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Debtholders being pleased is irrelevant to the point about the perpetuals.
Look, you can't have it both ways. Either the debt is paid off and the perpetuals come due (and you have to include it in the calculations) or the debt isn't paid off, the perpetuals never come due and the common equity goes to zero.
MMC's margin of error is razor thin when they can only generate $13M of cash after financing costs in a half year of enjoying $140/ton average prices. They need to be generating at least 5x that amount to be in a position to pay off the debt. And we have no idea how long the $140/ton average prices will last.
China could cut MMC's throat tomorrow, either on price or on volume or both.
The perpetuals become due after the senior debt is paid off. So, if it never comes due, that means that MMC can't pay off the senior debt. And, if that is the case, the stock will soon approach zero.
The stock only has value today because of the chance that MMC can do 6-7M in annual volume at a $70 per ton gross profit. They didn't come close on either metric in the first half of 2018 or the first half of 2017, but hope springs eternal.
I'm saying that your statement that earnings are higher than the stock price is demonstrably and factually incorrect. And I'm saying that earnings are irrelevant to the real story here, which is meager cash flows in relation to huge debt.
Of course...you need to throw out last years interim EPS due to the restructuring. But still......EPS is higher than current share price.
I don't think so.
When MMC says 0.29 cents, the company literally means 29/100 of a cent.
MMC just reported $29.8M ($29,898,000) in profit for the first half of 2018.
MMC has 10.292B (10,291,767,865) shares outstanding.
$29.8M divided by 10.292B is $0.0029. Or, said another way, 0.29 cents.
Stock price in USD is $0.025, which is 8.6 times more than what they just reported in first half earnings.
In any case, I don't think comparing stock price (equity value) to earnings is the right way to look at things because it ignores the suffocating debt burden and the onerous capital expenditures of the company. We should really be comparing the enterprise value (equity value plus debt value) to unlevered free cash flow. That comparison still looks horrible.
MMC just reported $65.3M in unlevered operating cash flow for the first half of 2018. Capital expenditures were $(34.6)M. That makes unlevered free cash flow for the first half of 2018 $30.8M. Let's double this number to get a rough full-year number (one could argue that the second half will be higher, but we should know by now that MMC always misses optimistic projections -- and, right on cue, MMC tells us in its interim results presentation that floods from heavy rains limited use of the border access road in July and August 2018). So, $61.6M in full year unlevered free cash flow is a decent guess.
MMC's equity value in USD is 0.148 HKD / 7.85 x 10.292B which is $194M.
MMC's net debt is $455M
MMC's perpetual equity is $76M
Total enterprise value is $194M + $455M + $76M = $725M
$725M divided by $61.6M = 11.8
In the current de-risking landscape, 11.8x unlevered free cash flow for a super-risky coal producer run for the benefit of its oligarch owner in an ineptly-run, landlocked, third world country does not look cheap by any stretch.
On the bright side, at least we can finally do this f@cking calculation. It's only taken MMC a year to actually accrue a modicum of cash on its balance sheet.
Always bet the under with MMC.
Looks like pretty formidable overhead resistance at 0.17 HKD.
Could this article have driven some of the surging buying volume in the past couple of days? The date doesn't seem to line up, but I wonder if it happened to be available to subscribers ahead of time.
https://seekingalpha.com/article/4197621-afc-special-report-mongolian-mining-corporation-one-best-ways-play-mongolian-economic-growth
And, without fail, here come the sellers ...
Had been up over 30. Now back down into low 20's.
I would have expected this kind of move back in mid-July when MMC released its Q2 volumes. Don't really understand today's price action.
Over 20 million shares already traded in HK tonight.
Temporary short squeeze?
Umm, volume might have picked up a tad.
I wonder what could have inspired today's interest? More importantly, is it sustainable? Past history suggests not.
Up .011 HKD now. Would be nice if it could hold the .13 HKD handle. Volume is still pretty meager.
(For the record, I fully expect the stock to trade back to the mid-to-high .11's HKD in short order. I've learned the hard way that it always make sense to expect the worst with this f'n company. And, just like that, the .13 HKD is gone. Of course.)
At least they aren't selling hand over fist as has been their recent tendency.
975 is flat in HK on low volume. Is there a lag effect from the broader index weakness?
Are you closing your position?
Why are you ignoring all claims on the company's cash flows -- namely the debt and perpetual equity -- in your calculations?
