Heading into the holiday weekend, junior developmental stage miner PolyMet Mining (PLM) has a lot to be thankful for after experiencing a sudden surge of investor enthusiasm that's sent its stock soaring 43% since Thursday's close. While its NorthMet project in the Mesabi Iron Range of Minnesota holds great potential, don't buy into this big move yet.
While it has received substantial financial backing from Glencore Xstrata, which owns more than a quarter of the company's stock and warrants that, if fully exercised, would give it 34% of the company, it faces a lot of challenges, not the least of which is substantial environmentalist opposition to its plans. With Minnesota's natural resources department due to publish a supplemental draft environmental impact statement on December 6, PolyMet will likely face a new chorus of voices against its open pit mine proposal even as it becomes the next step in the development of its project.
Yet the catalyst for PolyMet's big move higher had nothing to do with the draft EIS, but rather was related to a research report published last Thursday. While the folks at Edison Investment Research may be sincere in their belief that the miner's stock is worth substantially more than its current price -- and some 250% more than where it was trading before the report came out -- investors would do well to realize this is not an unbiased view as PolyMet itself commissioned the analysts to publish the report.
The junior miner's NorthMet project is one of the world's largest undeveloped deposits of copper, nickel, and other non-ferrous metals. It proposes to construct an open pit mine at a previously unmined region within the Superior National Forest that has been a source of contention since the beginning as environmental groups contend the site may require hundreds of years of water treatment after PolyMet closes the mine to restore its quality.
The draft EIS has been substantially reworked since it was originally submitted (and met strong resistance by the EPA and other government agencies) and a reworked draft was further delayed after PolyMet heard from tribal resource agencies in the region and took into consideration their input.
Miners around the globe are running into similar resistance from environmentalists and indigenous peoples who object to mining's encroachment onto sacred and cultural lands. Even here in the U.S., Rio Tinto (RIO -1.11%), which is trying to open the largest U.S. copper mine at its Resolution Copper project in Superior, Ariz., is facing stiff opposition from the local Apache tribe.
If PolyMet's draft EIS publication goes off without incident, there is still a public comment period to go through that can last as long as six months, and the U.S. Army Corps of Engineers gets to revise the plan into a final environmental impact statement. Only then can a decision be made on whether the project is feasible, and then only after obtaining a positive ruling can PolyMet begin the permitting process to start construction.
While the miner is looking to the second half of 2014 to get the ball rolling, it's clear this early action on PolyMet's stock is just that: early. It's much too premature to begin betting on whether the miner will successfully clear all the hurdles in its path each step of the way.
Further, the analysts seem to use some rosy assumptions to arrive at their valuation of PolyMet's stock, particularly as it relates to the pricing of nickel. The report assumes the metal fetching $10.14 per pound, but nickel currently goes for around $6 and hasn't seen the $10 level since mid-2011 as a supply glut has developed over the last two years. While copper trades around the $3-per-pound level, which is near the report's $2.96-per-pound assumption, it's also been in a slow downward trend since spiking to well above $4 a pound in 2010. Admittedly, the report does believe copper will be the primary output of the mine and to its credit does recognizes the risks associated with getting over the obstacles and to the construction phase.
In short, if PolyMet can get through the environmental reporting process, if it elicits no new challenges, and if it can successfully circumnavigate the permitting procedure, no small task in and of itself, then this miner just might be able to fulfill investor expectations. In the meantime, though, there's no need for anyone to rush right into this stock now.
I've been expecting a copper boom for some time and believe that despite recent pricing weakness, there's still room to run. I just don't see that PolyMet Mining has a dog in that hunt just yet.
