Copper Mountain’s Q&A: The Shareholders Deserve Better Answers.
Some public companies have issues that they would prefer no one talked about. Yesterday’s conference call hosted by Copper Mountain Mining Corp. (TSX: CUM) appears to have brought up one of those issues, and the shareholders deserve a better answer than management delivered.
CUM owns 75% of the Copper Mountain Mine in southern British Columbia. Mitsubishi Materials Corp. (source), a core member of the Mitsubishi Group, owns the other 25%, and is a large creditor of CUM.
Up until yesterday’s call, my largest concern was Copper Mountain’s history of missing its own guidance. There is a general expectation that 2015 will be no different.
Quoting from Dundee Capital Markets’ report from April 15/15: “Based on continued poor performance and expensive valuation, we are reiterating our SELL rating … there is no publicly available mine plan to provide guidance for 2016.” The headline from Haywood Securities’ April 15/15 report read, “Mill Performance Unfortunately Like Listening to a Broken Record But There is Hope on the Horizon (?)”. CIBC World Markets lowered its production estimate for 2015 but has faith in 2016. The Northern Miner’s headline read, “Technical troubles dog Copper Mountain in Q1”. (April 20 – 26, 2015, page 14).
The technical troubles are surprising given the high quality of the mining team at CUM. Jim O’Rourke, President and CEO of Copper Mountain, was inducted into the Canadian Mining Hall of Fame in 2013, the same night that Chuck Fipke and Pierre Lassonde were inducted. His involvement offers comfort to the investment community that Copper Mountain will eventually hit its guidance, either by improving performance or by putting out more accurate guidance.
The rest of the leadership team is skilled (although if you look at the board pictures here, a little diversity would be appreciated.)
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The analysts on yesterday’s call asked the expected good questions about production, costs, grade and revenue. One IIROC member, though, went in a different direction, targeting his questions towards the Net Smelter Royalties (“NSR’s”) on the claims, and that’s where management may have failed the shareholders.
Paraphrasing the question, he asked, “You’ve disclosed that CUM has 338 claims in a claims package totalling over 6700 hectares, and that 10% of those claims are subject to an NSR. Is that 10% by acreage or number of claims?” A simple question, right?
First, some discussion of Net Smelter Royalties. An NSR is a payment made by a mining company to a third party, equal to a percentage of the mine’s output. Most North American NSR’s are in the 1% -3 % range.
Assume a 1% NSR on a claim. If a mine on that claim produces 80,000,000 pounds of copper in a year, and copper sells for $2.80 a pound, then the owner of the NSR on that claim is owed $2.2M for that year by the mine owner (80M x $2.80 x 1%). At a 3% NSR the owner would pay $6.6M for the year. An NSR gets paid regardless of whether the mine is profitable. (This is a simplified explanation – NSR agreements can run for pages.)
What gets difficult is that “a mine” is rarely only one claim, and almost always spreads across many claims, with each individual claim having its own NSR owed to different third parties. Keeping track of what NSR’s are owed to whom can be difficult, especially when you consider how mining companies buy and sell assets over decades, how names gets changed, and how some mining companies temporarily become hi-tech or marijuana companies but still own the mining assets.
Paying an NSR takes cash out of a project. It materially affects the economics of a mine as well as its banking relationships (such as debt / equity ratios, working capital covenants, debt servicing). It increases the Cost of Sales and decreases Gross Profit.
Back to CUM’s conference call and that question.
The answer to that question was “by acreage” so the math should be easy: take Copper Mountain’s total acreage, divide by 10, and that’s how much of the mine is subject to a NSR.
The follow-up question showed this wasn’t so. The follow-up question (again paraphrasing) was, “Hornby Bay Mineral Exploration Ltd. put out a press release in 2013 claiming it had a NSR on more than double the acreage you say is subject to an NSR. Can you reconcile those two statements for me, please.”
The answer from Copper Mountain was, “We can’t speak for Hornby Bay and we haven’t seen that press release.” Wow.
Hornby Bay’s filing page at SEDAR includes a copy of the press release. Its MD&A for the period ending Dec 31/14 provides more detail: “Legal surveys conducted under the guidance of a B.C. land surveyor on all of Hornby Bay’s 5% NSR boundaries indicate that Hornby Bay owns a 5% NSR on 4,000 acres of CUM’s 18,000 acre copper-gold-silver mine leases in Princeton, British Columbia. The 5% NSR covers 22.3% of CUM’s mining leases and mineral rights, and consists of several areas within the holdings, but HBE’s 5% NSR areas are not currently being mined by CUM. There are a number of known mineralized areas within Hornby Bay’s 5% NSR area. Both airborne photographic surveys and ground legal surveys have been completed and the data has been filed with B.C. government departments.”
