Mawson West (MWE) is a copper miner trading at 0.5x EV/EBITDA. MWE is currently in a net cash position and meaningfully free cash flow positive. Cash Costs of $0.55/lb (H1’13 actual) provide protection against adverse metal price movements (current spot copper price is $3.25/lb). The Company has reached an inflection point which the market has been slow to recognize.
THESIS
1. Compelling Valuation
0.5x EV/EBITDA; 1.6x EV/EBIT
MWE generated ~40% of its current EV in Free Cash Flow last quarter
Current Enterprise Value[1]: $56m (Market Capitalization: $72m)
MWE is currently in a net cash position
$16m net cash at 30 June 2013 (22% of current market capitalization[2])
Net cash expected to be ~$30-35m (42-49% of current market capitalization[3]) by end-September 2013 (next reporting date)
2. MWE Has Reached an Inflection Point
Commercial Production commenced in Q4’13 – game changing for the company’s risk profile
Production has been consistent (and in line with guidance) since commercial production commenced
Q1’13: 11.5Mlb copper; Q2’13: 11.4Mlb copper (Guidance: 11-12Mlb per quarter)
Low cash costs ($0.55/lb in H1’13) result in MWE generating sizeable cash flow vs. current enterprise value
Free Cash Flow Generation is improving: Q2’13 was $22m vs. Q1’13 of $7m. Q3’13 should approximate Q2’13 (flat-to-increasing production and similar costs expected; metal prices have been in line with Q2’13)
3. The Market Has Been Slow to Recognize MWE HAs Reached an Inflection Point
MWE’s history, under previous management, wasn’t pretty – they failed to deliver operationally, had capex blow-outs, financially leveraged the company and almost ran out of liquidity
A new management team was appointed 12 months ago. The new team has: (i) gotten MWE into production; (ii) increased free cash flow; (iii) repaid debt; (iv) moved MWE into a net cash position (net cash is growing)
MWE is a very different company versus 12 months ago – the market has been slow to recognize this
4. Stock Has 125%+ Upside vs. Current
DCF valuation (15-20% WACC): ~$1.00 - $1.25/share (+133% to +191% vs. current)
Best comparable to MWE (Tiger Resources) trades at 2.1x EBITDA; 3.6x EBIT[4]: using Tiger’s multiples implies a $1.10-$2.00/share valuation for MWE (+156% to +365% vs. current)
Note: Tiger is also the least expensively valued comparable. Using multiples for other peers would result in higher valuations
MWE’s net cash position and FCF generation make capital management likely if current valuation persists
New CEO (Bruce MacFadzean) has created shareholder value previously
30 years of mining experience. Most recent executive role was CEO of Evolution Mining (ASX:EVN) 2008 to 2012. Total Shareholder Return during his tenure was 29% CAGR
WHY DOES THIS OPPORTUNITY EXIST?
Stock is not well known or widely followed ($74m market cap; concentrated register; limited equity research coverage)
Company’s history (under previous management) still weighs on the stock (in my opinion). More than once I have had this described to me as a ‘show me’ story
Assets are located in the Democratic Republic of Congo. This is clearly a risk but as explained in more detail below MWE’s closest comparable (whose sole asset is also in the DRC) trades at a material premium to MWE’s current valuation (~2-3x MWE’s valuation depending on the metric)
RISKS
Democratic Republic of Congo (DRC) Risk
This might be a deal breaker for some. I understand that. My personal view is that at the right price (and with the right position sizing and diversification) I can accept some geopolitical risk
In this case the upside/downside looks attractive and the low valuation multiples make the capital return/payback very fast (limiting the risk window / duration)
As an aside this is part of the Glencore business model – they take diversified geopolitical risk as long as the returns justify it
Copper Price Risk. A material fall in the copper price will impact MWE’s valuation
MWE’s current cash balance (>40% of current market cap at end-Sep) plus its low production costs ($0.55/lb in H1’13) mitigate this risk to some degree
Execution Risk
Kapulo commissioning delayed – would impact NPV but should not jeopardize capital structure given current net cash position and FCF generation
Reserve / Resource updates don’t extend mine life – would reduce DCF valuation (as Resources not converted to mineable Reserves) and mean drilling expenditure was wasted. I see zero mine life extension as a very low probability risk
CATALYSTS
Continued operational performance and cash flow generation – MWE is trading at 2.6x last quarter’sFCF. This valuation disconnect obviously can’t continue for very long
Q3’13 operating results should be available in early October and full financial results a few weeks afterward
