IMPERIAL METALS CORP DEEPDIVE

Description Long Imperial Metals All values are given in CAD unless otherwise stated   Imperial Metals looks like a dreadful investment. The company has been loss making for 8 of the last 10 years, and 80% lower despite never having paid a dividend. Granted, things haven’t always gone their way, being responsible for one of the largest tailings dam breaches in Canada in 2014. But somewhat unexpectedly, the company will report a decent profit this year and this should only increase in the coming years. Because despite this terrible track record, they have a 30% ownership of one of the most profitable copper-gold mines of the coming decade. And that mine has ample room to grow even larger. best stock research sites best stock research sites Imperial owns 2 active copper/gold mines named Mount Polly and Red Chris, both located in Canada. They both have a pretty interesting future production profile, but most of the value is in Red Chris. Red Chris was acquired by Imperial in 2007, and they spend big on opening an open pit mine, for it to just lose money for almost a decade. Imperial Metals had been written up on VIC before, and Red Chris was one of the foundations of that writeup, but things didn’t work out as planned. Back in 2007, the company conducted a deep exploration drilling program, coming up with some great results. One standout was an interception of 1024.1 meters grading 1.01 per cent copper and 1.26 grams per tonne gold, one of the longest mineralized intercepts ever drilled in British Columbia. This drillhole opened up a whole new way of looking at this mineralization, or so you would think. Many drill programs later, the potential of an underground mine was established, and the company published an updated feasibility study in 2012, of an open pit mine.. To give an example, they published a report for a 29 mine life open pit mine with a 442 million capital cost and a base case NPV10 after tax of 134 million. So it wasn’t until the entry of Newcrest in August 2019, having bought a 70% stake in Red Chris from Imperial for 806 US million, that the potential of a block cave became obvious. Two years after their purchase they published a feasibility study for an underground block cave with an NPV of 2.3 Billion, a 31 year mine life and an AISC (All In Sustaining Cost) to mine of negative 180 US dollars per ounce, with 8.1 million ounces of gold and 2.2 Million tonnes of copper in reserves, from total ore produced of 406 Million tonnes (remember this last number). Newcrest were (prior to their merger with Newmont) the operator of the low cost Cadia mine in Australia. Cadia has long been somewhat the envy of the industry, given its long mine life and very low cost. This is achieved by a mining method called Block Caving. Block caving is a low cost method where they start mining the orebody underground from beneath. They essentially blast a long decline to a great depth, make reinforced corridors under the orebody and start drilling upwards in the orebody. Then they blast this body and remove ore from underneath so it comes caving down into some fixed drawpoints. As you can see, this mining method, due to the help of gravity is quite cheap. There is no need to back fill, keep drilling, use explosives or to developing new levels in the mine. Of course, there are some requirements for a block cave mine, like a very large and vertical orebody, some rock characteristics so it has the capability to cave in by its own weight, etc.. Luckily, Red Chris has these characteristics. At the current Imperial Metals EV of 740 million, that is pretty close to the 30% NPV of 2.3 Billion that Newcrest calculated for Red Chris. Some caveats here. The NPV was calculated with reference prices of 1500 dollar gold and 3.3 dollars per pound of copper. The current prices are at least 50% higher for both commodities. Additionally, the underground development (and capex) has advanced 3-4 years closer to production, and the time where Red Chris will become FCF positive is at the current prices probably this year, and at the feasibility study reference prices in 2 years, when the block caving will begin. In 2028, Red Chris should, at feasibility study prices, deliver a FCF to Imperial of 100 million, and in 2029 that number should be 200 million, or 50% of the current market cap. At the current higher commodity prices, that amount will probably be closer to 3-400 million in 2029, or about the current market cap. The NPV at 1750 gold and 4.15 copper is already 1.2 billion net to Imperial Metals (or almost 60% higher than the current EV, which will all go to the equity). And then there is ample opportunity for the orebody to expand. For example, at Cadia, many more orebodies have been discovered nearby, which is a common occurrence with this type of porphyr orebodies. And this isn’t just hope speaking, but the drillbit. There is an East Ridge orebody, for which there hasn’t been a feasibility study yet, but a 14 march 2023 press release estimates (although some more infill drilling is required) that there is probably a 400-500 million tonnes orebody there (remembered the first number?), at a grade about 10% lower than the current East-Zone mine plan, but still substantial. So this is an orebody about as large and maybe even larger as the current mine plan, and you get this for free. And we are only a few years in exploration around this mine. Already, a few other promising prospects have been identified, like the ‘Gully Zone’ and the ‘Main Zone’. The discovery of the East Ridge has Newcrest (and now Newmont) considering the possibility of mining East Ridge before Cave Block 2 (which is lower grade than East Ridge), or even advancing a second production front in parallel to the main underground development at Red Chris. It goes without saying that this would drastically enhance the NPV of this project. So why invest now and not just wait a few years? Amazon CAPM Amazon Forward P/E Amazon Gross Margin Amazon Net Margin Amazon ROE Return on Equity Amazon ROA Return on Asset Amazon Graham Number Amazon Current Ratio