In light of this, CUM’s comment that it hadn’t seen the Hornby Bay press release is troubling. I find it hard to believe that no one has brought this purported blot on title to CUM’s attention over the past 19 months.
There is an inconsistency here between Hornby Bay’s press release and CUM’s position. My professional career began as a litigation lawyer, where I was taught to find the facts first, to have an opinion second. This inconsistency was bothering me so fact-finding I went.
Start with Copper Mountain’s own 2007 prospectus. From page 7: “Approximately 10% of the claims, primarily in the northwestern property area, are subject to certain production royalties (from 1% to 5%)”. Variations on this sentence are repeated throughout the prospectus. At that time the property covered 6702 hectares.
Move to CUM’s Annual Information Form effective Dec 31/14, filed on March 30, 2015. Page 12 has almost identical language: “Approximately 10% of the claims, primarily in the north-western property area, are subject to certain production royalties (from 1% to 5%)”.
Finally, The Northern Miner in its recent Global Copper Supplement quoted the company as saying the Copper Mountain land package was 72.8 sq km (which translates to 7280 hectares).
I then telephoned James Brady, Hornby Bay’s CEO. I told him about CUM’s conference call. Mr. Brady seems like a stereotypical old-time mining guy, ready to fight anyone anytime, and it took some time to work around his natural combativeness to get to the facts. To summarize, he said:
- The Hornby Bay press release was and continues to be accurate;
- After disseminating the Hornby Bay press release through the usual channels, he sent a copy to CUM directly, by emailing it to Peter Holbeck, VP Exploration. (Mr. Holbeck was referred to during CUM’s call yesterday but was not on the call.)
- “Exceptional care” was taken by Hornby Bay to make sure the press release was disseminated through business channels in Japan, so that CUM’s partner Mitsubishi would see it, at a cost to Hornby Bay of roughly $4,600 just for Japanese distribution;
- He also emailed the press release directly to Mitsubishi in Japan;
- He also emailed the press release to the President of the Canadian arm of Mitsubishi Materials Inc., Mr. Yao; and
- Suddenly, at the end of Sept/13, CUM re-started long dormant negotiations with Hornby Bay to buyback Hornby Bay’s NSR. Those negotiations did not result in any agreement.
Mr. Brady then added speculation about Mitsubishi’s likely reaction to the Hornby Bay press release and why CUM had to carry out a dilutive bought-deal equity financing in November, 2013. I’m assuming the investment banking shops that did that bought deal asked that question as part of their due diligence and were satisfied with CUM’s answer.
In light of the above, it’s hard to believe no one at Copper Mountain knew about Hornby Bay’s press release.
Mr. Brady, in full combat mode, then sent me a copy of the original NSR agreement from 1979. You can’t tell from the document itself, but Mr. Brady says these claims total 1619 hectares. It’s this agreement from 1979 that in part supports Hornby Bay’s Sept/13 press release.
If this document is correct, these claims have been subject to an NSR since 1979, and that would include the time of CUM’s 2007 prospectus.
Which brings us to yesterday’s conference call.
Copper Mountain said during that call that the Copper Mountain land package today is, “18,000 acres”, which translates to 7284 hectares. That’s consistent with The Northern Miner article.
Take Hornby Bay’s 1619 hectares and divide it by 6702 (CUM’s number from its 2007 prospectus), and the result is a bit over 24%.
If we use The Northern Miner’s number, consistent with the company’s statement yesterday, the math today becomes 1619 / 7284, which is over 22% of CUM’s claim package, still nowhere near the 10% repeatedly claimed by CUM since 2007.
This matters. NSRs directly impact the mine plan, potential gross profit, cash flow, shareholder equity and the company’s goodwill. It could also affect CUM’s relationship with Mitsubishi, who is CUM’s equity partner and major creditor.
Copper Mountain’s shareholders need answers to two simple questions:
- When did any member of management or the board at Copper Mountain first become aware of Hornby Bay’s September/13 press release?
- Is that Hornby Bay press release accurate?
(Copper Mountain’s conference call is available for replay at 1-888-390-0541, code 898630, until May 11, 2015.)
Mr. Clausi is an experienced investment banker, executive and director. A graduate of Osgoode Hall Law School called to Ontario's bar in 1990, Mr. Clausi ... <Read more about Peter Clausi>