Copper explorer Metminco has deep, underlying problems - in more ways than one. Its Los Calatos project in Peru is one of the largest undeveloped copper projects in the world. Yet the location and depth of the ore, as well as the massive amount of capital required to build a mine there, mean it will be exceptionally difficult to develop.
- QE3 could spark rally in small caps
- Potential funding from sale of other projects
- Ore deeper and lower grade than hoped
- Running low on cash
- Few upcoming share-price catalysts
- Copper price uncertain
Certainly, Metminco has spent the past few years and around £70m trying. It has drilled off an impressive resource totalling 2.3bn tonnes of rock containing low-grade copper and molybdenum - the problem is the drilling has shown that much of the ore body is deep underground, as deep as 2km. This is not insurmountable, but the lower-grade nature of the deposit means it should be mined by digging a big open pit. And since Los Calatos lies in a valley, open-pit mining is starting to look unattractive: the deeper down the pit goes, the wider it has to be - in other words, the more Metminco would have to dig out the hills, vastly increasing costs.
So Metminco wants to see if a smaller open pit and an underground mining shaft would be feasible instead. This might improve the project's economics slightly, but it isn't an ideal way to develop such a big deposit, where huge capital spending must be repaid as quickly as possible by producing copper in colossal quantities. In any event, mine construction is not coming any time soon. A pre-feasibility study is scheduled to begin early next year. After that comes a more detailed study, then mining permits, raising perhaps £1bn to fund the mine's construction and so on.
Meanwhile, Metminco is running out of money. In July, its bosses decided to trim back its infill drilling programme at Los Calatos by a third, partly to conserve cash. Instead of ending the year with cash on hand of about A$1.7m (£1.1m), it should now have closer to A$14m. But that won't last long, with the looming costs of mine studies.
METMINCO (MNC) | ||||
|---|---|---|---|---|
| ORD PRICE: | 5.75p | MARKET VALUE: | £91m | |
| TOUCH: | 5.2-5.4p | 12-MONTH LOW: | 16p | LOW: 4.45p |
| DIVIDEND YIELD: | nil | PE RATIO: | na | |
| NET ASSET VALUE: | 8.8p | NET CASH: | A$32.2m | |
| Year to 31 Dec | Turnover (A$m) | Pre-tax profit (A$m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2008† | 0.18 | -2.42 | -4.79 | nil |
| 2009† | 0.11 | -1.25 | -2.35 | nil |
| 2010† | 0.05 | -7.78 | -1.70 | nil |
| 2011 | 0.35 | -8.78 | -0.63 | nil |
| 2012* | nil | -11.30 | -0.64 | nil |
| % change | – | – | – | – |
Normal market size: 20,000 Matched bargain trading Beta: 2.2 *Canaccord Genuity forecasts £1 = A$1.546 †Results for year ended June 30 | ||||
With the exception of an updated resource estimate for Los Calatos expected around the end of the year, there are unlikely to be catalysts to move the share price over the next six months. True, the previous resource update in April increased the mineral resource by 170 per cent, but look what’s happened since: Metminco's share price fell 33 per cent in May and is down over 60 per cent overall. The outlook for the copper price, as indicated by copper futures, is also uncertain as global growth looks increasingly anaemic.
True, central banks could give equity markets a short-term fix with more quantitative easing. Commodities and junior resource stocks have benefited greatly from such action in the past. There is also the chance that Metminco decides to sell one of its two smaller exploration projects - and manages to find a buyer - to alleviate short-term funding concerns.
