Copper Mountain Mining (CUM-T) Is Finally Free Cash Flow Positive
Copper Mountain Mining which is operating the Copper Mountain copper mine in British Columbia, Canada. My previous concerns were related to delays in an optimal production process as the management suddenly realized the ore was harder than it thought, so it needed to install a $40M secondary crusher to tackle the problem.
The Q1 operating and financial results at the Copper Mountain mineIn the first quarter of this year, Copper Mountain milled almost 3 million tonnes of ore at an average grade of 0.35% copper. The total throughput did increase by 13% compared to the same quarter last year, but the copper grade was approximately 10% lower. On top of that, the average recovery rate was also lower at 'just' 80%, resulting in a copper production which was actually lower than in Q1 2014.
Source: press release
Fortunately Copper Mountain was also able to sell roughly 3 million pounds of copper it had in inventory, so the financial statements weren't impacted hard by the lower production rate. The attributable revenue was $58.5M resulting in an operating income of $3.67M. Unfortunately there also was a $28M unrealized forex and interest swap loss resulting in a total net loss of $26M.
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Source: financial statements
Fortunately the cash flow statements are showing better numbers and that's obviously caused by the fact the unrealized forex loss and depreciation of the asset ($10M) are non-cash charges and have no impact on the company's cash flow profile. So by excluding these charges, the operating cash flow before the changes in the working capital was approximately $14.7M. As Copper Mountain spent almost no cash on capex in the quarter (just $0.4M, which is pocket change for them), the company had an adjusted positive free cash flow of a little bit over $14M.
Will there be further improvements down the road?As there was a relatively high change in non-cash working capital charges, Copper Mountain's working capital position remained almost unchanged and still stands at approximately $15M. Whilst it's good to see the company having a positive working capital, the mining sector is a very capital-intensive business and with a major earthmoving operation like Copper Mountain has (it mines almost 60 million tonnes of rock per year), one would like to see a financial cushion in case things don't go as anticipated.
The company seems confident it will meet its operating guidance and has repeated it will produce 80 million pounds of copper and 35,000 ounces of gold this year, which means the remaining three quarters will produce on average 20.5 million pounds of copper per quarter (+10% compared to Q1) and 9,100 ounces of gold (+16% compared to the first quarter). Especially this gold production will be important for Copper Mountain as it will allow the company to keep its cash costs per pound of copper relatively low as the gold revenue will be deducted as a by-product credit.
On top of that, the weak Canadian Dollar is definitely helping, as well as the cheap fuel price (20% lower than estimated). In the conference call discussing the Q1 financial results, Copper Mountain's CEO also said the truck tires are now cheaper than last year. You might laugh, but the tires for large trucks are quite expensive, so any price reduction will have an impact.
Investment thesisIt's good to see Copper Mountain Mining has a positive adjusted free cash flow, but that doesn't mean the company is out of the danger zone. The company's long term debt position is still relatively high at $300M and it will still take quite a while before Copper Mountain has generated enough cash to be net debt free.
The company is on the right track but will still have to run a very tight ship as there's virtually no room for error. As the copper price is currently still trading below $3/lbs, Copper Mountain could only be seen as a stock for speculators on the copper price at this moment. |
