Monday, February 13, 2006

Speculative Stock

I'm having one of those days where I need to get a ton of things done, but I don't have enough time and I need some sleep (so this post might lack some details).

Disclaimer: Before I mention this stock I just wanted to say that I'm in no way saying it's a buy.
This is an extremely speculative and volatile stock, but I wanted to mention it because it seems interesting.

The company is Peru Copper (CUP) and they just came out with a feasibility study on a copper mine they have. Most of the details are in another file that is not with me, so I'm just going to give some general facts. The company was set up as an exploration company looking for copper mines in Peru (I think they are #5 in the world for copper mining). The company found a site called Toromocho and from the looks of the study it seems to have been a nice find.

The next paragraph is copied straight from their press release:
"At an estimated average annual production rate of 272,788 tonnes of copper and 5,387 tonnes of molybdenum for 21 years, the Project pre-feasibility study estimates a Net Present Value (NPV) of US$814 million from commencement of construction and an after-tax Internal Rate of Return (IRR) of 16.0%"
I saw this release and a few things caught my attention. One is the annual amount of copper and molybdenum (both, I believe, have been surging in price lately). The next is that the life of the project is 21 years. The last part is that there's a positve NPV of $814 million and an IRR of 16% (that's pretty nice).

The risky parts with these studies are the base assumptions they make. I've seen some reports that basically say "the share price should be $x because sales will grow 50% for the next 10 years". Having a base assumption of 50% sales growth for 10 years is a reach.
Anyways, back to this case. Their assumptions actually seem really conservative.
Copied straight from the release:
"Using base assumptions of a copper price of $1.10/lb.; a molybdenum price of $10.00/lb.; a silver price of $6.50/oz.; and a discount rate of 8%, the Project has an estimated Net Present Value of US$814 million and an estimated after-tax IRR of 16%. Recent metal prices are considerably higher than those used in the pre-feasibility study. On February 3, 2006 copper was $2.31/lb., molybdenum was $36/lb. (based on a molybdic oxide price of $24lb.) and silver was $9.74/oz."

Taking into account the NPV and the number of shares (including potential dilution from warrants) the end result would be over $8NPV/share.

With the stock at $3.32/share, it makes this case a little interesting. There are risks of course (for instance the mining won't really start till I think 2010), so nothing is happening in the near future except for the company burning through cash (which means that they will probably raise more funds and this will cause dilution in the stock). In some releases there are potential hints of selling the site and it might be able to catch a nice sized premium over today's close.

Again: I'm not recommending this, I just saw the release and thought it was interesting.
If you have any comments, please share

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