Sell Capstone Copper Ahead Of A Possible Fall In Copper Prices (OTCPK:CSCCF)

Copper Price Outlook

At the time of this writing, Copper Futures – May 23 (HGK2023) were trading at $4 per pound, up approximately 4.9% since early 2023.

Although not constant but quite volatile, the rise in copper prices benefited from renewed optimism about Chinese demand after the government of the Asian country, the world’s largest copper consumer, promised targeted measures to support infrastructure and construction.

However, fears of a possible recession after monetary policy tightening to combat runaway inflation continue to weigh on analysts’ estimates for the copper price throughout the year.

In fact, fears have increased after the US economy released some data on the labor force. That’s because the creation of 311,000 jobs in February versus the expectation of 225,000 jobs and the low unemployment rate, which, at 3.6%, currently remains well below the historic 5.73%, seem to lead analysts to believe interest rates will rise again providing further signs of an economic recession.

Due to the expected economic recession, copper demand is coming under downward pressure, which does not bode well for the price of copper. These headwinds appear to be stronger than the tailwinds from uncertainty on the copper supply side due to political tensions in Peru, the world’s second-largest commodity producer.

Therefore, from current levels, analysts expect a lower price per pound of copper of $3.96 by the end of this quarter and a further decline to $3.70 per pound by the end of 2023.

With copper prices potentially reaching lower levels than the current ones, investors may want to reduce their exposure to US-listed copper miners if selling shares allows them to earn a significant return on their investment. This is because the shares of these companies should follow the commodity.

Consider Decreasing Your Position In Capstone Copper Corp.

Positions to be impacted include Capstone Copper Corp. (OTCPK:CSCCF) as the company’s profitability in terms of Adjusted EBITDA, a metric followed with particular attention by investors in copper companies, appears to be very sensitive to negative changes in the price of the red metal.

As the red metal trades lower, Capstone Copper is unlikely to improve its Adjusted EBITDA from 2022 levels, creating strong headwinds for the stock price.

Capstone should benefit from certain milestones recently achieved on a portfolio of mineral projects. However, this may not be enough to offset a lower copper price, while sourcing less-cheap raw materials could potentially still put inflationary pressure on costs.

Lower realized copper prices and higher costs have significantly impacted the profitability of operations over the past year.

About Capstone Copper Corp.

Capstone Copper Corp., headquartered in Vancouver, British Columbia, produces copper from its mineral properties in the United States, Chile and Mexico.

Approximately 70% of the consolidated copper production is sulfides, while the remaining 30% is cathodes.

In America, the company is also engaged in exploration activities.

How Capstone Copper Corp. Is Performing

Thanks to higher copper production in 2022, which was nearly 159,000 tons or a 1.9x increase year-on-year, Capstone was able to sell nearly 160,000 tons of copper, a nearly 2x increase from 2021.

Consolidated revenue for 2022 was $1.3 billion, up 63% year-over-year. Although sales were significantly higher, the company’s profitability deteriorated due to the impact of the following factors.

Adjusted EBITDA decreased 18.4% year-on-year to $352.8 million as a result of a 15% year-on-year decrease in copper prices to $3.76 per pound and higher operating expenses. The change in cash costs can provide information about the impact of higher operating costs. Consolidated cash costs increased 45.3% year-over-year to $2.63 per pound sold in 2022.

Costs increased primarily because heavy speculation in fossil fuel spot markets forced the company to pay a much higher price for the fuels that enabled the production and exploration of metal resources.

The rise in sulfuric acid prices also led to more expensive production of copper cathodes.

The Adjusted Net Income for 2022 was $84.5 million, or $0.14 per share, a 65% decrease from the adjusted net income of $241.6 million, or $0.60 per share in 2021.

Capstone Copper Corp.’s Mineral Projects

Consolidated production was higher due to the addition of the Mantos Blancos mine in Chile’s Antofagasta region and the Mantoverde mine in Chile’s Atacama region.

In addition to Mantos Blancos and Mantoverde, the Canadian copper miner produces copper from the Pinto Valley Mine in Arizona and the Cozamin Mine in the mineral-rich state of Zacatecas, Mexico.

The Pinto Valley mine is reporting lower grades and mill throughput that cannot be fully offset by higher recoveries.

The wholly owned Pinto Valley Mine is an open-pit copper production and operations are expected to mine the red metal for an additional 15 years.

The company is working on a project called Pinto Valley 4 [PV4], which aims to improve the Pinto Valley mine in terms of longer mine life and a higher volume of copper to be produced.

Sometime in the first half of 2023, the company is expected to notify shareholders of certain work that would make ore processing more efficient, increase the mill’s production capacity, reduce certain costs as some inputs would be produced on-site, and reduce environmental impact.

The Cozamin mine is currently reporting higher throughput because of certain mill upgrades completed in early 2022, as well as slightly higher head grades and recovery rates.

The wholly owned Cozamin mine is an underground deposit with a mine life of approximately 8 years. The company is working to make the mine more sustainable over the long term.

