Disregarding your doctor's advice is by and large an unwise idea. But ignoring the ravings of Dr Copper, whose sole practice involves foretelling the health of the global economy from the way the price of copper behaves, is an altogether different proposition - and one that could prove quite profitable for contrarian investors willing to place a bet on copper miner Rambler Metals & Mining (RMM).
- Copper-gold mine running smoothly
- Potential to boost mine life
- Strong balance sheet
- Technical support
- Short-term copper price weakness
- Short mine life
The price of the red metal has fallen nearly 10 per cent in the past few weeks, from $3.30 (£2) per pound (lb) to $2.99, even though there were no significant disruptions to either supply or demand. Instead, commodity investors are worried that weakness in the Chinese economy might cause a wave of Chinese defaults on loans, releasing hoards of copper being stored in bonded warehouses as collateral.
Similar overhyped fears about China have sent the price of copper down before: it touched $3/lb last summer before climbing back, and temporarily fell by a sixth the summer before that. What's more, copper consumption traditionally picks up in the second quarter and China has signalled increased investment in power generation, which should help soak up supply.
Shares in copper and gold miner Rambler Metals represent a great way to 'buy the dip'. Having tumbled 16 per cent in the past few weeks on copper price fears, the shares now trade on just six times current year earnings estimates compared with a peer group average forward PE ratio of 10, and nearly a fifth below book value.
RAMBLER METALS & MINING (RMM) | ||||
|---|---|---|---|---|
| ORD PRICE: | 26p | MARKET VALUE: | £37m | |
| TOUCH: | 25.5-27p | 12-MONTH HIGH: | 35p | LOW: 22p |
| FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | 4 | |
| NET ASSET VALUE: | 58¢ | NET DEBT: | 28% | |
| Year to 31 Jul | Turnover (C$m) | Pre-tax profit (C$m) | Earnings per share (¢) | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 3.52 | -0.1 | -0.1 | nil |
| 2012 | 1.22 | -3.4 | -2.6 | nil |
| 2013 | 34.7 | 3.0 | 6.3 | nil |
| 2014* | 58.3 | 15.8 | 7.8 | nil |
| 2015* | 66.3 | 21.5 | 11.0 | nil |
| % change | +14 | +36 | +41 | - |
Normal market size: 10,000 Market Makers: 9 Beta: 0.6 £1=C$1.85 *finnCap adjusted forecasts | ||||
Since November 2012, Rambler has been steadily ramping up copper production from its small-scale Ming mine in Newfoundland, Canada, supplemented by gold and silver produced as by-products. Copper production is forecast to increase 68 per cent this year to 6,650 tonnes and peak at 7,200 tonnes in 2016. While the company is on track to meet or beat production guidance this year, a torrid winter pushed up production costs by over a tenth in the second quarter from C$1.44/lb to C$1.61/lb, which will dent profits somewhat.
Rambler is using its strong cash flows and balance sheet to fund exploration and in-fill drilling to extend the life of its mine. Already it has added a year to the original estimate of a six-year life and analysts at finnCap reckon this could be increased to 10 years or more in the future. At the end of March it had C$5.8m of cash to help fund investment in the mine, with debt at the last balance sheet date made up of a C$17.5m gold loan - financed by 25 per cent of gold production - finance leases of C$7.9m and C$2.6m of conventional borrowings.
