Why PolyMet Mining Is a High-Risk Risk Play

Exploratory Minnesota copper mining company PolyMet Mining (NYSEMKT:PLM) burst onto Wall Street’s radar in June. That’s when PLM stock went on an unprecedented roller coaster pride.

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First, PLM stock tripled essentially overnight in early June. Then, the stock gave back all of those gains, only to double a week later.

What’s going on over at PolyMet Mining to cause all this volatility? And – more importantly – is PLM stock a buy?

In short, a lot has happened at PolyMet in June. And the company’s growth prospects have significantly improved as a result. Still, PLM stock is essentially a highly-leveraged play on the global economic recovery, with some legal hurdles. The company is a high-risk, high-reward stock reserved only for the bold. This is true even with a potential supercharged Tesla-related (NASDAQ:TSLA) catalyst on the horizon.

Let’s take a deeper look.

What is PolyMet?

PolyMet is a Minnesota mining company that has obtained permits to develop a poly-metallic mining project, dubbed NorthMet, in northeastern Minnesota, with a focus on copper mining. PLM stock has struggled because development of the mine has been delayed by regulatory disputes. Most of these involve regulators questioning the environmental and social friendliness of the mine.

Copper prices – which closely track global economic activity because the metal is used in so many industrial end-markets – also plunged in early 2020 thanks to the Covid-19 pandemic. That didn’t help PLM stock.

Heading into June, shares were more than 40% off their early 2020 highs.

Two Big Catalysts for PLM Stock

Then two big things happened in June.

First, those regulatory headwinds holding up mine development showed signs of easing.

Specifically, the NorthMet project had been rewarded an air permit from the Minnesota Pollution Control Agency (MPCA). Then, on March 23, the Minnesota Court of Appeals remanded NorthMet’s air permit. The court cited concerns that the size and scope of the mine were more than what was proposed in the permit.

In mid-June, the Minnesota Supreme Court granted a review of the Minnesota Court of Appeals’ ruling. This paves the path for these legal headwinds to pass with a favorable Minnesota Supreme Court ruling.

Second, global mining giant Glencore – which owns a 72% stake in PolyMet – signed a major, long-term cobalt deal with Tesla (NASDAQ:TSLA) in mid-June. This has investors speculating on whether this deal will eventually involve PolyMet (whose Minnesota mine will also produce cobalt).

In sum, these catalysts have sprung life back into PLM stock.

A Highly Leveraged Play on the Recovery

In my view, PLM stock is – first and foremost – a high-risk, high-reward play on the economic recovery. So if the economic recovery persists, then big gains in PLM stock will persist, too.

As mentioned earlier, copper prices are tied to global economic activity. Gold prices, meanwhile, are often tied to the amount of fear in the world. One of the most closely watched economic indicators is the copper-to-gold price ratio. Nicknamed the “growth-to-fear” index, this ratio dropped to all time lows in March 2020 as growth evaporated and fear took over.

It has since rebounded, but to levels that are still below what has been the bottom-end of the ratio over the past several decades.

As such, if the current economic recovery persists, then global fear should ease, and global growth should pick-up. This should lead to a continued recovery in the copper-to-gold price ratio back to normal levels. Assuming so, copper prices could soar from about $2.60 per pound today, to $3+ within the next few quarters.

Copper Prices Key for PLM Stock

As a junior copper miner, PLM is a highly leveraged play on rising copper prices. Since PolyMet is still in the exploratory phase of mining, it has high production costs and narrow profit margins per pound of copper mined. For each minor increase in copper price, PolyMet’s per pound profit margins at its NorthMet project increase by a bunch. That big increase, over millions of tons of ore produced every year, adds up to a huge rise in the value of the NorthMet project.

In other words, every minor increase in copper prices will lead to a huge increase in the value of the NorthMet project, and in turn, PLM stock.

If copper prices rise to $3.50 and PolyMet is legally cleared to mine all measured and indicated resources at NorthMet, then the net present value of the NorthMet project using a 7% discount rate is nearly $3 billion.

That is more than seven-fold the current market cap for PolyMet stock.

What About Tesla?

There’s also the Tesla wildcard.

Tesla needs cobalt to power its electric-vehicle revolution. But the sourcing of cobalt has been a human-rights issue for several years. About two-thirds of the world’s cobalt comes from the Democratic Republic of Congo. The mines there aren’t known for their cleanliness and hospitality, but rather for their use of child labor.

Tesla will undoubtedly face pressure to source its cobalt through a more sustainable and humanitarian supply chain over the next few years.

The potential answer? NorthMet.

Glencore – Tesla’s big cobalt mining partner – owns a 72% stake in PolyMet. And, NorthMet – a Minnesota mine that is miles away from child-labor issues – is projected to produce a significant amount of cobalt.

To that end, could PolyMet turn into Tesla’s cobalt supplier within the next few years?

Maybe. It’s a wild card which remains in play today. Any positive news on this front will undoubtedly help PLM stock.

Bottom Line on PLM Stock

PLM stock isn’t for the faint of heart. In fact, for most investors, this stock is better forgotten.

But, for speculative investors with an appetite for risk, PLM stock offers a unique, highly leveraged way to play the global economic recovery.

So, if you believe in today’s recovery and can absorb some risk into your portfolio, PLM stock isn’t a bad pick, despite its penny stock status and recent volatility.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned stocks. 

Article printed from InvestorPlace Media, https://investorplace.com/2020/06/why-polymet-mining-is-a-high-risk-risk-play/.

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