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FMA - thanks. I was wondering what the hold up was. Was told over a week ago it was with the TSX - from your post, looks like a bit more work needed. Sure hope they get it out this week before the official mine opening ceremonies this Friday. No fun to invite all the analysts and not be able to give them the details.
Goldman Sachs April 21
Chile & Australia supply constraints put copper/coal in driver's seat
We maintain a bullish long-term outlook on the metal and bulk commodity price
cycle, despite a Western World (WW) slowdown. However, supply constraints in
Chile (labor strikes and power) and Australia (mine floods) have significantly
improved copper and met coal fundamentals. Thus, we have increased our copper
2008-09 estimates to $3.85/lb (from $3.37) and $4.30/lb (from $4.20), respectively.
In addition, 2008 met coal price settlements averaged $305/t (+211% YoY vs. our
$250 estimate), leading us to increase our 2009 estimate to $220/t (from $200). We
increased our 2008-09 moly and nickel prices, as they may benefit from these supply
constraints. We have also adjusted our zinc, lead, PGM and thermal coal prices to
reflect 1Q08 and 2008 settlements, plus our gold and silver price estimates (see our
note published today). We continue to expect metal demand to recover in 2H08,
followed by increased 2009 commodity prices.
Commentary came from a Euro Fund Manager based in Switzerland and Spain.
EPM - Even as late as February management were exercising stock options, which probably contributed to the weak share price. Even so, it looks as if Mr Kurzin is doing the remaining shareholders a very big favour by coming in now, before the banks get really stroppy.
Big favor? Is this guy nuts? They essentially stole 19% of EPM for peanuts. Sure, some more short term funding issues, but it's not worth 19% of the company.
But the market should be glad to hear Williams will soon be out on his arse - a bigger incompetent would be hard to find.
FMA - recent insider buying. Only one reason insiders buy...
First Metals Inc. (FMA)
As of April 19th, 2008
Filing Date Transaction Date Insider Name Ownership Type Securities Nature of transaction # or value acquired or disposed of Unit Price
Apr 18/08 Apr 18/08 Beatty, James Direct Ownership Common Shares 10 - Acquisition in the public market 50,000
Apr 18/08 Mar 14/08 Beatty, James Direct Ownership Common Shares 10 - Acquisition in the public market 99,900
Apr 18/08 Aug 28/06 Beatty, James Direct Ownership Common Shares 00 - Opening Balance-Initial SEDI Report
Mar 18/08 Mar 11/08 Beatty, James Direct Ownership Common Shares 10 - Acquisition in the public market 6,000 $0.980
Mar 18/08 Mar 11/08 Beatty, James Direct Ownership Common Shares 10 - Acquisition in the public market 12,000 $0.950
Mar 18/08 Mar 03/08 Beatty, James Direct Ownership Common Shares 11 - Acquisition carried out privately 81,900 $0.963
Jan 25/08 Jan 23/08 Mercier, Clément Direct Ownership Common Shares 10 - Acquisition in the public market 40,000 $0.860
Read this. Simply outstanding commentary imo...
Mining companies
As a block, mining represents the most important position in the
Classic fund, comprising more than 15%. As we’ll argue, it’s probably
not a good idea to look at it as a homogeneous block, but
that’s the way it is classified. Mining is also the core of our specialized
Mining fund.
Valuing a producing mining company is not very difficult: in general,
reserves can be ascertained fairly precisely, and there is no
doubt that the product will be sold at market prices as it is a commodity.
Besides possible technical problems, the only real source
of uncertainty is the future price of the commodity. Since mines last
between 10 and 20 years on average, a very long-term forecast is
needed to arrive at a sensible valuation.
Is such a long-term forecast possible? Certainly not, if one looks at
the stock prices of mining companies: the can go up or down by
more than 20% in a couple of weeks. However, the prices of the
commodities themselves don’t change that much. What’s going
on?
In our opinion, something similar to what happens with oil companies.
Markets don’t seem to have a clear idea of how to value mining
companies, and are moved both up and down by speculative
impulses. Yet, as in the case of oil, arriving at a workable long-term
price for commodities that makes sense is not that difficult. Let’s
look at copper.
Historically, copper prices exploded in the seventies, only to go
through a long depression that lasted almost thirty years. A few
years ago they started rising and, with up and downs, are now
close to historic highs (see figure 6).
Over the last few years, analysts and commentators have assumed
that the high prices were just a temporary blip caused by some sort
of “speculation,” taking for granted that prices would revert to some
sort of “historical average” of slightly below $1/lb. Consequently,
they didn’t recommend copper producing companies because they
regarded their high profits as just temporary. In fact, they convinced
many copper producing companies (which had experienced
a horrible twenty years!) that they should take advantage of the
amazingly high prices ($1.5/lb!) to hedge their production at those
prices for the next few years. Phelps Dodge, then America’s largest
copper producer, did so.
