Copper Mountain Mining has a very bad year (TSX:CMMC:CA)
I’m writing about Copper Mountain Mining (CCMC:CA) & (OTCPK:CPPMF), which is a small operation of mine that definitely didn’t work this year!
Copper Mountain Mining is a small cap copper mining company with an operating mine, Copper Mountain in British Columbia, and a mine under development, Eva in Australia.
After seeing a strong COVID rebound in 2020 and 2021, 2022 has been a disastrous year for the company on many fronts. Starting with the share price, which has taken quite a beating this year:
The stock is now down around 65% from its 2021 highs and around 55% since the start of the year. Copper Mountain shares also significantly underperformed the base metal miners index:
So why has the company underperformed so much this year? Well, it was one problem after another. Let’s dive in.
Macro dark clouds on the horizon
It should come as no surprise to anyone that the fear of recession; Whether due to central bank tightening or the global energy crisis, investors have been reeling. “Dr. Copper” also took these global economic fears on the chin:
Copper prices are now down about 25% from highs reached earlier this year (could have been much worse if not for the July-August rally). Junior mining companies like Copper Mountain have been hardest hit by this decline and the overall economic uncertainty.
Small-cap miners (orange line) have underperformed broader mining indices that are heavily weighted towards mega-cap and large-cap miners (purple line) by around 1500 basis points this year.
Lost in the mess and looking a little deeper, the copper price, even at ~$3.55/lb, is still pretty good compared to the last 5-6 years.
Given the energy crisis unfolding around the world (not just in Europe). It looks like the most likely short-term trend for copper is down.
In the longer term, the future still looks very bright for copper. S&P Global, Wood Mackenzie, Goldman Sachs, IHS and many others are very bullish on copper over the long term.
The reason is quite simple. A “green transition” is going to require a huge amount of copper and capital expenditure has been very limited over the past decade to meet this demand.
One of my favorite articles from last year was Issues’ “The Hard Mathematics of Minerals” which summarized the situation of copper (well, all base metals and minerals) as such:
It has long been known that the construction of solar and wind systems requires about ten times the total tonnage of common materials – concrete, steel, glass, etc. – to provide the same amount of energy compared to building a natural gas or other hydrocarbon – fueled power plant. Beyond that, supplying the same amount of energy as conventional sources with solar and wind equipment, as well as other aspects of the energy transition such as the use of electric vehicles (EVs), involves a huge increase the use of minerals and specialty metals such as copper, nickel, chromium, zinc, cobalt: in many cases, this is much more than tenfold. As noted by a World Bank study, the “technologies purported to power the clean energy shift…are actually significantly MORE material intensive in their composition than traditional energy supply systems based on fossil fuels”.
I recommend everyone read the whole article (if you have the time), but it’s safe to say that the long-term demand for copper itself looks very good. It’s just that you’ll have to put up with short-term volatility.
Bad time for operations to run into a road accident
The drop in the price of copper has been difficult for all mining companies. But for Copper Mountain, it was compounded by operational issues that hit the company hard in the first half of this year.
During the company’s fourth quarter 2020 report and conference call (in February 2021), the company alerted investors that the company’s mine had suffered significant damage.
A small piece of steel had entered the secondary crusher and severely damaged it. This meant that the company had to stop using the crusher, which greatly reduced the throughput of the mine.
At the same time, they were mining an area called Phase 2 which was to have much lower grades.
So, in summary, copper prices were down, while mine throughput grades would be significantly lower. Q1 and Q2 were shaping up to be very bad quarters! The stock quickly moved from ~CAD$4.20/share to CAD$3.40/share on the news.
Then we come to Q1 and Q2 results which were bad (as expected), but it caught markets off guard at how much the stock price was given to them and fell both times. As we can see from the slide below, production is down almost 50%, grades are down around 40% while cash costs/AISC are up sharply from the first half of 2021 (due to lower mine throughput).
Management now expects the second half of the year and 2023 to see a significant recovery in production, as the crusher has been fully repaired and major upgrades to the Copper Mountain mine have been completed in the meantime.