From this year on, the open pit mine will reach its last 2 years of operations. One characteristic of open pit mines is that the last year or two is usually very profitable since that is a time when the strip ratio falls quite substantially and they can target the highest grade if the pit is well designed. This translates into the AISC of Red Chris to drop from above 2000 US dollars an ounce last year to going negative this year for the next two years. Add to this the higher commodity prices of copper and especially gold, and this comes just at the right time. The original mine plan at the lower commodity prices assumes for 2025 and 2026 to be free cash flow negative, but with these prices it should probably be FCF neutral or positive. From 2028 on, this mine will deliver +50% of the current market cap in FCF, probably for the coming decade if they start mining the East Ridge zone before the CB2 zone. And where FCF is somewhat delayed due to the investment to transition the mine from open pit to underground, the company will start reporting very sizeable profits due to the low AISC of the open pit mine. Imperial will probably report net profits between 30 and 50% of the current market cap (this includes Mount Polley), and that is even assuming lower copper and gold prices. At some point, that will be noticed by the market.   Mount Polley The second active mine in the Imperial portfolio is Mount Polley. This was the mine on which the tailings dam collapse happened in 2014, they restarted after to shut it down again in 2018 due to uneconomic prices. Since the restart, which cost the company more than 55 million in reopening costs, gold and copper prices have advanced by more than 100% and 45% respectively. Since 2023, Mount Polley has been profit making, but this has been masked by the losses at Red Chris at the company level. Mount Polley has a pretty interesting production profile, in that in 3 years’ time, the mine should be very profit and FCF positive. The latest feasibility study was published in 2016, and it needs some patchwork to put it all together. When looking at the 2016 report, we are mining the year 2020-2021. These are good years in the report making a decent amount of FCF, but the top years are in 2-3 years’ time. According to the plan, and again following the same principle as the Red Chris mine and the end of an open pit, the mine will be throwing off a lot of cash. At a 2.25 dollar copper price and 1,275 gold price, the mine was forecast to get FCF around 80-100 million a year in in a few years. There is the possibility that this will get somewhat extended due to positive drill results, but it does go to show that this mine will have some very good years ahead. The last few years the company has been drilling deeper exploration holes under the current open pit, with the hope of finding another large copper-gold orebody which could be block caved (like Red Chris). Some of the results have been promising (like 230.1 Metres Grading 0.31% Copper and 0.50 g/t Gold), but it appears that the orebody is probably not going to be large enough. Only time will tell, but I’m not counting on it.   Shareholders & management On the share register, there are 3 important shareholders. N. Murray Edwards is by far the largest shareholder, with 45% of the shares. He also owns a large part of the convertible debentures, convertible at 3.2 CAD into shares until the end of august 2027. In the case that he converts these debentures into shares, he would own a bit above 48% of the shares outstanding. Another large suffering shareholder is Fairholme Capital. Despite the poor track record, management owns just under 5% of shares, and a small amount of the convertible bonds. N Murray Edwards is executive chairman of Canadian Natural, and owns a multitude of other Canadian companies, ranging from media and sports to aerospace. Personally, despite his immense wealth (2.8 Billion), many of his companies can’t really be considered a success. Magellan Aerospace for example trades a little higher than a third of its IPO price almost 30 years ago. Ensign Energy Services trades just a little higher than its IPO price, which also happened almost 30 years ago. So that is also what I consider the weakest part of an investment in Imperial Metals. Despite the wealthy reference shareholder, and the amazing track record at CNR, I can’t say the stewardship at Imperial has impressed me. The worst thing they can do with the future FCF at Imperial is to expand and buy marginal mines. Let’s just hope they don’t go there.   Risks The current high copper and gold prices come at an extremely convenient time for Imperial Metals. Just at a time when the last big capex spend at Red Chris is happening, they have good prices, for now. If the gold and copper price would dramatically fall in a short time and stay low, there is some risk in this company. It does have some debt, a history of unprofitability and a decent amount of capex (about 150-200 million) left at Red Chris before the Block caving begins. They also pay a fine interest rate on that debt. A downturn would be very inconvenient in the short to medium term. The combination of copper-gold does offer a kind of natural hedge (gold goes up when things go bad/times are insecure, dr. copper does the inverse). Another risk is bad spending of the future bounty by management. There are a few examples of this. The company has been paying the costs to put the Huckleberry mine on care and maintenance for almost 10 years. For a moment, there had been the thought that Huckleberry could have good underground potential, but since the last drill results in 2021 this seems more and more unlikely. The company could spend the money on bad mines, reopening bad ones or worse acquisitions.   Apple CAPM Apple Forward P/E Apple Gross Margin Apple Net Margin Apple ROE Return on Equity Apple ROA Return on Asset Apple Graham Number Apple Current Ratio Catalyst The company starting to report very decent profits for this and the coming years. Starting of the block Cave at Red Chris which should provide them with lots of FCF.