Copper prices refused to go down, however. This had a strange effect
on hedged companies: as spot prices went above their agreed upon
prices, they had to recognize an accounting loss. Phelps
Dodge thus managed to lose money at a time when copper prices
were much higher than anybody had expected. The company was
eventually bought by Freeport McMoran, currently the world’s largest
copper producer.
Un-hedged companies obviously started making serious amounts
of money, especially those with relatively high costs. Take a company
like Quadra Mining, which we own. It has production costs of
about $1.5/lb. If the selling price is $2, they barely make money. If
it is $3, they make $1.5 per pound which, multiplied by 130 million
pounds, which they produce every year, is $195 million earnings
before depreciation and taxes. At a price of $3.5, (16%% higher),
their ebitda goes to $260 million, 33% higher.
Again, analysts and commentators refused to believe that prices
would stay high, so shares continued to trade at relatively low prices.
We took a different tack: we asked ourselves what the fundamental
long-term price of copper would be.
0
50
100
150
200
250
300
350
400
450
Copper/lb in USD
Figure 6
Copper price evolution
Over the long-term, the price of anything in general must be such
that producing the thing is profitable, but not too much so. If it is not
profitable, people will stop producing it, so prices will go up because
of lack of supply. If it is too profitable, then more companies
will start producing it, and its price will fall. There are obviously
special instances where competition cannot easily enter (try selling
operating systems for personal computers against Microsoft, or
selling a drug patented by somebody else), but in the case of
commodities, competition can appear. To know the future price of
copper, we need to know what price would provide a “reasonable”
amount of profit for the “marginal producer,” i.e. the one with the
highest costs, as this is the first to stop producing if the price is too
low and the first to start if it is too high.
Simplifying, a copper producer has two kinds of costs: capital expenditures
(“capex”) and operational expenses (“opex”). Capex is
the amount needed to build the mine and all its accessory facilities,
which include the processing plant and, often, energy generators,
roads (or even railways), etc. In many cases, mines are far from
everything, and all the transport infrastructure has to be provided.
Opex is, of course, the current costs of extracting, processing and
transporting the mineral to the final processor (the “smelter”), which
will actually make the copper. Some mines make their own final
product, but often they simply sell the intermediate product (the
“concentrate”) to the smelter, which can be on the other side of the
world.
Obviously, both capex and opex vary a lot from mine to mine.
There are, however, some rough possible generalizations. Today,
it’s almost impossible to set up a producing mine for less than the
equivalent of $5 per pound of production per year. This means that,
say, setting up a mine able to produce 100 million pounds of copper
per year costs $500 million. A mine like this may normally last
15 years.
Opex can also vary a lot, and they are strongly influenced by byproducts.
Copper mines usually also produce other metals such as
gold, silver, cobalt or molybdenum in small amounts. These metals
are very valuable and contribute to “lowering” the operating costs,
because they are considered a “minus cost.” In fact, some copper
mines produce so many by-products that their cost is zero, or even
negative. These are, however, exceptions. An average copper
mine will have costs between $1 and $1.5/lb.
Now, what copper price would provide a “fair” return? It certainly
must be above opex, so $1.5 would seem the very minimum, which
is the price that many analysts currently accept. But that is silly:
nobody is going to open a mine, spending $500 million, to merely
recover cash costs, leaving the $500 million unrecovered. Mines
are being exhausted every year, and demand is growing, which
means that new mines must be opened every year. If the copper
price after opex does not provide a margin to justify the investment,
it will not be made.
The next question is how large that margin must be to justify the
investment. Different investors may have different expectations, but
we ask our readers what return they would demand on an investment
in which they put up the cash, wait for five years at least (this
is what it takes to develop a mine) and then, if everything goes according
to plan, start profiting for 15 years. Those profits will of
course depend on the price of copper over the next 20 years,
which most analysts will tell you will either be very low or completely
impossible to estimate. At the end, there is nothing left except
the final expense of cleaning up the site. By the way, the mining
may be in Guatemala, Ecuador or the Democratic Republic of
Congo, and will be contested all the way by several antiglobalization,
pro-environment NGOs, so most permits will be denied
in first instance, and only granted after lengthy review
processes. Another point: if you’re lucky and the price of copper
goes up more than expected, you can be sure that the local government
will waste no time rising your taxes and royalties.
When we actually ask investors how much they would demand
from such an investment, we get a unanimous response: silence.
