Taca Taca won’t be taken, analysts say

When Lumina Copper (LCC-V) announced in early May that it had increased the size of its Taca Taca copper project in northwestern Argentina, mining analyst Adam Low of Raymond James raised his six- to 12-month target price on the stock by $2.50, to $24 per share.

He also rated the company a “strong buy 1” — which means he expects the stock to appreciate, return at least 15% and outperform the S&P/TSX Composite Index over the next six months.

On May 17, the Toronto-based analyst reiterated his stock price target and rating, despite a 34% and 50% drop in Lumina’s share price since Argentina’s government voted to nationalize YPF (YPF-N), the local subsidiary of Spain’s Repsol oil company.

“One should not use YPF’s situation to make inferences about the security of title for Lumina’s mineral concessions in Argentina,” he argues in a research note. “YPF’s relationship with the Argentine government has been worsening for some time.”

Argentina withdrew some of the oil and gas company’s licences in March, Low explains, and the company had been under pressure to boost production because domestic oil demand was rising and supply was falling owing to measures the government took to control prices, therein limiting investment in the sector.

“Although the YPF situation, which when viewed in conjunction with previous nationalizations of Aerolineas Argentinas and private pension funds, does raise fears about broad-based expropriations in Argentina,” Low continues, “we do not believe this to be the case, and we do not expect nationalization to become an issue for copper mines in Argentina.”

Nationalizing copper operations in Argentina doesn’t make sense, he reasons, because the “domestic supply-demand characteristics do not necessitate nationalization.” The country lacks a domestic copper smelter, and the only producing copper mine in Argentina must send its copper concentrates to smelters outside the country to be processed.

“Nationalizing copper mines has no strategic value when the country has no means to refine the output,” he maintains. And even if it did, nationalization wouldn’t make sense because Argentina’s demand for copper is significantly less than the current output of Alumbrera — the single operating copper mine in the country — not to mention copper projects like Taca Taca.

Pointing to figures from the CRU Group, a private company headquartered in London that provides analysis on global metals, mining and fertilizer industries, Low says Argentina used 38,000 tonnes of refined copper last year. That is far less than the 116,698 tonnes of copper in concentrate that the Alumbrera mine produced. And Low expects Taca Taca will produce another 273,900 tonnes of copper in concentrate starting in 2017.

As for recent reports that mining companies in Argentina have been asked by the government to substitute mining supplies they import from abroad with domestic equivalents — which will likely fuel inflation — Low says he has already incorporated the possibility into his share price target and rating calculations, with an increase in his forecast of Taca Taca’s initial capital expenditure by 22% to US$3.3 billion, up from his previous US$2.7 billion.

“While we acknowledge that the political-risk profile of Argentina has increased,” he concludes, “the market’s reaction with respect to foreign companies in Argentina has not been equal. The downward pressure on Lumina’s share price has been exaggerated relative to its peer natural resource companies operating in the country.”

Tom Meyer, a mining analyst at Scotiabank in Toronto, has also reiterated his one-year target price on Lumina of $21 per share, and his “1-sector outperform” rating on the company. In a note to clients on May 17, Meyer pointed to what he believes is Argentina’s increasingly positive stance on mining.

“Although arguably starting from a low base, political commentary on the need to boost foreign direct investment, expand the tax base, create jobs and increase local availability of metals suggests to us that the country is indeed acknowledging the value of the sector,” he says.

Meyer also ascribes Lumina’s recent share price weakness to the negative macro sentiment and extreme caution about companies with early stage projects, but maintains the view that “some of these fears are misplaced . . . given the quality of the asset and management team.”

Lumina management announced after markets closed on May 16 that it was unaware of any specific reason, other than market conditions, for the decline in its share price. In early May, Lumina reported that it had grown the sulphide resource at the copper-moly-gold project from 14.9 billion lbs. copper to 20.5 billion lbs. copper.

The project’s indicated sulphide resource stands at 824 million tonnes grading 0.59% copper, 0.018% moly and 0.12 gram gold per tonne, with an inferred sulphide resource of 938 million tonnes grading 0.48% copper, 0.014% moly and 0.08 gram gold per tonne. The oxide gold resource and the proposed highgrade, supergene starter pit have also increased in size.

Christopher Chang, a mining analyst at Laurentian Bank Securities, raised his target price on the stock following news of the resource update to $26 per share from his previous target of $21.50 and maintained his “speculative buy” rating, saying in a research note on May 8 that Lumina “remains a strong takeover candidate, given Taca Taca’s significant resource size, attractive valuation and access to nearby infrastructure.”

Once in production, Chang forecasts life-of-mine average annual production of 432 million lbs. copper, 9 million lbs. molybdenum, and 56,000 oz. gold, at an average cashoperating cost of US$0.87 per lb. over a 21-year mine life beginning in 2017.

The deposit in Argentina’s Salta province remains open to the northwest, north, northeast, southeast, south and at depth.

At presstime Lumina’s shares traded at $10.69 apiece, within a 52- week range of $5.35–$17.60.

Looking ahead, Raymond James’ Low says Lumina will need more cash by mid-year if it wants to keep up the pace of its drill program, but argues financing won’t be a problem. If equity sources aren’t available, he says, funds “at a reasonable cost of capital” could come from one of Lumina’s largest shareholders. And there have been precedents. He says that “similar loans by this group have been provided in the past to Anfield Nickel and Northern Peru Copper.”