Paydirt in Plain Sight
08/24/2010 12:01 am EST
Shares of copper miner Quadra have priced in a most bearish scenario, writes Tom Slee in the Internet Wealth Builder.
Canadian copper producers are going to be an integral part of the business recovery. Worldwide demand for copper has grown 4% per annum on average for the last 100 years.
The supply side is much more problematic. Many of the world's largest copper mines are going to be exhausted by 2015 and, even with increased recycling, long-term shortages are on the horizon. For the moment, though, with copper trading in the US$3.25-a-pound range, we have a global surplus of about 580,000 tons, approximately 11 days’ worth of consumption. That's a relatively healthy, balanced situation. Moreover, according to Credit Suisse, supply is tightening, and China appears to be drawing down its enormous stockpiles. That suggests we could see higher prices heading into 2011.
The trouble is that copper is an extremely volatile commodity, and the picture could change very quickly. If we run into a double-dip recession, demand could plummet. As a matter of fact, some bearish forecasters already feel that copper could collapse to as low as US$1.00 a pound if the European debt crisis persists. So, there is a lot of uncertainty.
The intriguing thing, however, is that the sector is extremely cheap. Many of the good companies have the worst-case scenario already built into their stock prices. They are trading at extremely low earnings multiples and well below their net present values (the discounted dollar value of their ore bodies).
One that I particularly like is Quadra FNX Mining (Toronto: QUX, OTC: QADMF). This mid-cap mining company was created a few months ago when Quadra Mining and FNX Mining merged. It was a blending of two successful equals to provide a solid, profitable base for acquisitions and rapid expansion.
Quadra has five principal copper mines located in Nevada, Arizona, and Chile, and expects to produce approximately 265 million pounds in fiscal 2010. The company also owns nickel assets in the Sudbury basin. What I particularly like about Quadra, though, is that its net present value per share, using a discounted copper price of US$2.50 per pound, is $16.80, almost 60% more than the current stock price.
On August 12th the company released what some analysts saw as disappointing second-quarter results, with earnings per share coming in at 15 Canadian cents, well below the 23-cent consensus estimate. The shares, which were trading at over C$13 earlier this month, sold off [to] $10.53.
The company has excellent growth prospects and the advantage of operating in three politically stable countries, a big plus in the mining business. Three of its projects are ramping up, and FNX is activating its exploration properties in the Sudbury Basin. At the same time, production costs are being reduced. As a result, based on the current spot price for copper, I expect Quadra to earn about more than $1.00 a share in 2010 and upwards of $2.00 next year.
Quadra is a Buy with a target of C$18. I have set a C$8 revisit level.