Nobody seems to be interested in such a deal at any price. Fortunately,
miners are used to these circumstances to be scared off,
but they still need to raise money from investors. We submit that
few people would willingly invest in such a scheme if the project’s
net return (IRR) were not at least 20%.
To obtain a 20% return on something that only starts paying 5
years into the future and lasts for only 15 years, you need an annual
profit during those 15 years of about $160 million if the initial
investment is €500 million. This represents $1.6 per pound produced
per year (remember, our mine produces 100 million pounds
per year). Consequently, to obtain their 20% return, investors in
this hypothetical mine would need a stable copper price of $3.1/lb
over the life of the project, as this would cover the $1.5 opex and
leave the necessary margin.
The numbers we have used in this example are hypothetical, but
not arbitrary: they can be found in many real-life projects under
consideration. Some of the latest ones being discussed have even
higher capital expenditures, and costs are exploding overall, both
in capex and in opex. Add to this the very difficult negotiations with
environmentalists and the ever-increasing demands of host governments
for royalties, all of which eat directly into profits, and it’s
extremely difficult to imagine how the world is going to be supplied
with copper if prices go below $3/lb. We use $2.8/lb in our company
valuations, knowing that this is probably a very conservative estimation:
prices are currently close to $4/lb and, as in the case of
oil, we don’t know of any huge projects coming on stream that
would tilt the supply/demand balance. It is rather the opposite: for
all kinds of reasons, from energy shortages to labor unrest to the
lack of basic spare parts, companies are experiencing serious
problems maintaining production, let alone increasing it.
Before moving on, a question needs to be answered: if $3/lb is
probably going to be the minimum copper price in future, why was
it so low for so long? For a number economic, strategic, and technological
reasons, mining companies wildly overinvested in the
early seventies. When there is extra capacity in already built mines,
miners, desperate for cash flow are willing to lower their price below
full-cost, as long as they cover their opex. But that extra capacity
is now gone: many large mines are exhausted, and demand has
been growing at a fairly constant rate all these years. The situation
has changed, and, given the paucity of large projects being developed,
it will be a long time before we again see excess capacity.
This situation could, by the way, occur. If many mines open because
the price of copper seems to justify them, it is conceivable
that the industry could find itself with more production capacity that
demand. In that case, prices would quickly drop towards the cash
cost of the highest cost producer, and nobody would obtain their
sought-after 20% return. However, new mines need to be opened
every year, because old ones go out of business, so the adjustment
would be relatively fast: if no new mines were opened for a
few years, this would immediately absorb the hypothetical excess
capacity. This process is not immediate, and that’s why variations
in copper prices take some years to adjust. Investors can be sure
that, over the long term, the price of copper will be close to the one
originating from our analysis.
Readers will perhaps have noticed that we have discussed the
price of a key commodity without making the slightest reference to
US recessions, Chinese exports, hedge fund activity and other distractions.
As our little example has shown, developing new supply
takes between five and ten years, and investment decisions must
be made with a twenty to thirty year horizon. Whatever happens to
the US economy next year is totally irrelevant in determining the
value of copper producing companies with mine lives above 15
years. Unless mankind finds a way of functioning without electricity,
copper is going to be in demand as long as it can be mined.
We have undertaken a similar analysis of other commodities. As
you would expect, we have found different results. Some commodities,
such as zinc, seem to be in ample supply, and the prices are
fairly low, making life very difficult for the high cost producers,
which will probably have to leave the industry. In any case, no high
cost producer is currently opening a mine. Other metals, such as
nickel, are in a position in which many current producers are highly
profitable because new, large projects coming on line have been
seriously delayed and are above budget. Yet other commodities
are booming due to very serious supply problems: coal from Australia
has to be exported to China through a number of ports that
are completely saturated. Thus, even if there were enough mines
(which there aren’t as yet, although there will be in a few years’
time), they could not dispatch the coal, so that which is actually
shipped fetches very high prices: the price of coking coal, used for
steel making has trebled in the last twelve months.
We constantly have to put up with comments attributing the rise in
commodity prices to “hedge funds” and “speculators.” This is not
surprising: even before the Crash of 1929, unnamed speculators
were routinely blamed for whatever journalists didn’t like, whether it
was oil prices going up or stock prices going down (those sinister
short-sellers!). But it’s interesting to note that those commodities
that speculators cannot buy because there is no futures markets
for them, such as iron ore or coal, have gone up in price more than
those with which one can play speculative games. In fact, unlike
shares, commodities are actually consumed. One can, of course,
play speculative games buying or selling futures in commodities.