Reserve Updates / Mine Life Extension
Dikulushi Mine (3Q’13) – will probably add another 1-2 years to mine life
Kapulo Mine (4Q’13/1Q’14) – will probably add 2-3 years to mine life
Dikulushi Underground Feasibility Study to evaluate longer term underground mining (Q4’13) – could increase mine life to 4-5 years
Kapulo Mine Commissioning (Q1’14)
Capital Management Initiatives – the company will implement some form of capital management (dividend, buyback, etc.) if the valuation disconnect does not correct
BUSINESS OVERVIEW & HISTORY
OVERVIEW
Copper miner. All assets located in the Democratic Republic of Congo (DRC)
Assets were acquired in 2010 from Anvil Mining (MWE was a private company at that time). MWE listed on the TSX in 2011
The Company has three assets. Brief Summary:
1. Dikulushi Mine (currently producing)
Very high grade deposit => current reserve is 6.1% copper and 182 g/t silver
Produced 23Mlb of copper (at 6.8% head grade) and 925koz of silver (at 205 g/t head grade) in H1’13. Full year guidance for 2013 production is 44-48Mlb of copper
Cash Costs were $0.55/lb in H1’13 (including silver as a byproduct credit)
Open pit mining operations have been completed (~6mths of stockpiles – mined and sitting on the ROM pad – remain to be milled). Underground mining operations have commenced
Updated reserves expected imminently(3Q’13/4Q’13). Will add 1-2 years to current mine life. Reserve update to both underground and above ground (satellite) ore bodies
Underground – Reserve for 1st phase of underground mining
Note: there is currently ~0.5Mt of underground Resources (at >6% copper grade) at Dikulushi[5]
Note: Kazumbula ore body already has 0.3Mt of Resource[6]
Going forward production will be a mix of high grade (6-7%) underground ore and lower grade (~2%) ore from above ground satellites. The mine life of this operation is likely 5+ years
MWE scheduled to release a feasibility study for longer term underground mining in Q4’13. This along with the above ground satellite deposits will support a 5+ year mine life
2. Kapulo (Producing from Q1’14)
Open pit mining operation scheduled to commence production in Q1’14
Production: 35-40Mlb p.a. over a 8-10 year mine life
Original feasibility study contemplated ~35Mlb p.a. over a 7 year mine life; Recent management guidance is for 45Mlb p.a. over 8-10 years
Original feasibility study only contemplated mining the Shaba ore body. New mine plan will mine both Shaba and Safari ore bodies. The addition of Safari drives the increased annual production and longer mine life (Safari Reserve to be released in 4Q’13)
MWE has had some exploration success here to date but it’s still early stage
If successfully delineated this could be a very material and valuable asset. Some think Lufukwe has very similar characteristics to Ivanplats’ Kamoa Project[7]
Given the early stage nature of this asset I have not included it in my valuation, considering it a potential free option
MWE disappointed repeatedly under old management. A new senior management team was appointed in September 2012
A selection of what old management ‘achieved’ is summarized below
Dikulushi Production Commencement: originally expected to be in production by mid-2012. Production actually commenced in December 2012
Kapulo Completion: originally expected to commence commissioning in mid-2012. Commencement was pushed back a number of times. The current expected completion date is Q1’14
Kapulo Capex: original capex budget was ~$70m. This was increased to $105m in May’12
Funding:
At IPO MWE was supposed to be fully funded (i.e. with cash on hand) for its strategy which was: (i) complete Dikulushi (material cash flow generator); (ii) complete Kapulo (incremental growth and cash flow); and (iii) fund aggressive exploration
Because of the delays to production commencement at both Dikulushi and Kapulo as well as the capex blow-out at Kapulo MWE ran out of cash. As a result of this it needed to take on debt financing (2012) and complete an equity raising (also in 2012)
The new management team, led by Bruce McFadzean, has steadied the ship and has delivered on its promises. For example:
Dikulushi Production: brought the mine into production (in Dec’12). Subsequently delivered consistent production in line with guidance (11.5Mlb in Q1’13 and 11.4Mlb in Q2’13 vs. guidance of 11-12Mlb per quarter)
Cash Flow Generation: MWE has generated $29m of FCF YTD ($22m in Q2’13). The company has moved from a net debt position of $16m at 31 December 2012 to a net cash position of $16m at 30 June 2013
Bruce McFadzean is an experienced mining executive who has created value for shareholders in the past. McFadzean’s most recent role was CEO of Evolution Mining (ASX:EVN). During his time as CEO (2008 to 2012) total shareholder return was 29% CAGR[8].
