As the prices of base metals cratered in 2008, inventories started to build as a consequence. Furthermore, as the effects of global economic downturn caught hold, demand for all commodities weakened. Beginning with Nickel which hit a high of US$23.00/lb in 2007 and fell to US$4.00/lb in late 2008, Copper hit US$3.95 in Q2/08 and ended 2008 at US$1.40/lb, erstwhile Zinc declined 56% in 2008 to close at US$0.50/lb and Lead was down 60% to close at US$0.45/lb. Not to be left out, Aluminium was down 50% in 2008 touching US$0.70/lb and Uranium was down 25% to US$55.00/lb. As a result of these swift and drastic price declines, shutdowns of unprofitable mines accelerated, new projects were being delayed and inventory levels were being built up. Loofking forward, analyst Ron Coll opines, “As supply moves back into balance with demand in 2009, while China & the USA stimulate their economies with massive infrastructure funding, the prices for base metal commodities should recover.” Coll also notes that some of the benefits of the current crisis impacting the resource sector include “lower cost of fuel, energy, reagents, consumables, machinery, parts and transportation; availability and cost of geologists, engineers, consultants, operators and skilled trades people; the availability of large mining and processing equipment and a significant reduction in delivery lead-times.”
Coll’s top pick in the Base Metals sector is Mercator Minerals (ML: TSX). Mercator’s primary focus is increasing the production of copper and the resumption molybdenum and silver production at the 100% owned Mineral Park Mine located near Kingman, Arizona. The company recently completed the Phase 1 Expansion at the Mineral Park Mine and a ramp-up to full production (30,000 tpd) is anticipated by early Q2/09, producing 36 million lbs of Copper and 4.3 million lbs of Molybdenum in concentrates. Coll states that “Production could increase in 2010, to 50 million lbs of Copper and 10 million lbs of Molybdenum with the completion of the Phase II Expansion.”
Coll forecasts 2010 EPS and CFPS of US$0.32/share and US$0.58/share, respectively. If Coll’s forecasts turn out to be accurate, that would mean Mercator Minerals is trading at 1.2x forecast 2010 EPS and 0.7x forecast 2010 CFPS. Cheap, Cheap !
Mercator’s proven and probable reserves stand at 520 million tonnes averaging 0.13% Copper and 0.04% Molybdenum (1,386 million lbs of contained Copper and 343 million lbs of contained Molybdenum), sufficient for more than 20 years at planned production rates. Some of the catalysts for the company in 2009 would be: “the successful ramp-up to Phase I capacity of 30,000 tpd; recovery of Copper and Molybdenum prices from the current lows ($1.35/lb for Copper and $10.00/lb for Molybdenum); and the completion of the Phase II Expansion to 50,000 tpd (annual production rate of 50 million lbs Copper and 10 million lbs Molybdenum/year) by year-end, 2009.” Coll’s target price for Mercator Minerals is $2.50/sh.
more picks to follow …
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