However copper is used every day, wheat is eaten, oil is refined
and burned. That is real, not speculative activity. Current prices are
simply those needed to match supply and demand. The fact that
physical stocks of many commodities are at historical lows shows
to what extent high prices simply reflect strong demand.
To summarize, we don’t “play commodities,” we just look for fundamentally
undervalued companies whether they produce oil, copper,
wood-working machines or life insurance. Today we find
enormous value in many metal-producing companies.
TKO - nope, I don't think prices will be anywhere near $1.50 long term. But I'm not committing ~$1 B and waiting 5-10 years for a return of my capital on that assumption either. If prices go to hell, I'll be long gone - but TKO would be stuck with a white elephant.
And you can't rely anything in a PFS these days, other than knowing when the FS comes out that the PFS economics will go out the window (and almost always in a negative way). I doubt Prosperity will be economic with $2 Cu when (if?) a FS is ever released.
My point is that in relative terms, Prosperity is a mediocre project that requires a lot of time, capital and robust prices for a long time to pay out, let alone return a profit.
There was good reason why the market greeted the release of the PFS with so little enthusiasm.
TKO - I think Prosperity is a lousy project. They ran the PFS at $1.50 and IRR was a pathetic 12% with NPV of $260MM. And that was using $0.80 fx. Current fx drives the economics thru the floor - may as well invest in TBills and take no risk if that's the best they can do.
The FS will show substantially higher costs, perhaps 50% higher. When it's all said and done, I highly doubt Prosperity show positive NPV at $1.50 Cu. Spending $1B+, wait five years, dilute the shareholders and take on big debt with those anemic economics would be a strange way of driving shareholder value.
If Prosperity is their best idea in house, they sure as heck can do far better buying existing producers with far less risk and get immediate cash flow.
The 40-80MM lb junior producers all have big targets on their back. Buy the undervalued plays that are going to get bought out. GMI, Nord, FCC, CCT etc etc.
I just unloaded the 75K shares I bought at ave of $0.81 at $0.91.
EPM has been a sweet trader. Second 10+% flip in the last week. I'm loving it.
Not fond of the Lero deal. The property is Kyrgyzstan (sp?). It was spun out of Oriel a few years ago for about $5MM (may have been a lot less, but my memory is fuzzy). Now, after a tiny drill campaign, they sell it to EPM for 19% of the company? WTF? And Kyrg politics simply stink. I wouldn't own anything in that country.
No wonder EPM is changing names. Too bad management isn't being changed as well.
This is what the CIA Factbook says about Kyrg: (not impressive reading imo)
A Central Asian country of incredible natural beauty and proud nomadic traditions, most of Kyrgyzstan was formally annexed to Russia in 1876. The Kyrgyz staged a major revolt against the Tsarist Empire in 1916 in which almost one-sixth of the Kyrgyz population was killed. Kyrgyzstan became a Soviet republic in 1936 and achieved independence in 1991 when the USSR dissolved. Nationwide demonstrations in the spring of 2005 resulted in the ouster of President Askar AKAYEV, who had run the country since 1990. Subsequent presidential elections in July 2005 were won overwhelmingly by former prime minister Kurmanbek BAKIYEV. The political opposition organized demonstrations in Bishkek in April, May, and November 2006 resulting in the adoption of a new constitution that transferred some of the president's powers to parliament and the government. In December 2006, the Kyrgyz parliament voted to adopt new amendments, restoring some of the presidential powers lost in the November 2006 constitutional change. By late-September 2007, both previous versions of the constitution were declared illegal, and the country reverted to the AKAYEV-era 2003 constitution, which was subsequently modified in a flawed referendum initiated by BAKIYEV. The president then dissolved parliament, called for early elections, and gained control of the new parliament through his newly-created political party, Ak Jol, in December 2007 elections. Current concerns include: privatization of state-owned enterprises, negative trends in democracy and political freedoms, reduction of corruption, improving interethnic relations, and combating terrorism.
Capstone and Globestar to merge???????
This sounds very plausible. GMI hasn't rounded up a new CEO after months. Why not? Well, if a merger is in the works, no reason to. And where did all the sudden buying interest in GMI come from?
From Pescod's Late Edition:
The chart at the left of Metallica Resources shows that big
companies are definitely valued better than small companies
because of the only news out of Metallica recently...we’ve all
noticed and some of us such as ourselves have whined that
over the past year or so despite the boom in commodity
prices, it has mainly been the big companies in the gold sector
such as the Goldcorp’s, Barrick’s and Yamana’s of the
world that benefited from higher gold prices and not the Aurizon’s
and Lake Shore’s of the world. The same thing is happening
in the copper sector.
