Description

Elevator pitch

Jupiter Mines (JMS) has a 37 year supply of Manganese - an irreplaceable component of steel - and mining costs are among the lowest worldwide.  Applying 2014-22 Mn prices to expected future costs, JMS has a 16% average dividend yield.  Multiple tailwinds may increase Mn prices in the next few years, further improving returns.

Full pitch

I'll briefly discuss Manganese, since it's not as well known as other minerals.  Then I'll discuss Tshipi Mine, JMS' main source of EBIT, followed by JMS and how I estimate future dividends.  I'll end with what may affect future Mn prices and risks.

1.  Manganese (Mn) overview

90% of Mn is used for steel production, where the U.S. Geological Survey says that "Manganese has no satisfactory substitute in its major applications."  Mn is not recovered during recycling, so both new and recycled steel require new Mn.  JMS estimates that Mn used in steel will grow at a 1% CAGR over the next 20 years.  Mn is also used in Li-ion batteries where JMS expects Mn consumption in batteries to grow at a 9% CAGR over 20 years.  However, batteries are unlikely to affect total Mn consumption in the near future given that only 2% of Mn is currently consumed for battery production.  Mn is found worldwide including the U.S. which originally mined it for domestic steel production.  However, it's cheaper and easier to use Mn ore with a higher Mn concentration.  South Africa holds 30% of global Mn reserve due to its naturally high Mn concentration.

2. Tshipi Mine

JMS owns 49.9% of Tshipi Mine located in South Africa and Tshipi provides over 90% of JMS' EBIT through royalties.  Tshipi produces 6% of global Mn and is the 4th largest globally.  At Tshipi's current mining rate, it can mine measured + indicated deposits for 53 years.  However, the average measured + indicated Mn concentration is 33.6%, below what JMS is currently selling.  Looking only at deposits where concentration >36%, Tshipi has 24 years of measured + indicated deposits remaing and 37 years if you include inferred deposits.

Capex was 4.3% of EBITDA in FY2022 (2/2021 - 2/2022).  Capex as a percent of EBITDA was lower from FY2019-21 primarily due to higher past Mn prices and therefore, higher EBITDA.  JMS states states that "No major capex is expected in the near term."  Tshipi has low capex costs in part because they use open pit mining.  Open pit is generally cheaper than underground mines where miners typically use the latter to extract higher value minerals such as gold.  D&A was also low at under 3% of EBITDA for the last four financial years.

3. JMS

JMS has no debt.  It has a 49.9% stake in Tshipi which accounted for 95% of EBT in FY2022 and more in previous years.  Investing in miners who don't return earnings to shareholders can be risky.  However, since its 2018 IPO, JMS has returned an average of 97% of net income as dividends, so I'll estimate the value of JMS based on dividends.  Quantity of Mn sold increased from FY2014-18 as Tshipi was developing, then flattened from 2018-present.  Free on Board (FOB = costs include mining, processing, logistics, environmental and indirect costs) and capex costs were also steady since 2018.  The main variable is Mn price.

To estimate dividend yield under various Mn prices, I used FY2021 financials while averaging out various costs and taxes.  In FY2021, the average quantity of Mn sold and FOB costs were within 3% of the FY2018-22 five year average.  I set the Mn sales price to historic prices in FY2014-22.  2016 was the only year when net income was negative and JMS wouldn't pay a dividend.  Mn price in 2016 was $2.06 vs a break-even price of $2.67, current price of $3.32 and the 2014-22 nine year average of $3.92.  The average estimated dividend is 16%, which assumes JMS would reduce dividends in following years to make up for the 2016 loss.  The current below-average Mn price yields an estimated 9% and the maximum price in 2019 of $5.83 yields 40%.

4. What to expect of future Mn prices

The 16% avg future dividend yield assumes future Mn prices are similar to the past nine years.  Is the assumption reasonable?  The high Mn price in FY2019 was due to higher than usual construction in China which likely won't be repeated soon.  A global recession in the next year is also possible, indicating lower future Mn prices.  However, there are multiple reasons for higher prices over a longer time scale.  While the China housing boom is over, the three year COVID lockdown weakened its economy and daily headlines indicate a reopening sooner than later.  Chinese crude steel production accounts for ~56% of global production, so any improvement in their economy will likely increase Mn prices over current levels. Furthermore, following decades of offshoring, there's a worldwide shift towards reshoring or at least friend-shoring, both of which will require large-scale infrastructure development worldwide.  The U.S. is developing infrastructure that doesn't use Chinese parts and vice versa, while Europe is developing three sets of infrastructure: one for export to U.S., one for China and one for countries that are willing to use both U.S. and Chinese parts.  Since infrastructure generally requires steel, Mn prices would benefit as well.  Jeff Curry of Goldman Sachs also suggests reasons for higher infrastructure development.  He argues that the transition to renewable energy requires new infrastructure.  There's also a global shift towards redistributive policies to transfer wealth from rich to poor such as the $1.7T U.S. 'Build Back Better Act' last year.

5. Risks

The biggest risk to the stock thesis is sustained lower Mn prices.  If the reasons for higher Mn prices are wrong or the transition to higher steel / Mn consumption takes longer than expected, JMS yields an estimated 9% dividend based on the current Mn price.  JMS is also among the lowest cost producers with a 37 year mining lifespan and returns most of its earnings as dividends.  There are far worse stocks to hold in a downturn.  Another risk is that JMS makes bad acquisitions or has high capex from unnecessary expansion.  JMS has been prudent and return of capital has been good so far, so hopefully they won't do something too ridiculous.  The current South African president has been accused of corruption, but his party still backs him, so impeachment is unlikely.  Rising inflation and nationwide rolling blackouts from a poorly-run state electricity company are also risks, but none of these issues have had a large effect on JMS operations.  JMS is 47% owned by a black owned enterprise which may prevent race issues and JMS has no obvious problems with its workers or the government.

Catalyst

China reopens or large-scale infrastructure projects increase steel consumption.