MMC isn't nearly as cheap when you take into account the entire capital structure.
That being said, I'm astounded that the stock has barely moved on the release of the Q2 HCC sales number.
I think we are all collectively missing something significant here.
Those seem like pretty solid numbers. Now, I fully expect the stock to trade 20% lower.
Could this be why MMC is selling off? Because Tavan Tolgoi will have its own rail and MMC will still be stuck schlepping its coal via truck?
Although fewer Tavan Tolgoi trucks on the roadway would be the silver lining.
Why do you think the stock has traded down this far, if not for the AGM resolutions?
Stock getting hit in HK tonight. Down to a new 52-week low with 10M shares traded. It actually traded down 10% a few minutes ago, but rebounded a bit at the close.
As always, the stock has quicksand for a floor and titanium for a ceiling.
I think the significant recent stock weakness might be explained by the passing of a resolution at the AGM to allow the company to increase the share count by 20%. Market is probably correctly interpreting that as a foregone conclusion.
Oddly, authorization to repurchase 10% of the shares was also passed at the AGM. Before you get too excited, a third resolution passed authorizing the additional issuance of shares after any repurchase.
Corporate governance is not alive and well in Mongolia.
I can't recall seeing such a massive disconnect between on-the-ground fundamentals and near-term price movements.
Could OMOLIVES and mhsg really have the jump on hundreds of HK traders?
My guess is that the Chinese coal import figures are dubious. I don't know how hard it would be to build up the import number by adding up coal exports from other countries (e.g., Australia, Indonesia, etc.). I suspect that such an exercise would shed light on how much China cooks the books, so to speak.
Also, it now seems likely that MMC's weakness after the Q1 results-related sell-off is strongly related to Trump's tariffs on steel imports. China apparently only represents 2-3% of U.S. steel imports, but that number only shows steel directly imported from China to the U.S., as opposed to steel imported via another country (like South Korea, for example).
Cashflow/generation:
At the start of 2017, this was a company to be restructured and a mine essentially on care and maintenance. They paid +/-$35m in restructuring fees that were a one off. Working capital increased $80m as they ramped up to 8-9Mt (?) ROM (=4Mt HCC product) from negligible amounts. This $80m also included the pay down of overdue payables to the mining contractor, which will hopefully be extinguished in 2018.
So the debt restructuring fees should not repeat. The working capital impact should be less. Overdue payables to be paid off this year?
$7.5m of debt due this year, $23m next year and then nothing for close to 3 years.
Hopefully 1H results released in August will back this up
Re oxidization of coal, this occurs after 3 to 6 months. For moisture, they are trucking this through the Gobi desert and lack of moisture is more of an issue – if you sell with 10% moisture you want them to pay for water rather than coal. I reckon they had a stockpile however far larger than 200kt at the end of Q1 as production was 400kt higher than sales last year based on their Operational Updates.
Q2 exports & sales to be a record high….
Great post. I mean that sincerely, not being sarcastic.
How do you feel about management?
My concern currently is missing data ..be it...inaccurate data. As such, my concern is with regards to missing coal import data from another nation besides Mongolia. The April and may numbers do not seem to add up...so where did that coal come from? At the least....where is the coal from April that didn't come from the seaborne imports vs Mongolia April export numbers. The numbers are not matching! Where is that rough 6 million tons from?? Same with the other Months(Jan/feb) ... where is it coming from?
Could it be from North Korea? That could also be overland since it borders China (just like Mongolia), and might have represented an inducement from the Chinese to get the North Koreans to the negotiating table (not that the Summit actually produced any meaningful negotiations).
Also, North Korea is not that far from Tangshan (closer than Mongolia, actually).
Some new data starting in March:
China march coal imports @ 26.7 million tonnes
China seaborne @ 23.2 million tonnes
Mongolia March export was @ 3.44/3.5 million tons(3.445)
These numbers are from three different and completely separate sources. Now onto April and May... which needs to be clarified...eh?...because I see discrepancies...be it data problems.
The March numbers are accurate...and very interesting to say the least.
Is it possible that March is just an anomaly where the numbers actually fit together nicely? Is it possible that the China coal imports number is distorted by the Chinese government to present a more robust view of the economy?
I can only imagine how excited your posts will become if MMC shares ever actually start going up.
This company reminds me so much of ...
!yippe ki yay'!
Is that in regards to tonight's HK volume or something else?
