Griffin Mining GFM
April 07, 2022 - 4:45pm EST by
SwissBear
2022 2023
Price: 1.50 EPS .59 .59
Shares Out. (in M): 185 P/E 2.5 2.5
Market Cap (in $M): 278 P/FCF 2.5 2.5
Net Debt (in $M): -25 EBIT 125 125
TEV (in $M): 252 TEV/EBIT 2 2

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Description

Griffin Mining is on the cusp of what should be a huge breakout in earnings. The stock price should follow. It seems as if some of the larger shareholders of the company are growing impatient (and rightfully so). There have been changes made to the board, which should accelerate the timing for the stock to approximate its intrinsic value. This could happen as fundamentals align in terms of operations and the commodity prices.

This idea was written up a few years ago and it was believed that the company was on the cusp of receiving its mining permit to extract ore from the adjacent zone. This was an event that was supposed to be happening "within the next 6 months" since 2014. The company finally received approval to extract ore from Zone II at the beginning of 2021. Given the environmental shutdowns prior to the Olympics, however, the production never ramped up. This was because the company needed to have the development plan approved by the government. This is more of a formality and the development plan is expected to be approved shortly. As production ramps up, Griffin will become one of the largest zinc producers in China.

When the company increases its mine rate to 2,000 tons of ore, the earnings will grow considerably. Assuming $1.30 per lb zinc prices, the company's share of post tax earnings will increase to 76p per share. If we use current zinc prices, the earnings per share grow to GBP 1.3 per share. Assuming the company is for some reason unable to bring Zone II into production, the earnings at respective commodity prices are 22 and 40p, respectively.

We think that the shareholders brought in a new, independent board member, Clive Whiley, last summer in order to ensure that value gets realized here. It is time that the company begin paying a dividend or buyback stock as the cash flows ramp and there is no debt on the balance sheet to retire. Furthermore, the company could look to partner/merge with Chinese mining companies or seek to list on exchanges, where its value will be appreciated. This could be on TSX or potentially a Chinese/Hong Kong exchange. 

Since the last write-up, the company posted a new resource update. Griffin is sitting on a huge resource. The estimate of the in situ resource was increased by 50% to a value of $17.7 billion. Clearly, the rate at which the company is extracting ore will not maximize the value of this resource; however, there is a very long mine life. As such, the company should not trade at a paltry sub 3x cash flow multiple. It begs the question what a larger mining company that has more clout with the Chinese government could accomplish with this resource base? 

If the company were to trade in-line with peers at its NAV, or 5.5x EBITDA at normalized prices, the stock would trade up to GBP3.50-4.

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

- Quarter following mine ramp up

- Return of capital

- Any exploration success on nearby lands

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