of the milling cycle combined with expected lower oxide grade ores but higher sulfide grade ores will improve copper recoveries.

All the above improvements should result in higher production levels and lower costs through 2023, starting with an improvement in the last quarter of 2022, with results expected to be released in mid-February 2023.

Gil Clausen, President and Chief Executive Officer of Copper Mountain Mining Corporation, believes the company has passed an operational inflection point, as several challenges have been addressed to optimize the plant and the processing of increased volumes of high-quality copper material.

If these improvements are reflected in positive production and cost trends and are met by a rising copper price, the impact could be very positive for the stock price.

The Stock Valuation

Shares of Copper Mountain Mining Corporation traded at CA$ 2.20 per unit, giving it a market cap of CA$ 474.73 million as of this writing.

Shares are not trading high as they are slightly above the long-term trend of the 200-day simple moving average line of CA$2.02, but below the middle point of CA$2.805 of the 52-week range of CA$1.23 to CA$4.38.

There is no doubt that shares of this copper stock have good potential to rally strongly and form much higher levels than the current ones. This potential derives from the optimization achieved at an operational level, which should be reflected in better results in production and costs compared to Q3 2022. Costs should benefit from the optimization and also from easing inflationary pressures on mine site costs as a result of the hawkish stance of the U.S. Federal Reserve.

Additionally, a high copper beta should add even more gas to the rally if copper prices rise. Copper demand is in excellent shape which should put strong upward pressure on metal prices given the limited supply.

It could also be that neither the operational improvement nor the copper price catalyst will work as expected. However, something can be done to reduce the risk. Today it remains to be seen whether the optimization of activities will bear fruit. With the company anticipating improvements as early as the fourth quarter of 2022, these should be reflected in the financial and operating results, which are expected to be released in mid-February 2023. If these meet the company's expectations, especially in terms of costs, then not only the copper price but also production has a good chance of fueling the comeback of the Copper Mountain Mining Corporation after the big slump in 2022.

From today's perspective, the copper price has a very good chance of performing well in 2023 due to the favorable combination of supply and demand.

Conclusion

Investors should consider owning shares of Copper Mountain Mining Corporation, as they are well positioned to benefit from the expected uptrend in the copper price.

The Copper Mountain Mining Corporation stock price tends to outperform the commodity. After some optimization work and a slowdown in inflationary pressures, the company is expected to improve production and, in particular, costs.

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