No..the most extreme circumstance is running @ 50% capacity. That's my concern. You have a wash plant that needs to run @ 75% currently. At the least.....60%. That is my concern. They had 200 thousand tonnes in surplus......and that equates to a minimal of 1,100,000 tonnes needed to be sold this quarter. They need to regain market share..of which,,they currently sell 75% of washed coal...and a low baseline of a rough 8% total coal Mongolian exports. That needs to rise to a minimal of 10%....again minimal! I'll stay at that for now...but I got much more..:)
As an aside, do we need to consider degradation risk with MMC's stockpiled hard coking coal? Does it need to be discounted in price after some period of time?
Coal begins to lose energy almost the minute it’s mined, through a variety of means.
Upon exposure to the atmosphere, a slow oxidation process begins, essentially burning away heat content. Once the coal is handled—through loading, shipping, unloading, stockpiling, and reclaiming—it will lose energy from dust and fines at each step of the process. In addition, moisture is typically gained during shipping and storage, which results in a variety of negative impacts at the power station. While the coal lies in storage, the oxidation process will continue, accelerated by exposure to the elements, potentially leading to spontaneous combustion.
Although most coal power station personnel understand that these three mechanisms—loss of energy through oxidation, dust and fines, and added moisture—will affect their coal stockpiles, the magnitude of the degradation is often unknown. This article explores the root causes of each of these energy loss pathways, how they affect a power station, the magnitude of the degradation that can occur, and methods for reducing both coal mass and coal quality losses.
http://www.powermag.com/who-moved-my-btus-the-pitfalls-of-extended-coal-storage/
Nope, neither source is named Nick. I think Nick's crystal ball cracked a while back, unfortunately.
As far as the "gossip" allegation, where there's smoke, there's fire, especially when it comes from intelligent sources who have been on the ground and have done their due diligence. And I know them in person, not via the internet.
Your spirited defense of OJ notwithstanding, where's the proof that he's looking out for minority shareholders? It's not there because it simply doesn't exist.
But you're still missing the broader point. It's been a year since this company re-emerged from a bankruptcy restructuring. And they still can't generate cash.
By the way, MMC's run into the .30's was awfully short-lived and in no way impugns the credibility of folks who were recommending a sell in the .20's. Based on the current stock price, their calls (made independently of one another) look pretty sound in retrospect.
The skimming et al other similar ills you mentioned are just conjecture.
Yeah, you keep saying that.
Unfortunately, my conjecture is based on the word of two trustworthy sources who have been on the ground in Mongolia -- one was an MMC investor who has met with management multiple times and the other is a coal industry consultant based out of China. Neither one had any financial incentive whatsoever to lie to me. Ironically, both of them advised me to sell all of my MMC shares when it was trading in the 0.20's over a year ago.
If you have evidence to the contrary, I would love to hear it. Until then, my "conjecture" beats your unsubstantiated opinion.
Regardless, the broader point still stands ... where is the free cash flow in this story? Until it shows up, we shouldn't expect to see a re-rating of the stock price.
In fact, MMC stock continues to trade lower and lower. I think the stock is at 18-month lows right now. When will this dead cat bounce?
I think the big issue here, despite the headline HCC sales figures, is that MMC has never in its history demonstrated an ability to convert HCC sales into free cash flow for the benefit of minority shareholders (since its greedy majority shareholder skims off the top) in terms of paying down debt, buying back stock, issuing dividends or simply accruing cash on the balance sheet.
Folks will point to EBITDA, but that is a flawed and lazy metric because it doesn't account for working capital effects.
Given that there is a big slug of MCC debt coming due in a few years, one can somewhat understand the market's skittishness. Now add to that bad fundamentals in the form of huge buyer power (China), inefficient transportation, a bad management team and a corrupt, jingoistic and stupid government of Trump-esque proportions, and there you have it.
Not being sarcastic at all. It was great fundamental research connecting all of those dots between China coal imports, China seaborne coal imports, Mongolia coal exports, etc.
As far as when the market will start to read the tea leaves, I hope the answer is closer to soon than to never.
Great fundamental research!
I deployed some of the proceeds from the VTSI sale into WTTR after reading the following writeup on Seeking Alpha.
https://seekingalpha.com/article/4179703-select-energy-misunderstood-deeply-undervalued-energy-franchise-wide-moat
In the spirit of full disclosure, I was one of the "foolish" sellers who fishhunter has been cursing over the past couple of days.