While this sort of thing happens all the time in mining, it still hurts the credibility of management. It will be up to management to rebuild their credibility through solid execution and more “surprises”. Which brings me to the final setback…
The hits keep coming
Last week, Copper Mountain announced that its chief financial officer had been terminated and that its vice president of finance would be promoted to interim chief financial officer. It was quite a shocking announcement and the company didn’t provide any reason or rationale for the termination.
The next day Mining Journal (among many others) reported that (now fired) Chief Financial Officer Rodney Shier sold approximately half of his CMMC stock between November 2021 and March 2022 without disclosing it or filing proper documentation. Once the company and the board became aware of the situation, they quickly fired him for this serious violation of laws and regulations.
It was (hopefully) a unique event and none of the other Copper Mountain leaders did something similar. But again, this hurts their credibility even more at a time when their credibility wasn’t great to begin with. The net result is that most investors will see Copper Mountain in the “penalty zone” for the rest of the year (or longer).
Management really needs to execute and “keep their noses clean” now to rebuild their credibility. But it’s going to be a real uphill battle.
The coast is not clear
Copper prices have fallen and now appear to be recovering (or at least stabilizing). Management has indicated that the production issues are behind them and going forward it should be all clear to ‘buy the dip’, right?
Unfortunately, it’s been a tough year for most investors (state the obvious). After the past two years of strong market gains, I expect we will see significant tax-loss selling to Copper Mountain as well as many other names.
Tax-loss selling can often have a huge impact on Canadian stocks, especially smaller, less liquid stocks like Copper Mountain.
I think there’s a very good chance that we could see a scenario like this:
- Copper prices have bottomed out and are slowly rising.
- Management reports third quarter results in October, showing a rebound in operations as well as positive updates on Copper Mountain LoM and the Eva project.
- The stock price drops towards the end of the year (ie falls below C$1/share), as investors look to realize tax losses in November and December.
For this reason, I cannot recommend buying now. Even if the fundamentals started to improve, I think that would be drowned out by the tax-loss selling. I’ve already started putting together a shopping list of tax-loss candidates to “buy the dip” for late November and December. Unless surprise, Copper Mountain will be one of them.
Longer term thesis
The medium to long-term thesis on Copper Mountain Mining still looks very attractive, despite the short-term setbacks.
Copper will be in short supply for the rest of the decade, and given that it now takes an average of 12 to 17 years to build a new mine, it is very unlikely that additional supply will be brought in quickly enough to meet demand. planned. .
The Copper Mountain mine is in a low-risk jurisdiction (British Columbia) with its developing copper project, Eva, also in a low-risk jurisdiction (Australia).
The company is also busy making exciting improvements that will simultaneously reduce costs, improve efficiency and improve its environmental record. For example, they recently installed an electric cart system (the first of its kind in North America) to pull their trucks out of the pit. This reduces energy consumption (saves diesel), increases the speed of transport trucks and reduces environmental emissions (because the electricity comes from nearby hydroelectric plants).
This is the kind of “win-win” moves that I like to see as a long-term investor. But it will take a lot more for investors to pick up the name.
Overall, the company’s shares are very cheap once operational issues are resolved. However, you won’t know that by looking at the stock price over the rest of the year, as it’s likely to remain under pressure from the tax-loss sale.
I think the biggest risk to the thesis (apart from bankruptcy) is that a bigger mining company rushes in and buys the company while it’s cheap. At first glance, a large company like First Quantum or Freeport stepping in and offering a 25% to 50% bonus being a “bad outcome” would seem absurd. But that kind of premium would likely only represent a stock price offer of C$2.00 to C$2.50/share, which would leave many investors underwater and a bitter experience.
So, in summary, this is a small property that I have and will not be adding to in the short term. Hopefully, as we approach Christmas and the end of the year, we will have a better understanding of the right (or wrong) course of trade and have a chance to add to the position of price insensitive sellers (aka tax loss).
Until then, stay safe and have a good fall.