Is 29Metals a leveraged copper play? Or a trap?

29Metals (ASX: 29M) staged a rally for the ages – up as much as 200% between mid-February and late-March after copper prices soared past US$4 a pound for the first time since April 2023. But as it turns out, this was just another dead cat bounce.

Shares in the embattled copper producer tumbled 25.9% on Tuesday after the company announced the suspension of operations at its Capricorn Copper mine following a period of extensive rainfall between late January and mid-March. The announcement indicates that water at Capricorn has returned to levels similar to the March 2023 extreme weather event.

29Metals 12-month price chart (Source: TradingView)

"With water at these levels, dewatering of Esperanza South underground mine (‘ESS’) cannot continue which, in turn, delays the restart of mining at ESS as part of the Capricorn Copper Recovery Plan," the company said in a statement.

Chief Executive Peter Albert says the duration of the suspension "will be dependent on a number of factors, including reducing the water levels held on site and securing the regulatory approvals required to set Capricorn Copper on a sustainable footing."

"It never rains it pours"

Macquarie downgraded the stock from Neutral to Underperform on Wednesday, and slashed its target price by 44% to 25 cents.

"29Metals has a difficult pathway ahead with a leveraged balance sheet, transformation required at Golden Grove and the need for a new strategy accompanying leadership changes," the analyst said.

The downgrade was centered around three key areas, including:

Significant copper production decrease: Macquarie forecasts a cessation of production from the second quarter of 2024 which results in a material reduction in copper production in 2024 from 34,500 tonnes to 23,900 tonnes. The forecasts do not assume a restart of Capricorn.

Source: Macquarie Research

CEO in transition: Chief Executive Peter Albert is set to retire on 30 April 2023 and replaced by former BHP executive James Palmer. "One positive from today's announcement is that James Palmer can start with a relatively clean slate when he commences in May, with most of the bad news on Capricorn already priced in," the analysts said.

Golden Grove needs lower costs: "29Metals is now a single asset company with its risk profile going forward solely driven by Golden Grove ... higher base metals prices and/or significant cost reductions is required for it to generate positive EBIT," says Macquarie. To add some perspective, Golden Grove's all-in sustaining cost for 2023 was US$4.12/lb.

Source: Macquarie Research

Leveraged balance sheet: 29Metals has a net debt position of $109.5 million as well as an outstanding $26 million in stamp duties for Golden Grove. "In our view, the company's balance sheet remains a key risk and the company may need to raise additional equity or find a funding solution to improve balance sheet position," the analysts said.

Putting it all together

29Metals was one of the best performing copper stocks during the mid-February to late-March period – It goes to show just how much leverage the company has towards higher copper prices (or serious concerns if copper prices trend lower).

The latest flooding represents a massive hit towards the company's project diversification and overall production profile. While some of this has already been priced in (shares down more than 30% in the last two sessions), the market remains concerned about the company's balanced sheet and tailings capacity (treatment of leftover waste material).

The last thing 29Metals needs is a stagnant or downward trending copper price. And for investors, the dreaded trading halt for a capital raising.