I entered the week with just under 12,500 shares at an average cost of about $4.42 per share (which I bought back in August 2016). On Wednesday and Thursday, I took advantage of the increased liquidity coming ahead of Virtra's inclusion in the Russell Microcap Index to completely exit my position at an average selling price of $5.30 per share or thereabouts. I saw the price move on the basis of the index change as not being grounded in the fundamentals of the business. Ultimately, I ended up with something like a 10% annualized return on investment with my VTSI shares. I can't say that I'll be taking any victory laps with that kind of performance.
I bought into Virtra nearly 2 years ago thinking that I had found a true gem and a long-term compounder. To me, the company seemed to have a long runway for revenue growth, some attractive competitive advantages (e.g., return fire, scenarios, favorable law enforcement word-of-mouth, etc.), a superb business model with high returns on invested capital and strong free cash flow generation, and was run by an owner operator (with meaningful skin in the game) who had an excellent track record from 2008-2016.
Over the past couple of months, I have grown increasingly dismayed by the decision-making of Virtra's leadership. Ultimately, I decided that I just did not trust that Bob would steer the ship in a sufficiently shareholder-friendly manner going forward. The list of things that gave me serious pause in descending order of importance included:
1. The prevalence of what I perceived to be fundamentally more attractive alternative stock investments
2. Bob's prioritizing buying back his and Matt Burlend's in-the-money options over buying back VTSI shares in the open market, even when VTSI shares fell to very attractive valuations
3. Bob's repeated claims of never being more confident about the business ahead of posting a very poor quarter immediately after the OTCQX uplist and ahead of posting two very poor quarters immediately after the Nasdaq uplist
4. Bob's failure to either preannounce or signal ahead-of-time weak Q4 2017 and Q1 2018 results
5. Bob's mealy-mouthed conference calls largely filled with evasive non-answers, generalities, cheerleading and other pablum
6. The narrowly-approved stock compensation package for executives and insiders
7. The slow pace of new product development and the slow traction associated with Virtra's military weapons simulator sales
8. The decision to impair the Modern Round investment a few months after committing additional funds to increase Virtra's Modern Round stake
9. Bob's poor track record in selecting I.R. reps. I didn't especially trust the guy who preceded Hayden
10. Virtra's less-than-ideal results in the Beneish M-Score for earnings manipulation in 2015, 2016 and 2017
The decision to sell was not made lightly, and it isn't lost on me that I sold my position ahead of what should be strong Q2 and Q3 results for the company. It's entirely possible that VTSI shares take off from here. If so, you can thank me for being a reverse jinx. I won't begrudge the reversal of fortune of fellow suffering VTSI shareholders. Obviously, my opinions are my own, and you should take them with a grain of salt.
I'll continue to keep tabs on the company, but likely won't reinvest until there's been a change in the board composition and/or CEO position.
P.S. I wouldn't lose too much sleep over the price action over the past couple of days. I'd be very surprised if the stock didn't rebound back to the mid-to-high 5's next week.
How many capitulations can one sh!tty mining stock attract in a year?
That is actually very good news...but yet once again...no one seeing it in HK.
At some point, we may have to admit that we're missing something. Markets can be irrational in the short run, but the duration of the MMC selloff is pretty alarming. Also alarming is MMC's abject lack of cash generation.
Emerging markets across the world are weakening on the backs of their currencies, fears of trade wars are mounting and western relations with North Korea (a noteworthy high-quality HCC supplier) are on the cusp of normalizing. None of these facts should be comforting to MMC shareholders.
Add to the mix huge buyer power, subpar transportation and logistics, an incompetent management team, a self-dealing, corrupt controlling shareholder and an ineffectual government, and you have all of the makings of a classic value trap.
I appreciate the connecting of the dots, but here's the rub -- this isn't sustainable.
All of this is likely temporary since the Mongolians have no desire whatsoever to allow the Chinese to take a stake in Tavan Tolgoi. What's to stop the Chinese from once again slow-rolling the border when they don't get their way in consortium negotiations X months from now?
Not sure you understood my post.
I got into the stock thinking the upside was north of $1 HKD and the downside was $0.20 HKD. This would have represented asymmetry in that the upside dwarfed the downside.
As it turns out, the upside is $0.26 HKD and the downside is $0 HKD. This unfortunately represents asymmetry in the reverse fashion.