Investors Lower Likelihood of Bankruptcy at Frontera Copper, Shares Soar

by: FP Trading Desk December 01, 2008 | about stocks: FRCPF.PK / PAAS    

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Shares of Frontera Copper Corp. (FRCPF.PK) jumped from C$0.31 to C$0.59 last week, a gain of more than 90%, as 14.3% of the Toronto-based miner’s outstanding shares were acquired by two or three investors in the past month. The most recent purchase comes from Mexican registered Invecture Group, which bought 7.2% on Wednesday, bringing its stake to about 16%.

“Somebody is seeing value in Frontera,” Scotia Capital analyst Majed Jandali said in a research report that suggested a change in legal ownership control may be on the horizon. He thinks the company may be forced to claim bankruptcy and liquidate its assets if more money is not injected or the company’s debt is not restructured.

However, the history of these two investors – Pan American Silver Corp. (PAAS) chairman Ross J. Beaty and Invecture – as well as the purpose of their investment, suggests a lower likelihood of bankruptcy, Mr. Jandali said. At the same time, the chances of it being sold to another miner at a significant premium is unlikely, he added, noting that Frontera is a relatively high cost mining operation.

Its debt and the risk associated with operating a mine that is not generating enough cash flow to pay the debt – even when copper is at roughly $1.70 per pound – were cited as reasons why it may be difficult to find a buyer. However, its 1.55 billion pounds of copper in proven and probable reserves could be considered an attractive option on copper prices in anticipation of a rebound.

The Scotia analyst suggested that the recent investor interest and their expected willingness to acquire more shares limits the downside risk on Frontera. He raised his price target to C$0.60 per share as a result.

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