The Pros And Cons To Copper Mountain Mining Corp. - Seeking Alpha

By: Lars Moffatt

Introduction

Volatile to mineral prices, mining companies often either struggle or surge in the market based on what their produced mineral is worth. A large portion of Canadian mineral companies are small market caps, leaving many of these stocks in the $0-$3 (NYSEARCA:CAD) range. Many investors shy away from these stocks due to high levels of risk, while some take the plunge into the sector and can have bi-polar earnings/losses.

Today’s North Channel Investments analysis will look at Copper Mountain Mining Corp (OTCPK:CPPMF), which although has high levels of risk, could lead to some fair future gains. This article will show you what to consider in mining stocks, with Copper Mountain as the main example.

Company Overview

Incorporated in 2006, Copper Mountain Mining Corp (OTCPK:CPPMF) is a mid-tier mining company which produces copper, gold and silver. Headquartered in Vancouver, British Columbia, Copper Mountain’s mining operations are located roughly 300km east of the Port of Vancouver and 20km south of Princeton, British Columbia. The Copper Mountain Mine is owned by two parties: Copper Mountain Mining owning 75%, while Mitsubishi Materials Corporation owns the other 25%, and purchases almost all mineral resources from the site to be shipped to Japan. Based on an evaluation on January 1st, 2017, the open-pit mine has a useful life of 16 years, which is expected to last until 2031. There are three main pits on Copper Mountain.

During 2016, Copper Mountain as a company and as a stock struggled due to extremely low prices of copper and silver. The following charts indicates copper and silver prices from 2015-Late November 2017:

Copper Prices, 2015-Present

Silver Prices, 2015-Present

Source: Mactrotrends

The final financial results for 2015 and 2016 were not favorable for the company, where the company posted a 3.8 million dollar adjusted-loss for the fiscal year of 2016, caused by a huge drop in the value of copper that stayed under $2.60 (US$) until late 2016. There was huge doubt if the company was even financially stable for the future as there was several years of losses that the company already had gone through, where at the end of 2015, the company posted an accumulated deficit of $81.3 million. Cash flows were also dangerously low, which were at a jaw-dropping 1.76 million at the end of the first quarter in 2016. By the end of 2016, the company managed to increase their cash on hand to roughly 31.4 million, which was only made possible through the issuance of common shares and increased cash from investors.

Nine months later, the company is still in a fair size of a deficit. However, the horizon looks a lot more positive than it did one, even two years ago. The company has done very well at increasing their cash on hand as well as to decrease the deficit. Clips from their third quarter financial statements show the cash on hand increase as well as the cut of their deficit over the last 9 months:

Source: 2017 Third Quarter Financial Statements – Copper Mountain Mining Corp

Growth Prospects

With all of the financial risk (which I will discuss more in detail later) that Copper Mountain carries, the company has done a lot to turn around the company financially. Despite 2016 ending with a 3.8 million dollar loss, the company posted a great year of production where gold, silver, and copper all increased and have done so over the last four years.

This increase has also continued well into 2017, where they have continued to post higher and higher production results, while having lower operation expenses than the previous nine months of 2016. As of right now, the company (while having another quarter to report) has reported earnings of $0.24 (CAD) per share for 2017, which is tied for the second highest EPS since Copper Mountain’s incorporation in 2006.

Source: Copper Mountain Financial Statements (2007-2017)

Comparing 2017’s nine months against 2016’s first nine months, Earnings per share (adjusted) are much better, where they went from a 10 cent loss per share to a 12 cent increase per share.

Source: 2017 Third Quarter Financial Statements – Copper Mountain

This is an extreme positive for the company as they reap the benefits of current copper prices, which are at the highest price since January 2015.

Copper Mountain has also confirmed that Mitsubishi Materials Corp will purchase all metals produced from Copper Mountain. This ensures the company does not have to worry about the organisation of mineral sales to various buyers, nor the transportation of the product to other purchasers.

Another potential (not confirmed) positive growth prospect comes from one of their pits on Copper Mountain. This pit is currently being drilled and examined to confirm the levels of minerals in the ground. If they are correct, the pit’s life expectancy could increase by 10 years.

