Monday, April 09, 2007

Imperial Metals - The Right Hedge

Imperial Metals is a primarily copper mining company with other metal by-products. Like Quadra, in 2006 they hedged their copper, only Imperial hedged the right way, protecting earning and minimizing losses.

The company did have derivative losses from hedging, about $27 million for 2006, relative to production, that's about 1/5th the loss that Quadra had. In one hedge they protected themselves from copper going below $1.80, but participated in price increases to $2.60. Later they had a hedge that had protection from going below $2.90/lb, but price participation up to $3.68/lb, and another hedge had price protection for $2.50/lb and price participation to $3.06/lb. Sure the hedge cost them money, but this is the right way to hedge, keeping 75-80% of the gain. Quadra hedged at $1.60.

The change in their financial position from 2005 to 2006 is stellar, short term assets up $27 million, all assets up $78 million and none of those fiat intangible assets like "Goodwill" listed on their balance sheet. Additionally, their liabilities are down by $21 million for a total change in financial postion of $99 million. Not bad for a company with a fully diluted market cap of $433 million. Earnings per share for 2006 was $2.69, or 22% of today's earlier share price of $12.12.

Imperial currently has two sources of income, their Mount Polley mine which provided net revenue sales of $210 million for 2006 and their equity income from their share in the Huckleberry mine, which provided them with $34 million. Guidance for 2007 is 98 million lbs copper, 58,800 oz gold, 596,000 oz silver, and 210,000 lbs molybdenum. And again they have hedge for 2007, 3/4rd of their copper is hedged to between $2.97 and $3.47/lb.

The company recently purchased bcMetals for $68 million, from cash and a $40 million loan. According to Management Discussion and Analysis:

The Red Chris project has received Federal and Provincial environomental approvals for mine development. A bcMetals feasibility study on the Red Chris property indicates a 25 year mine life at 30,000 tons per day with reserves of 276 million tonnes grading 0.349% copper and 0.266 g/t gold.

Working through the numbers, 276 million tonnes of 0.349% copper is a contained resource of 2.1 billion pounds of copper, which they bought for a take-over price of about 1/3 of a penny per pound, making the gold free. That price is well under the 1c/lb of copper resource guideline of my previous post.

The production rate indicates 84 million pounds of copper/year and 94,000 oz of gold. With recovery rates taken into consideration it would be more in the range of 75 million pounds of copper and 50,000 oz gold (my rough estimate).

Other exploration holding include their Bear property which has molybdenum and copper. The best drill results were 296 meters of 0.059 molybdenum and 0.27% copper. Some pure moly plays for open pit have just 0.06 molybdenum.

Their Sterling property is gold and so far has defined a resource of 46,000 ounces of gold with 7.41 g/t. There are more exploration opportunities on this property.

Their Nak property has rich chalcopyrite veins which grab samples returned grades as high as 5.11% copper and has drill results with 0.1 to 1.1% copper.

Their Giant Copper property, located 220 km east of Vancouver, had a 1989 feasibility study that calculated a reserve of 3.7 million tonnes of 1.08% copper, 0.47 g/t gold, 19.18 g/t silver and 0.01 molybdenum. These results are before NI43-101, so they are not compliant.

Their Porcher Island property is also a gold property with before NI43-101 estimated mining reserve of 623,000 tonnes of 6.9 g/t gold.

By doing the hedge the right way Imperial Metals is in a very, very strong position for 2007 earnings. They will be able to pay off debt and be in a strong financial position to further develop and explore their properties.

1 comment :

NonyMous said...

Hey Debra ..
Interesting Blog..i see your quite interested in commodities and junior mining plays..just like me !!