Chintzy's great post connecting some dots:
30 Billion Market Cap Doesn't Make Sense? -
chintzy
2 stars March 04, 2017 02:39 am
I recall someone scoffed at the idea of a $30B market cap recently. Not writing with any wrath as I tend to think it preposterous as well, it is just too high for a mining co. and it doesn’t make sense. But here are some points that really make you think:
I’ve stared long and hard at that Cu chart that’s been circulating which shows a supply deficit beginning in the next couple of years and then becoming seriously acute next decade just when copper is becoming more essential to human economic life; EVs, alternative energy, clean air, infrastructure build-outs etc. Not unreasonable in my view to envision Cu in the vicinity of $5 and K&K free cash-flowing $4/lb. Think hard about Cu becoming scarcer just when it is becoming more vital and then major entities such as China, India, US, Germany, auto manufacturers competing to strategically stockpile. Increasing demand meets decreasing supply. You either outbid the other guy for scarce supply or you live without it. What does that do for the price of Cu? And as Cu is priced in USD what about a debt-triggered currency crisis - Stephen Leeb has alluded to a time in the next decade when disgraced fiat currency will not be accepted in exchange for vital commodities such as Cu. We could see Cu going a good bit higher than $5 but let’s keep it at $4 profit per .lb and this is also supported by Paul Gait’s analysis.
Chilean production has begun a long slow painful decline with lower and lower grades requiring massive sustaining capital just to maintain status quo production and Grasberg seems to be over the hill and facing host country problems. I can’t defend it really well but I have a hunch that K&K production will be hitting an interim sweet spot in the years 2019 to 2024 or so when the mines (Codelco/Grasberg) that are presently supplying the world economy falter badly and before mines like Oyu Tolgoi and expanded Olympic Dam begin to contribute 2024 onward. Peruvian production has some potential but is likely overstated and will be restrained by problems inherently Peruvian: labour, no social license etc.
in the cc RF says a 4MTPA operation at K&K yields 200,000 tons and you can multiply up from there to as high as 20MTPA. Let’s aim high but short of 20. 12MTPA yields 1.32 billon .lbs per year @$4USD /.lb = 6.86 billion CAD X .4 for IVN’s share gives you 2.75 billion CAD FCF. Put a 10X multiple on that for a 27.5 billion CAD market cap. Say you have to wait 4 years until mid-2021 to build up to a 16MTPA operation which gives a free cash yield to IVN of 3.66 billion CAD. Ursus B suggests that the right mining co. in the right market can get a 20X multiple. A more conservative 15X multiple on the 16MTPA operation gets you a market cap of 55 billion.
note a perfect storm scenario where IVN is processing 20Mtpa and producing the highest quality Cu in a desperately short world market at $5/lb. profit and a 20X multiple and you get a market cap of 114.4 billion.
apply limited thinking of 8MTPA, $3/lb. profit and a 12X multiple and you still get to 16.5 billion market cap/$21 SP just for K&K.
keep in mind massive exploration upside and RF’s mention of the possibility of more Kakulas.
let’s turn to Platreef and I’ve stared just as long and hard at the supply/demand forecast chart for Pt and noted the favourable macro trends for fuel cells, clean air etc. plus the wild card of investment demand in relation to the deterioration of fiat. With cash cost of $322/oz I don’t think it outlandish to target $1250/oz. free cash flow for each oz. of Pt equivalent (3PGM/Au basket) in 2021 when shaft 2 is lifting its max. 6Mtpa and yielding 600K oz. for .975 billion CAD X %64 attributable to IVN gives you 624 million CAD FCF and a 15X multiple for a market cap of 9.36 billion.
consider the four highly prospective target zones already identified for exploration upside, we have 48 square km of unexplored prospective ground beyond these target zones and the project as delineated so far comprises only %10 of the property. I just don’t know when this exploration potential will ever be reflected in the SP. I confirmed last year with IR that they aren’t drilling at Platreef as it is a full court press focused on mine development and shaft sinking. So I’ve no idea when they might ever get back to drilling there, but they will some day.
say Kipushi goes into production in early/mid 2018 and starts throwing off huge cash flow contributing a billion or two to market cap and precluding any share dilution for the development of K&K and Platreef. Zinc over $2/lb.?
so you can begin to see how TA1 isn’t so drunk when he rants about $30-$40/share. What seems to me to be reasonable math leads us easily to a 20 billion market cap from K&K plus Kipushi and Platreef combining for an additional 10 billion. And there you have a $40 SP, just a matter of waiting a few years for RF to do what RF does.
I just listened to a podcast discussion among elite entrepreneurs the other day wherein one of them was talking about an indicator for big upside opportunity is when he hears people dismissing an idea by saying “it doesn’t make sense” and it can even be himself thinking that thought. He takes the view that they may be applying an incorrect, outdated, inappropriate model to a new idea and by further exploring he can determine if there is indeed a misapplication of a faulty model and hence an opportunity that he can position himself to exploit by developing and applying a more appropriate model. So with IVN a 30 billion market cap doesn’t make sense; we are not accustomed to comprehending that kind of valuation for a mining company. Up to this point in history our model thinking tells us it is absurd. Even as I have just set out a rational justification for such a market cap, I still remain skeptical that it will ever get there - it just doesn’t make sense to me. Are we/I applying an outdated model that is constructed in great part on the illusion of infinite prodigious cheap Cu production from Chile that in fact can not be sustained anymore and can’t be replaced? Does the current model fail by not accounting for the potential demand for metals driven by the technological advancement and ecological imperatives that are coming on the near horizon? Is the current model constructed to a good degree on our experience with massively debt-burdened mining companies while IVN might never have debt?
So any corrections to these assumptions are welcome as I really don’t know much about mining - I’m just a duffer who bought 60K at 62.5 cents - but I can envision the onset of favourable macro trends and spot and outlier company then capitalize by adjusting my model thinking just as I did in Dec. 2015 when I bought my chunk with no intention to sell until 2020 at the earliest. At a plausible $15SP/12 billion market cap my 37,500 original investment will cash out at 900K - it should be interesting to watch.
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RE:$30 Billion Market Cap Doesn't Make Sense? -|
jeff77d
s March 04, 2017 04:55 am
Hi, nice post. And i completely agree. I think 30 to 40 cad is reasonable in 3 to 5 years. In 5 to 10 years I think it will reach 100 cad. The market cap comparsisons are irrelevant, because there isn't any other mining company that is comparable. Like I said yesterday, this will get a valuation more like the royalty and streaming companies. Because of the very low cash costs, the low capex and the exploration potential. Tworemarks l would like to add. The 322 $ cost for Platreef is for life of mine, RF stated numerous times, they are going to mine the best stuff first, so it will be much lower the first years. Also the Chilean mines are not only facing diminishing grades, but also enormous problems with getting water to the mines.
in the Kakula cc RF stated Kakula will have 80% operating margins, and that is at 3$ copper!
