Copper Mountain Mining Corp (TSX: CMMC) is a copper producer, developer and explorer. Copper Mountain's flagship asset is the Copper Mountain mine located in southern British Columbia near the town of Princeton. The Copper Mountain mine produces over 90 million pounds of copper equivalent per year with a large resource that remains open laterally and at depth. The company also has the development stage Eva Copper Project in Queensland, Australia, which is expected to add approximately 106 million pounds of copper equivalent on an annual basis and an extensive 397,000-hectare prospective land package in the Mount Isa area.

Revenue Mix

Source: Annual Report, Kalkine Group

Investment Rationale

• Solid Second Quarter Performance: The group's performance in the second quarter of FY20 significantly improved led by strong price rally in the commodities the group is dealing. Revenue jumped by 40% to CAD 91.1 million on a YoY basis; Adjusted EBITDA jumped by 131% to CAD 15.7 million and Cost of sales as a percentage to revenue significantly reduced in the second quarter of FY20 to ~67%, as compared to 97.5% recorded in the same period of the previous financial year. The company reported a positive bottom line during the quarter after reporting losses in the last three quarters.

• A recovery in the Copper prices is likely to benefit the company in the near term: The company derives the majority of its revenue from copper. Copper prices have improved significantly in the recent past. Further, China, one of the world's largest consumer of copper, has opened its economy and allowed the economic and industrial activities to resume, which is supporting the copper demand. Further, copper prices are likely to remain stable in the second half of the year as most of the governments across the globe eased the lockdown restrictions which is likely to result in the resumption of the industrial activities. Quick recovery in the copper prices and surge in copper demand is expected to benefit the company in the near-term. With Copper Prices are up ~14% on a YoY basis and Gold prices are up ~29% in the same period, the company's revenue and cash flow are likely to improve in the near term.

Copper and Gold Price. Source: London Metal Exchange (LME)

• Positive Drilling Testing Depth Extensions at New Ingerbelle: The group announce positive results from two drill holes, totalling 1,538 metres that were drilled to test the depth extent of the New Ingerbelle copper-gold pit at the Copper Mountain mine. The drill program shows that mineralization extends for at least an additional 250 metres below the design pit. Both holes terminated in the ore. As a result of this drilling, the group believes that there is considerable potential to materially increase the mineral resource and ultimately, the mineral reserve. Further, the average copper and gold grades of these wide intercepts are above the average mineral reserve grade at New Ingerbelle. New Ingerbelle has meaningful precious metals exposure with nearly 40% of its reserve value comprised of gold and silver.

• Strong Relative Strength Over the Past One Year: Shares of CMMC have significantly outperformed the benchmark index amid volatile stock market. CMMC shares have outperformed the broader TSX Composite on a YoY, YTD, 3-Month and 1-Month by approximately 40%, 39%, 54% and 17% respectively. This reflects a strong relative price strength in the CMMC stocks on the TSX.

• Stock is in a Bullish Trend: At the last traded price of CAD 0.94 (on September 29, 2020), CMCC shares traded above the crucial short-term as well as long-term support levels of 30-day, 50-day, 100-day and 200-day Simple Moving Averages (SMAs). This shows a bullish trend in the stocks. Moreover, the short length and long-length moving averages are also edging higher, making the prevailing trend stronger. Also, Price/200-day SMA ratio stood at ~1.49x, implies that CMMC shares are trading approximately 49% above its 200-days SMA, a bullish indicator.

CMMC Moving Averages and Price comparison. Source: Refinitiv (Thomson Reuters) 

• Risk Associated to Investment: The group’s financials depend on the prices of the commodities that the company sells; therefore, a correction in the copper and gold prices could weigh on the group’s performance. Also, the company has relatively higher debt contribution in the balance sheet, which poses a balance sheet risk as well. Further, given the small market capitalization of the company, the investors are exposed to the liquidity risk as well. 

2QFY20 Financial Highlights

Source: Company Presentation

• Revenue jumped by 40% to CAD 91.1 million on a YoY basis, led by solid price recovery in the underlying commodity prices.
• In the second quarter of FY20, the group’s production increased by 8% to 23.9 M lbs of copper equivalent compared to Q2FY19. The group produced 18.1 million pounds of copper, 7,499 ounces of gold and 86,126 oz of silver during the quarter.
• Cost of sales as a percentage to revenue significantly reduced in the second quarter of FY20 to ~67%, as compared to 97.5% recorded in the same period of the previous financial year.
• All-in cost (AIC) decreased by 29% to US$1.67 per lb.
• Gross profit increased to CAD 30.3 million compared to CAD 1.6 million reported in a year over period.
• EBITDA improved from CAD 10.3million in the Q2FY19 to CAD 49.1 million in the Q2FY20 and adjusted EBITDA jumped by 131% to CAD 15.7 million.
• Cash flow from operations (before working capital changes) stood at CAD 41.5 million against CAD 4.7 million in a year-over period.
• Cash and Cash Equivalent stood at CAD 29 million at the end of Q2FY20.

Q2 2020 Mining Activities

Source: Company Filings

Stock Performance

Over the past one-year CMMC shares generated a price return of approximately 36%, and the share price increased approximately 32% on a YTD basis. The stock gained 62% in the past three months and 13% in a month over period. Moreover, CMCC shares have outperformed the benchmark index in all the above-mentioned periods.

1-Year Price Chart (as on September 29, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

In a year over period, its shares have touched a 52W high price of CAD 1.19 on September 18, 2020 and a 52W low of CAD 0.28 as on March 19, 2020. At the last traded price of CAD 0.94, its shares traded approximately 235% above its 52W low price level and approximately 21% below its 52W high price level.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 41.98% of the total shareholding. ICM Limited and Cloke and Mackenzie Financial Corporation hold the maximum interests in the company at 15.75% and 9.96%, respectively. The institutional ownership in the company stood at 38.10% and strategic ownership stood at 5.6%, respectively.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters).

Peer Comparison

Source: Refinitiv, Thomson Reuters

Stock Recommendation: The group’s performance in the second half of FY20 was solid led by strong price recovery in the commodities. Copper prices have recoded a sharp recovery on the London Metal Exchange, with commodity prices are hovering above the pre-pandemic price level. Improvement the copper price is likely to benefit the company’s performance in the near to medium term. Further, copper prices are likely to remain stable in the second half of the year as most of the governments across the globe eased the lockdown restrictions which is likely to result in the resumption of the industrial activities.

CMMC shares are moving in a bullish price trend, with the price hovering significantly above the crucial short-term as well as long-term support levels of 30-day, 50-day and 200-day SMAs. Moreover, the leading momentum indicator MACD is rising, and the difference between 12-day and 26-day EMAs is positive, which is another bullish trend.

However, the group’s financials depend on the prices of the commodities that the company sells; therefore, a correction in the copper and gold prices could weigh on the group’s performance. Also, the company has relatively higher debt contribution in the balance sheet, which poses a balance sheet risk as well.

Therefore, considering the above rationale and valuation, we have given a “Speculative Buy” recommendation at the closing price of CAD 0.94 on September 29, 2020.

*Recommendation is valid at September 30, 2020 price as well.

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Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.