So now that many observers have noticed that since Metallica
has announced its merger with New Gold and Peak
Gold has created this interest in Metallica. A merger such as
this creates a much bigger company with a market cap of
roughly $2 billion and it does give some synergies in that the
new company will need less executives and it will give diversity
as far as how many mining operations in different countries.
So now we hear all sorts of rumors and gossip of many
different miners trying to merge to get the better market capitalizations.
When we were at Joe Martin’s Cambridge House
conference last weekend, there was all sorts of gossip. But
how would this one work between two copper miners—
Globestar Mining, with its mine about to be in production this
summer in the Dominican and Capstone Mining, which is currently
operating the Cozamin copper/silver/zinc/lead mine in
Zacatecas State, Mexico.
To us, this sounds like a great marriage of two miners in
two countries that could reduce executive costs and country
risk and definitely make for a bigger company. It’s definitely
one of only a thousand rumors out these days, some of
which might be true and some of which might be rewarding.
FMA - are about to release the long awaited 43-101 that will finally allow them to start promoting the play with solid numbers and give guidance. They've been saying that for a month, but last I heard was that they were waiting for the TSX to give approval for release, so it should be coming any time now.
Also, mine opening next Friday, with ~200 people registered for the event.
FMA is the cheapest Cu producer one can buy. Jennings has $2.15 target using very conservative $3.10 Cu. Extrapolating $4 Cu and target price is over $3. Last trade was $1.10
EPM - picked up 75K shares today on the sell off. Canaccord released a note today suggesting that a $30MM PP was coming 10% below current share price ($0.89 at the time). That was telling the market to expect a $0.80 PP, well below the 52 week low.
I think EPM management have their heads up their arse if they go thru with the PP at those prices. Even the stinkiest debt would be better.
So far, had very good success trading this thing. Got out with a tiny loss after they released the lousy update about issues with the mill. Rebought at $0.88 and sold at $1.01 a few days later. Have an average of $0.81 again and would be happy to flip in the $0.90s.
The sad thing is that $0.81 adjusted for inflation and fx is lower than the US$0.60 I paid three years ago. I'd never have believed that possible with $950 POG and $4 Cu. Never.
Monty - You got in just as the last of the selling from one big seller was winding down. Took months to unwind due to the poor market. Looks like management rounded up some institutional support as today was some of the biggest volume in months.
GMI has been very frustrating hold. The Ni gets completely ignored and is worth more than the rest of the company (and that's saying something for a play about to throw off ~$100MM/yr in cash flow). Xstrata could buy out GMI, split out the Ni, add big chunk of high grade Ni reserves worth ~$1B, and sell the Copper assets for more than they paid. Talk about a sweet deal.
Management says they are worried that they have a target on their back at current prices. Says if the price doesn't move up strongly to more realistic valuations soon, they may not survive the summer as an independent entity.
Monty - sorry. You know I'm sensitive on that one, lol.
There is a big disconnect what is being used in FS and what the friggin "experts" are using to run their calcs. So many of em are so conservative, that many projects that should get financed, never will. And that in itself is bullish for commodities as supply simply can't meet demand if the "experts" use numbers that are so low that many mines never meet financial hurdles.
Lone - I was looking for producers, or better yet, near term producers. TIA
Acid should begin to get a bit easier to get for ZMR as Cananea ramps back up. Grupo recently said they were at 100% of SXEW production, but only 30-40% of sulfide production. And it's the sulfides that produce the acid. But the union is still on strike, despite losing the court case, so could take a while to get back to full production.
In any event, looking at the FS, ZMR's acid consumption isn't huge. When I did the calcs a few months ago, I remember calcing ~$0.25 lb additional if current $300 tn prices remain. But acid should drop as more supplies become available. And it hardly matters if Cu stays above $4.
ZMR is breaking out. Finally seems to have the big seller off their neck.
Anyone know Tin producers to invest in?
"Similar to what I saw with TAM where they used high zinc price to make the economics look better."
Huh? They used then current zn prices ($1.30) and $0.80 lead. Zn is currently $1.05 and Lead is $1.30. Zn price lower by $0.25. Lead higher by $0.50. Almost a total wash as their Lead production is about half the Zinc. Lead is in deficit. Zinc is about balanced and set to go into deficit just about the time Pine Point goes into production.
IRR remains about 100% at current prices (and that's paying 100% for the mill and infrastructure out of one deposit). Since their first deposit is only a year long (but have the updated FS coming showing another 5+ years of big tonnage production coming soon), it made zero sense to run the economics on anything other than current prices.
TAM remains significantly undervalued. The fact that some suggest that they used "high zn prices to make the economics look better" show what a crappy job of explaining the story they've done.
