Maxim Power is an undervalued merchant power company with (not so) hidden metallurgical coal assets that the company is seeking to monetize in some fashion. A sum of the parts calculation shows per share value of at least $6.70 (+100%) versus the current price of $3.25 (all figures in CDN).
Maxim has three different power segments:
- France: They have a 184 megawatt portfolio of co-generation plans in France. These are a collection of relatively small scale plants that have long-term contracts with the national utility to purchase power at a fixed price. It's highly predictable and will generate $12m a year in contracted EBITDA.
- United States: 433 megawatt portfolio of gas-fired plants, primarily in the northeast. This is a collection of five small facilities that were orphaned by a larger owner (one was developed by Maxim). Maxim has purchased them, invested a modest amount of capital and then signed long-term off-take agreements or operates them to receive capacity payments, i.e. they get paid for having capacity available, regardless of whether they run. The fixed payment stream will generate $20m a year in EBITDA. If we get a hot summer, or a restoration of the demand destruction for power that occurred in 2008/2009, and the plants run, EBITDA would be meaningfully higher.
- Canada: The main asset here is the 150 megawatt coal-fired Milner plant in the Alberta market. Alberta power prices have averaged $70 per megawatt hour over the past six years, but in 2009 they were at a low of $48/hr. The futures for 2010 project an average price of $55/hr for Alberta. Maxim consistently gets roughly $5/hr higher realized prices due to the timing of when they run the plant (they perform turnarounds during seasonal low periods, it's a flexible plant, etc.). At $60/megawatt hour assumption, Milner would generate $11m in EBITDA for 2010.
o Costs are $20/hr fixed, $4/hr variable, $24/hr for fuel = $48/megawatt hour to run Milner.
o Should generate 900,000 to 1million megawatt hours/yr.
o $60/hr revenue minus $48/hr cost = $12 margin per megawatt hour x 900k hrs = $11m EBITDA
o If Milner realized $70/hr (the market average for past six years) it would add $9m in EBITDA (or 12c/shr in FCF).
o The Alberta market demand for power actually grew in 2009 and continues to grow in 2010; if pricing realized were consistent with the $90/hr seen in 2008, it would add $27m in EBITDA relative to expectations for 2010, or 35c/shr in FCF.
Capital Structure and Cash Flows
- Maxim has 54.5m shares fully diluted for a market cap of $177m. It also has net debt of roughly $90m.
- Projected 2010 EBITDA is France ($12m) + US ($20m) + Milner ($11m) - corporate ($5m) = $38m
- Free cash flow is calculated below:
o EBITDA $38m
o DA $18m
o EBIT $20m
o Interest Exp $6m
o Pretax income $14m
o Taxes @ 29% $4m
o Net income $10m
o DA $18m
o CAPX $5m
o Free cash flow $23m (42c/shr)
- In this scenario, roughly 75% of the pre-corporate EBITDA generated at Maxim is highly-predictable, contracted cash flows not exposed to volatile market prices.
- A "mid-market" power price for Alberta would result in FCF of 54c/shr.
The Met Coal Asset
- Maxim has an extensive coal lease in northern Canada (near Grande Cache) which they were originally planning to develop as fuel supply for their Milner plant. However, they discovered that the coal is high quality metallurgical coal and as such, has much higher economic use than burning as steam coal.
- After a seemingly endless permitting process, Maxim now has all regulatory permits required and can start building the mine.
- The company is exploring what the highest and best use is for shareholders. There are three options (1) hire expertise and develop the mine in-house (2) form JV with existing coal mining company to develop the mine (3) sell the mine outright and redeploy capital in some fashion (presumably to shareholders)
- Basic math on the mine is as follows:
o 26m ton proved reserve (ultimate reserves will be higher), at least half of which is recoverable. They can mine 1.3m recoverable tons per year for ten years.
o By washing the coal, it will generate roughly 750,000 tons of met coal and 550,000 tons of tailings that they can burn for fuel at Milner, which will displace the entire existing fuel needs. (This has a value of $22m to $25m a year.)
o The cost to build the mine is $85m to $90m and can be processing coal by year-end 2011.
o Fully loaded cost to mine is $85/ton, delivered to the port. Unclear where 2010 global met coal contract prices will settle; some spot trades are > $200/ton but probably in the $150/ton ballpark. That would produce $50m/yr of gross profits for the met coal portion of the mine. (At $200/ton, the met coal stream alone would generate $1.50/shr in net income to Maxim. There's a lot of potential leverage in that asset.)
- Taxes in Canada on a capital gain at a corporation are 17%.
- Whether they develop the mine, do a JV or sell it outright, net proceeds / value to Maxim should be somewhere between $100m (very conservatively) and $200m or roughly $2 to $4/shr.
Tax Shield
- Maxim recently purchased a tax loss shell for $6m which can shield $117m in income, has a gross value of $34m and a present value of roughly $25m. (50c/shr)
Sum of the Parts
- It seems that a 10x multiple on 2010 projected FCF is fairly reasonable given that (1) 75% of profits are from contracted plants and (2) Milner is at a cyclical low, generating cash at 50% of mid-cycle and 25% of peak power pricing. That would put a value of $4.20 on the power assets.
- Met coal $2.00 to $4.00 per share
- Tax shield 50c/shr
- Total value $6.70 to $8.70 per share with significant additional upside from a tightening Alberta power market.
Risks
- Shares are illiquid
- Environmental / carbon legislation could gut the attractiveness of oil-sands mining which is substantial component of power demand in Alberta market.
- Carbon legislation could make Milner prohibitively expensive to run (though company has some environmental offsets which should protect them in all but the most unreasonable scenarios).
Disclosure: We and our affiliates are long MXG. We may buy / sell shares in the future. This is not a recommendation to buy or sell shares
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