July 15, 2011 - 6:21pm EST by
2011 2012
Price: 1.11 EPS $0.00 $0.00
Shares Out. (in M): 337 P/E 0.0x 0.0x
Market Cap (in $M): 375 P/FCF 0.0x 0.0x
Net Debt (in $M): -175 EBIT 0 0
TEV (in $M): 200 TEV/EBIT 0.0x 0.0x

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We are recommending buying shares of Baja Mining (BAJ CN).  BAJ is a Canadian listed mining company and its main asset is their 70% owned Boleo copper mine project in Mexico.  BAJ provides a unique opportunity to participate in a high quality copper development project that is fully funded through to production. 

The Boleo copper project is located in the Baja Peninsula region of Mexico.  The deposit was initially discovered in the mid-1800's and small mining operations took place on the property until the 1980's.  In the late 1990's, a mining company issued a feasibility study on a new mine at Boleo but the economics did not work due to low commodity prices at the time.  A few years later, the current management team of Baja took over the project and a new feasibility study was commissioned in 2007.  The new study not only utilized higher commodity price assumptions but it was also able to apply a newly endorsed process to handle the clay ore in the Boleo deposit. 


The Boleo mine currently has an estimated mine life of 23 years with average copper production over the first decade of 110mm pounds per annum.  This is based on the current reserves of over 2.5bn pounds of copper grading 1.33% (vs. many of the other copper development projects out there grading below 1%).  However, the company has a big enough resource that the mine will likely end up in operation for over 50 years.  In addition to copper, Boleo will also produce significant amounts of zinc and cobalt.  When these by-products are incorporated into operating costs as credits, the cash cost per pound of copper produced should be less than $0.40 versus the current copper price of ~$4.20/lb.  Production at Boleo is scheduled to commence at the end of 2012/beginning of 2013. 


Baja is currently exploring a few options to increase the value of Boleo.  Management is looking at the feasibility of adding a manganese recovery circuit which could provide a significant increase in NPV and they are also looking at the potential to expand copper production and mine life at Boleo.


One of the big differentiators with Baja Mining versus other junior copper companies is that their project is fully financed through to production.  The capital expenditure for the Boleo project will be over $1bn and financing was historically a large overhang on the relatively small company.  The project has been financed in a series of stages over the past couple of years and this was finally completed with an equity raise of $184mm at the end of 2010.  The first step in the process took place in 2008 when Baja sold a 30% stake in the Boleo project to a consortium of well-known Korean companies.  The Boleo joint venture then received an $823mm debt package from various banks in September 2010.  


On our conservative commodity price assumptions (copper prices of $3/lb in 2013 tailing off to $2.25/lb. in 2016), Baja trades at over a 50% discount to its NAV and will trade at extremely low multiples upon production.  When ramped up, annual EBITDA attributable to BAJ should be running at well over $200mm (current BAJ EV is ~195mm).  This is giving zero credit for the manganese circuit, which we believe could add another $0.30-0.50 to the share price.  We believe that Baja is a very attractive target for an acquirer due to the quality and scale of Boleo.  The Koreans could be a potential acquirer for the other 70% of Boleo that they do not currently own.  However, we also think that their 30% stake in the project would not stop another suitor from looking at Baja.  We believe a big reason for Baja's low valuation is that the story is relatively unknown among investors (especially among investors that will not look at a mining development company without financing in place).   We think the market will begin to take notice of the company as Boleo moves closer to production and management begins to communicate the story to a new universe of investors.           



There are the usual risks of commodity prices, mining operations, cost overruns, delays, etc.  There is also the risk that management decides to do a dumb acquisition. 


- Continued development progress
- Announcement on manganese JV/offtake
- Takeout
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