Copper Mountain also recently announced that the acquisition of Altona Mining, which is a mineral project in Queensland, Australia. This is an open pit as well, where they will own 100% of the site. The site will add an additional 1 billion pounds of copper reserves and a 14 year life expectancy to the project. This acquisition will be beneficial in the future as they will begin to operate yet another pit that has similar deposit and features of Copper Mountain. Experience handling mines of a similar suit is definitely beneficial.

Overall, the company is performing very well as they continue to pay down their accumulated deficit, as well as increase production year over year. Their recent acquisition of Altona is also very promising. From a growth and performance perspective, Copper Mountain is doing quite well.

Comparison Among Competitors

Mining and mineral companies of similar, small market cap size (100M-500M) will be used for comparison. Price-to-earnings ratio as well as price-to-book ratio will be used for comparison.

Source: Data collected from Y Charts

Copper Mountain fairs well against other competitors, where they have one of the lowest P/E ratios and a slightly higher than average price to book ratio among other mining companies.

Russell 2000 Comparison

Due to their small market cap, Copper Mountain will be compared the Russell 2000, which compares small market stocks.

Copper Mountain fares against the Russell 2000 as follows:

S&P 500 P/E Ratio (as of marketing closing Dec 4th, 2017): 26.5 – Copper Mountain : 6.433
S&P 500 Price-to-book Ratio (as of marketing closing Dec 4th, 2017): 2.25 – Copper Mountain – 1.184

Copper Mountain is much lower than both Russell 2000 ratios, indicating they are not overvalued in comparison to other companies.

Pros and Cons to investing in Copper Mountain

There are several pros to investing in Copper Mountain, including:

Production of gold, silver, and copper have all reached new levels, where the company has done an excellent job in keeping expenses low while increasing revenues.
Copper Mountain has focused on increasing cash flows while also decreasing the accumulated deficit. The deficit has been cut by almost 30 million this year, while cash flows have increased by roughly 38%.
New potential increase in life expectancy of one mining pit which could increase the pit’s life by 10 years. Other additional increases will come from the mine acquired from the Altona mine in Australia.
2017 earnings (after 3 quarters) are $0.24 per share, which is tied for the second highest earnings annually since their incorporation.
Guaranteed purchaser of minerals (Mitsubishi Materials), makes organisation of sales smooth and easy.
Low P/E ratio in comparison to other small market competitors, slightly higher than average P/B ratio against the same comparers.
Recent acquisition of Altona Mining in Australia is promising. Mine operations are similar to that of Copper Mountain’s in their British Columbian mine.

However, although Copper Mountain is doing very well in this present time, Copper Mountain still poses high risk for investors. Cons to the company’s current situation and operations are the following:

EXTREMELY low current liquidity ratio which is slightly lower than 2016. Current liquidity ratio stands at 0.944 as seen below. If all hell breaks loose, the company does not have enough liquid assets to pay for all liabilities.

Source: 2017 Third Quarter Financial Statements – Copper Mountain

Company is still currently in an accumulated deficit of over 40 million. No need to explain on why this a con.
To combat years of continuous loss, the company has issued shares to raise capital as well as seek funds from investors. This is extremely alarming as the company cannot create their own cash flows and seeks other methods to do such.
Precious metal markets are very volatile, and can crash or surge due to economic conditions and demands. Copper Mountain lives and dies on these fluctuations, where they could either reap the benefits or see their demise based on price changes in the future.
The company has a history of inconsistency in earnings where they have posted adjusted losses per share four times in the last ten years.

Final Thoughts

There are many pros and cons associated with Copper Mountain, which indicates that investors should weigh all of these when making the decision of shorting the stock or keeping it for the long haul. In comparison to other companies, Copper Mountain has a great P/E ratio in comparison to other small market competitors. They also have had positive increase in production of minerals, where gold, silver, and copper levels have continuously gone up other the last few years. This increase will be expected to continue in the future, where it could increase largely due to the Altona Mining acquisition. However, the risks stated above are extremely concerning for anyone who invests in stocks with little to no risk. If you are an investor who likes stocks with higher risks, I believe Copper Mountain could provide a fair gain in the near future as long as they continue to lower the accumulated deficit and keep cash flows strong. Financially, Copper Mountain is faring a lot better than they were a year or two years ago and have fair growth prospects. If investors have been waiting on Copper Mountain to become a good investment, I believe the time is now, but high risk is still relevant.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.