TAM has 8 billion lbs of metal in the ground in a greenfield location. And has released some of the highest grade and longest intersections of any zn play in the world in the last few years (surpassing the extremely high grade Dairi mine). And yet carries a minuscule $40MM mc. That's less that what rank zinc exploration plays with nothing but a story command.
Centenario Copper - anyone following this play? Will be in production later this year with 66MM lbs cathode copper production in Chile.
Running the numbers, it looks to be trading about 1.5x '09 cf.
Similar valuation as Globestar, but without the Ni and about 4 months behind.
Raymond James has a $12 target - trading about $6 now.
FMA still takes the valuation cake on a cf basis.
Nord probably takes the cake on NPV basis.
I look at copper plays and see ridiculous undervaluation across the board. Teck buying Global Copper for a decent valuation (about $0.04 inferred) should set the tone. But what kills me is why Teck would buy late stage exploration plays rather than producers or near term producers. Where is the value added in that? Many of the junior producers are trading at less than cost to build their mines, let alone a premium for their immediate cash flow.
If I had a billion $, I'd buy up 3 or 4 juniors and turn em into a midsize and get a huge revaluation (perhaps 2-3x). Easy money for some deep pocket with a bit of foresight.
ZMR. A trap? Trading ~1x '09 cash flow? Pluheeze.
NORD - what are you yammering about? THEY FINANCED THEMSELVES INTO PRODUCTION - that's why there was dilution.
Sometimes I wonder why I even bother discussing these plays.
Nord - the stock has gone into virtual hibernation while waiting on permits. I don't think it takes much more than patience to see a very nice return. Like you, I've found it difficult to get any fills without buying at the ask. I've had a few thousand filled in the low $0.80s, but it takes forever to get a fill.
65MM shares os. 25MM lbs/yr production at ~$1.30-$1.50 cash costs (higher than the FS due to rising acid costs). At $4, that's $2.50-$2.70 lb cf = $62.5-67.5MM. IRR is approaching 150% at $4 Cu (127% at $3.55)
Market cap is ~$55MM. Trading well below 1x '09 cf.
This year they should announce an expansion to ~40MM lbs/yr at very low capex of around $15MM. (Adding 1 lb of capacity for $1/lb is about 1/3 the typical cost of installing greenfield capacity). IRR would be astronomic at current prices.
Something has to happen with all these small base metal producers. They are unbelievably cheap and it makes no sense. Mid size producers can't afford not to buy these guys out - they can't bring on new production of their own at anywhere near as cheap as they can buy an existing producer - this has to be one of the strangest times in the sector - to see existing producers trading near (or below in some instances) this year's cash flow.
It is a no brainer to buy these juniors up. Yet nobody is doing it - I am astonished how crappy most of the "management" teams are in the BM sector. How can they fail to take advantage? It's so friggin obvious.
Mart Resources (MMT) just about to start production in Nigeria (after two years delay). Will start with one zone at 2-3K bpd and test reservoir characteristics for a few months, then go to full production around 5-7K bpd. MMT owns ~50%, but gets reimbursed for capex upfront, so should see a wall of cash coming in the door this year.
They are now self funding and can finally put their two company owned drill rigs to work on their tasty looking targets that have proven reserves but were never produced.
300MM shares os and $0.58 share price. At $110 oil and light sweet crude, they should finally see some market interest.
Sold all my $0.88 shares - flipped em all over $1. Nice 15% trade for a few days work.
EPM is a very reliable trader, but a lousy buy and hold. The $0.88 shares I just picked up, adjusted for inflation and fx, were virtually the same price as I paid 3 years ago. In the meantime Cu tripled and Au doubled.
EPM - nothing on Stockwatch yet, so probably no financials released. I think it's just buyers coming in at over sold levels.
I sold most of my $0.88 shares today for a nice gain. Nice ~$8K profit for a few days hold. EPM has been a very reliable trader for years, usually for ~5% moves. This was perhaps the easiest and lowest risk flip.
EPM - all of the negatives are priced into the stock already, so now is the time to start a position.
But EPM still isn't the cheapest around - FMA is - trading around 1x cf which is table pounding cheap.
GPR - take your profits. 1.75MM oz guidance is below where they were supposed to be 2 years ago. But for Ag doing well, they'd be in deep trouble, as cash costs are well above their guidance.
I don't see much value in GPR. Say $10 oz cash costs (vs $11+ in '06 and '07) and $18 Ag (being optimistic), that's $8 margin x 1.75MM oz = $14MM cash flow.
Then deduct interest expense, ongoing capex, G&A and DD&A and taxes, and they will lose money one more time this year.
