Mohnish Pabrai says to look for businesses with "low risk coupled with high uncertainty." Notwithstanding his travails as a mining investor, I think MMC fits the criteria relatively well.
Having pored through the debt restructuring and the JPL report (more on my takeaways in a second post), I've concluded that MMC is facing a binary outcome: (1) being a stand-alone company in its current position or (2) becoming a JV with Shenhua. Each person has to assign their own probabilities to each scenario -- recent word on the street is that a handshake TT agreement coming out of the One Belt One Road meetings in Beijing is in place (although we've heard that rumor at least twice before, and it's proven false on all prior occasions). Nevertheless, I'd personally be comfortable assuming it's a 50/50 proposition going forward.
Stand-Alone Prospects (DOWNSIDE SCENARIO)
As a stand-alone company, the post-bankruptcy MMC is a price taker totally levered to HCC prices. Even though it has decent assets (a well-situated mine with ample reserves, a sizable CHPP), it is hampered by significant buyer power, poor transit infrastructure to its end market and forced competition with an irrational, large-scale state actor (even now, despite MPP oversight, the shenanigans at ETT apparently continue).
If you assume a frontier market 3x multiple on $157M in FY18 cash EBITDA less cap ex (calculated with the assumptions below), you get an FY18 enterprise value of $471M USD and an equity value of $0.11 HKD.
-- 10.6Mt ROM @ 51% HCC yield (no thermal yield due to transport capacity constraints)
-- 5.4Mt HCC (below downside scenario in JPL report) sold @ $85 ASP (approx. 40% discount to Platts Australia HCC futures and more in line with base case scenario in JPL report)
-- $(49)M fixed cash cost of sales and $(37)/ton variable cash cost of sales contributing to total $(46)/ton cash cost of sales (in line with JPL report)
-- $(30)M cash SG&A
-- $(25)M maintenance cap ex (mandated by restructured debt covenants)
-- $(425)M total debt / $100M cash on balance sheet
Joint Venture w/ 49% Shenhua Ownership (UPSIDE SCENARIO)
Joined at the hip with Shenhua in a joint venture now spanning the entire Tavan Togloi coal complex, the post-bankruptcy MMC is almost magically de-risked. Its assets are now upgraded to superb (well-situated mines with massive reserves, a CHPP double the previous size and a direct railroad link from the mine mouth to China's eastern coastal steel manufacturing end markets). With an expanded addressable market (coming at Australia's expense) and the Chinese government as its partner, MCC's pricing power has improved, and buyer power has tempered. Most importantly, with TT now under joint venture control, irrational and counterproductive large-scale domestic competition now ceases to exist.
If you assume a more generous 5x multiple on $551M in FY20 cash EBITDA less cap ex (calculated with the assumptions below), you get an FY18 enterprise value of $2,082M USD and an equity value of $1.41 HKD.
-- 30Mt ROM @ 60% HCC yield and 20% thermal yield
-- 18Mt HCC sold @ $100 ASP and 6Mt thermal coal sold @ $30 ASP
-- $(150)M fixed cash cost of sales and $(30)/ton variable cash cost of sales contributing to total $(38)/ton cash cost of sales
-- $(90)M cash SG&A
-- $(120)M maintenance cap ex
-- 51% of operating economics accrue to MMC shareholders
-- FY20 figures discounted back 2 years @ 15% annually (to 2018)
-- $(620)M total debt and preferred equity / $400M cash on balance sheet
If my numbers are in the ballpark, at last night's closing price of 0.168 HKD, the market is telling us that there's less than 5% chance of the upside scenario happening. If you think (as I do) that the odds are closer to 50/50, fair value would approach 0.76 HKD.
Said another way, we appear to be looking at 0.06 HKD of downside versus 1.25 HKD of upside. I'm going to take those odds.
