TD Update
Quadra Mining Ltd.
(QUA-Tÿ) ÿC$6.84
Q4 results highlight potential
Event:
On Friday March 10, 2006 Quadra released its Q4 and full year 2005 results.
Impact:
Positive. Q4 results were somewhat stronger than our estimates and further reinforce our view that Quadra is positioned to deliver significant earnings and cash flow growth in 2006, which should see the shares valued more in line with its peers. We maintain our BUY recommendation and our $10 target.
Details:
Financial Performance: Reported earnings for Q4/05 were $0.08, however, these results included several one-time items. Namely the non-cash charges related to the mark to market of various derivatives contracts for 2006 copper production (approx. $32 million), pricing adjustments made on concentrate sales that were only provisionally priced at the end of Q3 (approx. $20 million benefit that resulted in a significant improvement in reported operating margins) and from a change in the accounting treatment for stripping costs (approx. $5.8 million benefit). Excluding these items, we estimate operating earnings were approximately $8.5 million or $0.32, somewhat stronger than our forecasts of $0.18 per share. For the full year, reported earnings were a loss of $0.07. Quadra’s earnings for the year would have been $1.11 per share, taking into account the company’s 2005 hedging program but excluding the mark to market of derivatives. We would note that given Quadra’s share structure even a modest change in net income has a significant impact on reported EPS.
Operating Results:
The operating performance of the Robinson mine was somewhat mixed in Q4 as the company transitioned through a more difficult metallurgical ore zone. Copper recoveries declined slightly to 73.5% from 79.5% in Q3/05 producing 31.6 million pounds, down slightly from Q3 production of 36.5 million. Production for the year was 126.2 million, in line
with company guidance. Gold recoveries, however, improved to 61.5% from 57.3% demonstrating the benefit of the new gravity concentrators. That said, production was down to 22,262 ozs from 24,666 ozs due to lower head grades. Mill operating time was also marginally lower at 90%. That said, cash costs continued to show improvement declining to $1.11 per pound of copper produced, slightly better than we had estimated.
Metals & Minerals
Recommendation: BUYÿ
Unchanged
12-Month Target Price: C$10.00ÿ
Unchanged
12-Month Total Return: 46.2%
Market Data (C$)
Current Price $6.84
52-Wk Range $4.50-$8.45
Mkt Cap (f.d.)($mm) $236.7
Dividend per Share $0.00
Dividend Yield 0.0%
Avg. Daily Trading Vol. (3mths) 326879
Financial Data (C$)
Fiscal Y-E December
Shares O/S (f.d.)(mm) 34.6
Float Shares (mm) 34.6
NAVPS (current)(f.d.) $9.46
Estimates (US$)
Year 2004E 2005A 2006E 2007E
EPS (basic) (0.10) 0.08 2.28 1.45
CFPS (basic) 0.06 1.09 2.79 1.94
Valuations
Year 2004E 2005A 2006E 2007E
P/E (basic) nmf 73.8x 2.6x 4.1x
P/CFPS (basic) 98.5x 5.4x 2.1x 3.0x
Supplemental Data (US$)
Year 2004A 2005A 2006E 2007E
Copper Price 1.3 1.67 1.80 1.50
Copper (MMlbs) 14.2 126 149 169
ÿ
All figures in US$, unless otherwise specified.
Cliff Hale-Sanders, CFA
Action Notes March 14, 2006
Equity Research 13 of 16
2006 Outlook:
The performance of the Robinson mine is expected to show continued improvement in 2006 as Quadra commences mining in the Veteran pit thereby leaving the more difficult mining environment encountered in 2005, which should allow for more optimal mine sequencing. Also the company should benefit from continued strength in gold recoveries and the commencement of molybdenum production in 2006. The company indicated that while it has not reached commercial production the molybdenum circuit has already produced 100,000 pounds of metal contained in concentrates. As per the company’s November 29, 2005
guidance, copper production is forecast to be 145-150 million pounds with 55,000-60,000 ozs of gold.
Molybdenum production is expected to be around 1.0 million pounds. Operating costs are not expected to be materially different in 2006 at this time, however, reported cash costs should benefit from higher production rates and increased by-product credits. As such, our outlook for 2006 earnings and cash flow is unchanged at
this time.
Growth Projects:
With respect to Quadra’s growth projects, namely Carlotta and Sierra Gorda, further development work is planned. At Carlotta, basic engineering, development and financing plans are expected to be concluded in H1/06, with construction expected to commence in mid 2006 assuming a positive board decision. Exploration at the Sierra Gorda projects remains ongoing and a $5 million budget has been put in
place to further define the potential offered by this resource.
Valuation:
Based upon our revised estimates, Quadra is currently trading at a 2.5X our estimated 2006 EPS and 2.0 our 2006E of cash flow. It is also trading at a discount to our calculated NAV for the shares. Based upon these multiples Quadra is the most inexpensive copper producing equity in our coverage universe.
Justification of Target Price:
Our target price for Quadra remains C$10.00. Our target price is slightly below the mid-point of our NAV for QUA shares of C$9.46 and a 5.0 times multiple to our blended 2006E and 2007E cash flow estimates, which suggests a value of C$13.94. Given the history of operating problems, we have continued to believe that a discounted cash flow multiple relative to its peer group is warranted; however, if the operation does turn around as expected, higher share prices than our target could be possible. Our NAV assumes a 10% discount rate, our current metal price forecasts, development of the Carlotta project and incorporates the company’s current hedging program. We also included a somewhat more speculative value for the Sierra Gorda project
based upon the value of the copper contained in the deposit using a 0.5% cutoff value at US$0.02/pound in the ground implying a value of C$1.44 per share. This is in line with what the market is paying for similar development projects, many without a 43-101 compliant resources.
Key Risks to Target Price:
The key risks to our target price are future commodity prices relative to our forecasts, operational disruptions, cost performance, ongoing development risks for the Carlotta and Sierra Gorda projects, environmental risks and share liquidity risks.
Investment Conclusion:
We maintain our BUY recommendation and our target price of C$10.00. We continue to anticipate that Quadra should post significantly improved operating results in 2006, which we believe should result in the shares being re-rated by the market.
