Looking at Mergers & Acquisitions in Today’s Copper Market

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In today’s global market, aging copper mines are producing lower amounts of copper at significantly increasing costs.  Copper ore has been on a downward spiral since the mid-1990’s.  A copper miner has to dig up an additional 50 percent of ore to get the same amount of copper.  The increasing costs of mining for copper combined with challenges in logistics are driving major miners to look for possible acquisitions

Major explorers have been missing their production targets for a few years now while struggling with the skyrocketing production costs to produce the most copper out of their mines.  Even though production is declining, the demand for copper will continue to increase.  For example, Rio Tinto is expecting an increase in copper demand at double what demand is today over the next 15 years.  The company’s production decreased 16 percent last year, but to keep up with this new demand, the company says it needs to spend $80 billion to expand within the next five years. 

Expansions in this industry by companies such as RIO will require acquisition of smaller miners and exploration companies that have “new” deposits or deposits that will come online soon.  When trying to build a new mine, the costs substantially outweigh the purchase of existing production.   That’s because the costs associated with exploration, obtaining permits, and opening as well as waiting for ore to come on line are far greater than acquiring an existing production. 

Based on what the copper market is doing, there are a few miners that make good acquisition targets.  A good acquisition target is a company that is currently online or close to being online.  You want these projects to be located in geopolitically stable regions and have low cash costs when it comes to production.  Prime takeover targets are those that own valuable projects and are currently undervalued. 

If you’re a major miner, the following are targets you should consider: 

Capstone Mining (CSFFF.PK)

The company has two producing copper mines, the Cozamin (a copper-silver-zinc-lead mine) which is located in Zacatecas State, Mexico and the Minto (a copper-gold-silver-mine) which is located in Yukon, Canada.  The company also has two development projects.  One is a 70 percent owned (Santo Domingo) copper-iron-gold project located in Chili and the other is a 100 percent owned (Kutcho) copper-zing-gold-silver project located in British Columbia.  Capstone’s portfolio includes other exploration stage projects as well. 

Capstone recently reported its FY2012 results.  Its earnings per share were $0.20 and its revenue was $305.5 million on the sale of 79 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.  The total payable copper produced was 79.6 million pounds at a cash cost of $1.50 per payable pound.  The company ended its year with $499.9 million of cash on hand, no long-term debt, and a $200 million credit facility. 

Currently, the company’s shares have a 52-week range of $2.03 to $3.17.  RBC Capital has a $3.00 target price on the stock.   

Mercator Minerals (MLKKF.PK)

This is a Canadian mining company producing copper, molybdenum and silver.  Its mines are located in the US and Mexico.  The company has impressive assets.  However, shares are trading at near 52-week lows which make it a cheap acquisition target.  Shares have fallen due to the decline in molybdenum prices. 

Although, the company’s El Pilar copper project located in Mexico is coming along nicely.  It’s performing metallurgical testing at present while waiting on the final environmental permits to construct the power line to the project.  The project’s expected average life-of-mine total cash costs are $1.34 per pound of payable copper.  Its expected annual production is 79.3 million pounds of copper cathode for the 13-year forecasted lifespan. 

Copper Mountain Mining (CPPMF.PK)

This company has a fully operational mine in British Columbia, the Copper Mountain Mine.  Its production started in the summer of 2011.  Although,  this is not a new mine, its produced over 1.7 billion pounds of copper, 700,000 ounces of gold, and 9 million ounces of silver from five separate pits and an underground operations from 1927 to 1996.  New technology along with prime market conditions made the property attractive again.  CMM recently released financials reflecting a $38.2 million profit for year-end 2012, which was a 137 percent increase over its previous year.  Year 2012 revenues were $229.5 million from the sale of 59 million pounds of copper, 20 thousand ounces of gold, and 402 thousand ounces of silver.  The adjusted earnings for last year were $0.28 per share.  Shares are currently around $3.00 a share and at the low-end of their 52 week range of $2.43 to $4.88. 

Source: www.seekingalpha.com

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