TGR: Do you cover any names you believe could be M&A targets?
IP: I could make an argument for a takeover of the vast majority of companies I cover.
On the base metals side, my coverage focuses on copper. Copper is strategically important and the fundamentals look solid—it's a 22 million ton market. There will be continued desire to grow the copper portion of a mining company's portfolio. On the gold side, I cover some quality companies that have the scale and the right political risk. When we're talking about M&A, it's not simply about the commodity or the cost structure, it's also about political/jurisdictional risk.
TGR: Large companies want large-scale, low-cost, long-life projects in relatively safe jurisdictions. What fits the bill?
IP: I look at a name like Nevada Copper Corp. The company is building phase one of the Pumpkin Hollow mine in Nevada. It checks all the boxes. It's in a mining-friendly jurisdiction in the U.S. with road access and an able-bodied work force. It's a project that has the right scale if we look at the big picture.
Phase one is the underground portion of Pumpkin Hollow but the bigger prize is the as-yet unpermitted open-pit mine that would move the needle for any suitor. The permitting timeline is less problematic for a larger company. If permitting takes 6, 12 or 18 months, it's less of an issue in a broader portfolio of assets.
TGR: Do you have a permitting update on phase two?
IP: The Lyon County Land Bill has been entered into the calendar of the U.S. Senate. Subject to scheduling among other Senate business, the bill could be heard at any time, so I am optimistic. If the bill passes, we could be talking about having all the boxes checked by the end of the year.
TGR: Does that account for the overhang on the stock?
IP: Yes, mostly. Phase one is not 100% financed so there is a financing overhang, but I think it's quite minor. I think the company can overcome it. This is an example of a big disconnect in the market. Nevada Copper is trading at 0.41x our estimated net asset value (NAV).
But its producing peers are trading at much higher valuations: Capstone Mining Corp. is trading at 0.59x NAV, Lundin Mining Corp. at 0.86x NAV and First Quantum Minerals Ltd. at 0.95x NAV. You could argue that Nevada Copper is trading like a junior that's not as advanced.
TGR: What's another name that ticks off all the boxes for a larger company?
IP: I think there are opportunities with single-asset companies. Another one that comes to mind is Copper Mountain Mining Corp. It runs the Copper Mountain copper-gold-silver mine in south-central British Columbia. It would move the needle for another midtier copper producer. The company tends to lag the valuations of more senior players. In our numbers, Copper Mountain trades at 0.69x NAV; larger names are trading at 0.85–0.95x NAV in today's market.
TGR: What's your target price on Copper Mountain?
IP: I have a $3.20 target—based on 1x our NAV10 estimate.
TGR: Copper Mountain is up about 35% this year. It's noteworthy that you're ranked No. 1 in the Bloomberg Absolute Return Rank (BARR) for your call on Copper Mountain.
IP: Thank you. I didn't realize that.
TGR: Copper Mountain and Lundin Mining, both of which are under coverage, are performing. What are some common denominators in their success?
IP: They're base metal-focused. I have a stronger view on the base metal pricing structure versus bulk commodities like iron ore. If we go up-market and start playing in the realm of BHP Billiton Ltd. and Rio Tinto Plc, we are taking on more of that bulk commodity exposure. Investors have to come down to these smaller names to get that pure exposure to base metals.
The valuation of Copper Mountain and Lundin, as well as other companies that I cover, are all driven by the same inputs. Our price targets are all 1x NAV/share, using the same price deck for all companies.