GPR is a profitless miner and unlikely to ever generate many earnings. $11 oz cash costs are exceedingly high and they've been unable to get anywhere close to their original $4-5 guidance.
With current mc over $105MM, I see little reason to want to own them.
Be careful with cobalt - it's a very small market and there are a lot of projects coming on line with big production. Current world production is btw 50-70,000 tpa. Katanga alone plans to bring on 30,000 tpa and is already in production, with big ramp up in the next 3 years. And there is at least another 100,000 t expected to come on line in the next few years. Cobalt is in shortage now, but not for long. I'd avoid any primary Cobalt plays, like Caledonia or Formation Capital
Nord - just very low liquidity and the market makers keeping the spread as fat as possible. Not gonna move until they announce their expansion plans to 40MM lbs or get the permits to assemble the crusher/conveyors.
Moly Mines - big news over the last few days and prices have rebounded from grossly over sold levels.
Press reports are revealing MOL is in late stage talks to sell an equity position in their very tasty Spinifex Mo deposit in Australia to a Chinese company.
MOL will produce 24MM lbs Mo and 24MM lbs Cu/yr. That's over $500MM cash flow.
Currently have $70MM in cash and an equity infusion from the Chinese could give em enough cash to satisfy the equity portion of their $1.3 B financing. If not, it could be very close.
I am modeling 100MM share os post financing assuming the Chinese buy in for a big equity kicker of ~$150MM. Assuming 80% ownership, that implies $400MM net cash flow, or $4/sh cf. With 5x cf multiple, that's a $20 stock. Trading at $2.25 at the moment.
The upside looks very bright. I could be off 100% and it still looks like a 5 bagger from current prices.
I doubled up in the last week. MOL is one of my biggest holdings now.
FMA is within a day or two of finally releasing 43-101 report. Will finally let them give cash costs and guidance.
Trading below their $1 IPO and about 1x '08 cash flow.
FMA is the most mispriced producer I've ever seen. 1x next years' cf is what I used to think was mispriced for a preproduction junior. To find a producer trading so cheap simply shows how silly this market is.
Jennings has a $2.15 target assuming $3.10 Cu this year. At current Cu prices, that implies $3+ target price. Trading $0.90 right now.
QUA - agreed. VERY cheap for a producer. I see earnings around $75MM in Q1 - blow out - all things went right for them - record production, prices and will see upward revisions based on final settlement prices for Q4.
If QUA can string together a few quarters like this, they will see big analyst upgrades. The problem is that they are a skarn deposit and grades (and thus production) are variable. But this Q's production numbers seemingly came out of nowhere - 38MM lbs is way above past quarterly production numbers - interestingly, recoveries were best ever - and if that continues, that bodes very well for them.
QUA has consistently under promised and over delivered. Time for the market to give em credit and price em at fair value (like $35 share as they deserve) instead of a huge discount to the peer group.
Great Panther - released Q1 production.
With the continuing improvements in the mines and plants, the company anticipates that quarterly production will continue to climb throughout the remainder of 2008 such that the first quarter production is on target to meet or exceed the annual goal of 1.75 million silver equivalent ounces.
In '06 they were originally "supposed" to produce 2.5MM oz. In '07 they were "supposed" to produce 4MM oz. Now, "guidance" is only 1.75MM oz??
When I looked hard at GPR in '06, they were saying up to 10MM oz/yr by 2010. By then, it looks like they'll be hard pressed to meet their original 4MM oz/yr '07 guidance.
Liberty - LBE - Taking a gander at em again now that the price has come back to some semblance of reality.
They won't reach commercial production on McWatters until year end. As such, the $19MM capex (less $6MM preproduction revenue - net $13MM) offset by the 200 tpd or about 2.2MM lbs payable from Redstone (with $8 lb cash costs = $4.50 margin at $12.50 Ni) = $10MM. That should leave em with a ~$5MM loss in '08 when G&A and interest expense are added in, but excluding any other costs, including capex to put Hart into production.
Only in '09 will they see $ from McWatters and positive cash flow (and perhaps some earnings), and then only until April '10 when McWatters is exhausted. That cash will be needed to fund Hart into production - they'll need to drill up Hart and put out another FS and raise funds. I wonder what that will cost? Another $20MM?
Seems they are on a treadmill of small deposits that never allow them to see serious net cash flow, let alone profits.
Thoughts?
I'm loading up on MOL. $1.55 with ~$1 share in cash and ~$1B NPV - mine all set to begin cstr as soon as they finance - sold off hard on news they had to delay financing for a few months while the credit markets stabilize. Just announced resources doubled.
