Technical troubles dog Copper Mountain in Q1

Mechanical difficulties at Copper Mountain Mining’s (TSX: CUM) 75%-owned Copper Mountain mine in southern B.C. involving a transformer failure on one of the ball mills in February and a 10-day disruption with the regrind mill in March affected first-quarter production, but the company says it’s still on track to meet its full-year guidance.

From the open pit, the company reported first-quarter production of 18.4 million lb. copper, 7,800 oz. gold and 80,300 oz. silver, sums that fell a little below the expectations of several mining analysts that cover the company. Copper Mountain Mining did not provide cash costs for the quarter.

For 2015, however, Copper Mountain’s management team is confident that copper production will reach its 80 million lb. forecast at a total average cost of US$2 per lb. net of precious metal credits, based on an average mill throughput rate of 37,500 tonnes per day and a 0.3% mill feed grade.

Mining analysts at Haywood Securities pointed out in a note that the transformer failure at the ball mill was “the third ball mill transformer failure at the project within about the last two years,” and described the mill performance in a headline as “unfortunately like listening to a broken record.”

“We look to better mill reliability going forward to establish investor confidence, noting the Copper Mountain mine, which began mill production in third-quarter 2011, has yet to deliver a complete quarter at a [35,000-tonne-per-calendar-day] nameplate design capacity,” analysts Stefan Ioannou and Jenny Lemberg wrote. “In the meantime, we continue to model 2015E average mill throughput of 35,000 tonnes per calendar day,” they said, versus company guidance at 37,500 tonnes per day.

But the analysts gave credit where credit was due, pointing out that once the regrind motor was repaired in late March, the mill achieved an average throughput rate of 40,971 tonnes per day (including an all-time high of 45,939 tonnes per day) during the first 12 days of April. They added the company was “able to work around the interruptions” and that mill availability averaged 93.2% during the quarter, above the 92% design rate.

In addition, Ioannou and Lemberg noted that higher-than-expected head grades (averaging 0.3% copper) helped offset the lower-than-expected throughput.

Copper Mountain Mining is confident that throughput can reach 37,500 tonnes per day, and said its goals this year are to keep optimizing the mine’s performance, reduce costs and maximize production.

In a research note to clients, Tom Meyer of CIBC World Markets said he has lowered his 2015 volume outlook given the first-quarter mechanical issues, but maintains his view that by 2016 “a 41,000-tonne-per-day mill throughput rate is achievable via debottlenecking.”

This year, the Haywood analysts model 75 million lb. copper production in concentrate at an average total cash cost of US$2 per lb. net of credits, based on an average throughput of 35,000 tonnes per day and an average head grade of 0.3% copper.

Aleksandra Bukacheva of BMO Capital Markets forecasts production of 78.8 million lb. copper in 2015 at a by-product cash cost of US$1.92 per lb. on grades of 0.3% and mill throughput of 37,038 tonnes per day.

Last year, Copper Mountain Mining produced 81 million lb. copper, 22,600 oz. gold and 443,800 oz. silver. Copper production was 23% higher than it was in 2013. Last year the company posted a $31.8-million gross profit on revenues of $265.7 million from metal sales. Total cash costs for the year worked out to US$1.98 per lb. copper sold net of precious metal credits, and after off-site charges.

The company also ended 2014 with a new $40-million secondary crusher, which increased mill throughput above the 35,000-tonne-per-day design capacity.

Jim O’Rourke, the company’s president and CEO, and Rod Shier, its CFO, were unavailable for interviews because they were travelling. But in an email, Shier said that the past quarter “was significant to the company, as it was the first quarter that had the secondary crusher operating for the full three months … we just installed it last year, and it performed very well.

“This resulted in the mine being able to process on some days well above the mine’s design capacity of 35,000 tonnes per day,” he continued. “We set an all-time mine mill throughput record of over 45,000 tonnes per day, again very significant, as it gives an indication of what the mine can do.”

Joseph Gallucci and Ian Bjornson of Dundee Capital Markets commented in a research note that they would give the company “the benefit of the doubt that they can still make guidance of 80 million lb.,” but were concerned about the company’s repeated production troubles and “history of missing guidance.”

They wrote that “during ramp up, Copper Mountain missed annual copper production guidance by 35% and 17% in 2012 and 2013. Gold production guidance figures missed by 31% and 38% in 2012 and 2013, while silver production missed guidance by 40% in 2012.”

The Dundee analysts are mostly concerned about the company’s mine plan. “The company is working on a five-year mine plan. This will not be released to the public … but emphasizes that the deposit poses several grade continuity challenges, and is unlike other copper porphyry copper deposits. Copper Mountain Mining asserts that due to the complexity of the orebody, the grade is not consistent to give life-of-mine guidance.”

Copper Mountain Mining has a strategic alliance with Mitsubishi Materials Corp., which owns 25% of the mine.

The company says its 18,000-acre (72.8 sq. km) land package has a large resource of copper that remains open laterally and at depth.

At press time, Copper Mountain Mining traded at $1.13 per share within a 52-week trading range of 96¢ to $3.15 per share.

CIBC has a 12- to 18-month target price on the stock of $1.75 per share; BMO Capital Markets, $2 per share; and Dundee Capital Markets, 90¢ per share.