The Mantos Blancos mine is an open pit mine to produce copper and has a mine life of 15 years. Mantos Blancos is producing more copper than in the past after increasing the throughput of the sulphide concentrator system based on existing technology.

The company aims to further increase throughput from the current 7.3 million tons per year to 10 million tons per year and extend the life of copper cathode production. In relation to this phase of the project, called the Mantos Blancos Phase II project, Capstone is expected to issue a feasibility study in the second half of 2023.

The Mantoverde mine (Capstone indirectly owns a 69.99% interest in this mine) is an open pit production of copper with a mine life of 20 years, including the Mantoverde development project [MDVP], which is expected to be operational from 2024 onwards.

The MVDP is expected to increase production from an anticipated 36,000 to 40,000 tons of copper (cathodes only) for 2023 to 110,000 to 120,000 tons of copper (copper concentrate and cathodes) once the project has been completed. At the same time, cash costs should improve from $3.50 – $3.70 per pound expected for 2023 to less than $2 per pound when the project has been completed. The mine will also produce approximately 31,000 ounces of gold per year and the company will benefit from the by-product credits.

MDVP will transform the Mantoverde business from a growth standpoint and then the next step will be the construction of a 32,000 tons per day sulfide concentration facility on the fully licensed Santo Domingo project, located approximately 35 km northwest of the Mantoverde deposit. Wet commissioning of the concentrator is expected before the end of 2023.

How the Company Sees 2023 From a Production and Cost Perspective

Capstone forecasts consolidated copper production of between 170,000 and 190,000 pounds at cash costs of $2.50 to $2.70 per pound.

The midpoint of this cash cost forecast is flat compared to the cash cost the company supported in 2022. Any consolidated cash costs in the lower half of the forecast will be the result of a decrease in higher-cost copper cathode production due to lower grades.

Additionally, Pinto Valley, which accounts for approximately 33% of consolidated copper (sulfides and cathodes) production, should not improve in terms of production and costs from 2022 levels.

Cozamin accounts for 13-13.5% of total 2023 consolidated copper production, Mantos Blancos 32.4-33.2%, and Mantoverde 21-21.2%. Investors should be aware that the Mantoverde guidance is calculated on a 100% basis and not on a 69.99% basis (Capstone’s interest share).

The company plans to allocate $400 million to capital expenditures (35% sustaining capital and 65% expansionary capital) in 2023.

The Stock Valuation

Capstone Copper Corp. shares are trading at $4.41 per unit at the time of writing, giving it a market cap of $2.97 billion.

Shares are slightly below the 50-day simple moving average of $4.49, but well above the 200-day simple moving average of $3.19.

Based on the above technical indicators, Capstone stock is not trading low. And if this outcome is coupled with analyst estimates of lower copper prices in 2023 and with the significant risk that cash costs will not improve from levels of 2022, then shares don’t seem to be trading cheap either.

The idea that Capstone is not a cheap stock is also reflected in the following comparison of Capstone’s fundamental valuations with those of its closest competitors.

I believe the combination of high costs and lower copper prices will negatively impact the company’s profitability and share price, as investors could potentially switch to Capstone’s competitors.

Many peers are already faring much better than the Canadian copper miner in terms of EBITDA margin.

The EBITDA margin (EBITDA/Revenue) is closely followed by investors in mining companies as this metric is a reliable indicator of the profitability of capital-intensive industries.

Currently, Capstone Copper’s EBITDA margin of 26.62% is compared to Lundin Mining Corporation’s (OTCPK:LUNMF) 32.05%, First Quantum Minerals Ltd.’s (OTCPK:FQVLF) 42.51% and Freeport-McMoRan Inc. (FCX) 40.90%.

Taseko Mines Limited (TGB) fares worse with an EBITDA margin of 25.43%, while World Copper Ltd. (OTCQX:WCUFF) is not yet known.

Then, the enterprise value [EV] to EBITDA ratio provides a valuation metric that helps to determine whether Capstone’s profitability is cheaper or more expensive than its peers.

Capstone Copper Corp. shares appear to be overvalued relative to the peer group, based not only on past profitability but also based on the future profitability analysts are predicting over the next 12 months.

As such, investors might consider selling some shares of Capstone Copper Corp., but not before the stock price has reached a new high, which the trend depicted in the chart above seems to indicate. That’s because these shares move through cycles while following the price movements of the underlying commodity.

This strategy should give investors a higher chance of maximizing the returns they can get from their investments.

Capstone Copper Corp. is also traded on the Toronto Stock Exchange under the symbol (TSX:CS:CA).

Shares were trading at CA$6.04 at the time of writing, giving it a market cap of CA$4.1 billion. Currently, the stock price is slightly below the 50-day moving average of CAD6.08 and well above the 200-day moving average of CAD4.27.

Conclusion

Investors may consider selling some of Capstone Copper Corp.’s stock, but since it appears to be making a new high, investors may hold off on it for now.

A sell stance on this stock is based on expectations of lower copper prices, as forecasted by analysts, and continued inflationary pressures on operating expenses.

These factors will likely negatively impact Capstone’s profitability, which could create severe headwinds for the stock price.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.