VALUATION
Summary: DCF and multiples based valuation both support >$1/share (vs. current price of $0.43/sh)
DCF Valuation: $1.00 - $1.25/share (+133% to +191% vs. current)
Multiples Based Valuation: $1.10 - $2.00/share (+156% to +365% vs. current)
1. DCF Valuation ($1.00-$1.25/share)
Production: Current Reserves + 50% of Resource Conversion (zero valuation for exploration properties, including Lufukwe)
Metal Prices: forward curve
WACC: 15-20% (high & low valuation respectively)
2. Multiples Based Valuation ($1.10-$2.00/share)
There are a number of mining companies operating and/or developing mines in the DRC
However several of these companies are large and/or multi-mine operations (e.g. Glencore, ENRC, Freeport, Lundin). As such, they are not really comparable to MWE
The best comparable to MWE is Tiger Resources(ASX:TGS)
Tiger has a single operating mine which is located in the DRC (MWE’s assets all in the DRC)
MWE: 2013 Guidance: 20-22kt (44-48Mlb); 2014 Guidance: higher than 2013 (Kapulo comes online and Dikuluski continues, however no numerical guidance provided yet)
Tiger’s cash costs approximate MWE’s cash costs
Tiger: H1’13: $0.67/lb (2013 Guidance: $0.48/lb)
MWE: H1’13: $0.55/lb
Despite these similarities (geography, number of mines, production & costs) MWE currently trades at a material discount to Tiger (table below)
Tiger
MWE
MWE vs. Tiger
Equity Value (local)
($)
$196m
$74m
Equity Value (US$)
($M)
$183m
$72m
Total Debt
($M)
$10m
$22m
Cash
($M)
-$13m
-$38m
Enterprise Value (US$)
($M)
$180m
$56m
Share Price change (YTD 2013)
(%)
-2%
-45%
Share Price change (3 Months)
(%)
+38%
-10%
EV/EBITDA
LTM
(x)
3.2x
1.0x
-69%
2013
(x)
2.1x
0.5x
-75%
2014
(x)
1.1x
0.5x
-59%
EV/EBIT
LTM
(x)
4.6x
3.6x
-21%
2013
(x)
3.6x
1.6x
-57%
2014
(x)
1.8x
0.7x
-63%
EV/Reserves
($/lb)
$0.18
$0.16
-14%
EV/Resources
($/lb)
$0.08
$0.07
-14%
Reserve: Copper Grade
(%)
1.66%
3.91%
MWE grade more than double
Resource: Copper Grade
(%)
1.57%
3.53%
MWE grade more than double
2013 Guidance
Production
(Mlb)
92.6
46.3
Cash Cost
($/lb)
$0.48
$0.35
MWE lower cash cost
The current valuation discrepancy is partly due to Tiger’s recent share price outperformance relative to MWE. Tiger’s share price has increased almost 100% over the past 3 months
Using Tiger’s current valuation multiples implies a share price range of $1.10 to $2.00 per share for MWE (+156% to +365% vs. MWE’s current share price)
MWE Ent. Val
MWE Net Cash
MWE Equity Val.
MWE Per Share
MWE Input(A)
Tiger Multiple
(US$M)
(US$M)
(US$M)
(C$/sh)
EV/EBITDA
$120m
2.1x
$252m
$16m
$269m
$1.64
EV/EBIT
$86m
3.6x
$310m
$16m
$326m
$2.00
P/E
$0.17
6.5x
$163m
$16m
$179m
$1.10
Average
$258m
Average Per Share
$1.58
vs. Current
259%
(A) Bloomberg 2013 Consensus for MWE for each of EBITDA, EBIT and EPS
Other companies with mines in the DRC all trade at higher valuations than MWE. As mentioned above I don’t believe these are especially good comparables because they are larger companies typically with multiple mines
However for completeness the valuations of these companies are shown below
These companies are all trading at a premium to Tiger Resources. As such using multiples from the group below would result in a more aggressive valuation
EV/EBITDA
EV/EBITDA
EV/EBIT
EV/EBIT
P/E
P/E
EV (US$M)
(2013E)
(2014E)
(2013E)
(2014E)
(2013E)
(2014E)
Glencore XStrata
123,603
10.1x
8.3x
18.3x
14.1x
18.0x
13.3x
Freeport McMoRan
57,492
7.2x
5.3x
10.8x
8.2x
14.0x
10.8x
Eurasian Natural Resources
10,598
5.2x
4.4x
8.5x
6.3x
7.7x
6.3x
Lundin Mining
2,390
8.2x
6.9x
23.1x
16.7x
17.8x
14.5x
Katanga Mining
1,597
5.6x
3.5x
7.6x
3.7x
13.6x
8.4x
Average
5.4x
4.2x
10.2x
7.2x
11.0x
8.0x
Median
5.6x
4.4x
8.5x
6.3x
13.6x
8.4x
[1] Close of Business on 17 September 2013 and net debt at 30 June 2013 (latest available)
[8] BM joined Evolution Mining (then called Catalpa Resources) as CEO on 10 June 2008 (share price $0.06/sh) and stepped down on 25 January 2012 (share price $1.68/sh). During his tenure the company completed a one-for-eleven share consolidation. Total Shareholder Return over this period was 255% or 29% CAGR.
I do not hold a position of employment, directorship, or consultancy with the issuer. I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Continued operational performance and cash flow generation – MWE is trading at 2.6x last quarter’sFCF. This valuation disconnect obviously can’t continue for very long
Q3’13 operating results should be available in early October and full financial results a few weeks afterward
Reserve Updates / Mine Life Extension
Dikulushi Mine (3Q’13) – will probably add another 1-2 years to mine life
Kapulo Mine (4Q’13/1Q’14) – will probably add 2-3 years to mine life
Dikulushi Underground Feasibility Study to evaluate longer term underground mining (Q4’13) – could increase mine life to 4-5 years
Kapulo Mine Commissioning (Q1’14)
Capital Management Initiatives – the company will implement some form of capital management (dividend, buyback, etc.) if the valuation disconnect does not correct
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