Big Moly mine in WAustralia - 24MM lbs yr plus 24MM lbs Cu. At current Mo prices, will generate over $500MM in cash flow/yr. Current mc is about $120MM with $70MM in cash. All contracts/long lead time orders in place. Need last permit (due in the next month or so) and then financing of around $1.3B (60-70% debt).
Great entry imo.
Bought back my EPM at $0.88.
And yes, I own about 12-15 juniors and trade a few others when I see opps to flip.
Wished I owned more coal plays - they are on fire.
AVM could get taken to the woodshed if (when?) the DRC takes a big chunk of their properties and revises the tax/royalty scheme. AVM seems to be dead center in the DRC crosshairs due to one of the most generous (or abusive depending on which side of the table you sit at) royalty/tax regimes in the DRC.
I think Katanga/Nikanor is better value, especially due to their very big Cobalt production. But I wouldn't own either while they are renegotiating.
And yes, why head to DRC when Canadian/US plays are significantly undervalued anyway? Some are cheaper than the Congo plays and that's an astounding thing.
EPM - I wished I never heard of them - bought them originally 3-4 years ago at US$0.60. Have traded em regularly. My last trade was last week - bought before earnings and sold immediately after - my first losing trade.
There are some big problems - the late financials are the least of their issues in my mind. Commissioning is taking a year - they were "supposed" to be commissioned in about 3-4 months - so there are big issues with the mill that aren't easy to fix.
And EPM isn't particularly cheap - $300MM market cap plus debt. Going to be interesting to see if they can scrounge up enough cash to meet interest payments and keep the lights on while they ramp up - if not, welcome to another round of needless dilution.
They hedged their gold at $574 - I think about 1/3 of production per year for the first few years - their hedge price shows how long ago the mine was supposed to go into production. If we are to believe them now (always been a mistake in the past), they will be two years behind their original schedule - and they've only been talking about restarting Varvinskoye for the last 4.
LBE - Less than 1MM tonnes of 0.94% is all?
And what is the capex needed to bring on those 14MM lbs? $30MM?
I don't understand how LBE manages to keep such a lofty valuation. Chronic over promise, under deliver. Last year they couldn't even get close to 200 tpd, despite their claims they were producing that much back in '06. And they are so far from their promise of 1500 tpd in July '07, it's a joke.
I've long lost track of how many shares and debt they have now.
First Metals - table pounder imo
Financials out.
Will declare commerciality as of March 1. Averaged 1400 tpd in March vs full rate of 1500 tpd - excellent progress for a start up.
Loss last year ($2.9MM) was very low for a start up operation with only 1 month of revenues. And that will be offset by another ~$900K when final sales prices are applied ($2.98 provisional vs $3.55 actual).
At current tonnage, they are producing over 2.5MM lbs/mo. And with cash costs expected to be in the $1.80 range, they should be cash flowing $4.5MM/mo or ~$45MM in '08. If they ramp up to 1500 tpd average, there's even more upside.
Current os share count is 39MM, but will soon rise to about 43MM when they issue 10% to the property vendor when commerciality is declared. With 43MM os and current $0.95 share price, that's $41MM mc.
I've never seen a producer ever trade less than 1x cf before - never.
Table pounder buy imo.
Call up Dick Gusella at Connacher (he'll take calls from anyone) and see what he thinks of STP's "independent" consultant's assumptions about costs to get into production. I'll bet dollars to donuts he'll give a hearty laugh over how ludicrously outdated they are.
CLL is one of the lowest capex cost (if not "the" lowest cost smaller oilsands producer). Their actual costs are ~300% higher than what STP is telling the market to expect. Plug realistic numbers into STP valuation metrics and it's clear why few want anything to do with STP, despite "analyst" price targets to the contrary. And it's not just STP that is seeing little interest - all the wannabe oil sand plays suffer from the same realities.
My advice is to go take a look at CLL actual costs and then compare to the "estimates" STP is putting forth. Methinks you'll not be pleased at how the economics change. To me, it is so obvious, that once I read what STP was "estimating", I immediately blew them off as a potential investment.
From my perspective, lots of land with marginal economics doesn't equal large valuation. In fact, I see just the opposite. I see lots of capex needed to support drilling and thus lots of dilution just to get to a point of starting to have an asset worth anything more than the cost of the leases. Right now, they are worth little more than what they paid for the leases, plus the cash in the bank. I don't know that number, but I suspect it's lower than current mc.
In any event, I have never been a believer in resource plays. I've never understood the rationale for wanting to own them other than as some sort of annuity play with low returns. I'd much rather spend my time investing in fast growing oil plays and reaping near term rewards than waiting half a decade before the first dollar rolls in from an oilsands play. Maybe that suits some portfolios and investing philosophies, but not mine.