Description:

Metals X

Metals-X (MLX) owns 50% of the Renison Tin mine in Tasmania, Australia’s largest Tin mine and the only tin play in a tier 1 jurisdiction (the other 50% belong to Yunnan Tin Parksong Australia). 

The shares are trading on a discount of more than 60% to my estimated post tax NPV for the existing mine. In addition, there is exploration upside which is likely to prolong the mine life (currently 10y+).

Furthermore, there is huge optionality:

*The Rentails project offer potential for organic growth (reprocessing of tailings)

*The market currently assigns no value to the Wingellina Nickel Cobalt project (Western Australia, 100% MLX ownership), the in situ metal value of the deposit is in the double digit USDbn range. Should this ever be developed it would be a huge value driver for the share.

*Copper exposure due to A$36m Cyprium Metals convertible notes (gross cash position of Cyprium at March 31 A$ 54m).

Since the sale of Nifty copper mine the balance sheet is in shape (A$ 51m net financial assets, around 25% of market cap, gross debt as of April 2021 just A$15.5m). The enterprise value is currently only A$ 148m.

On my estimates the stock trades on EV/EBITDA of 1.9 FY 2022 (ends June 30 2022) based on a tin price of USD 30000 (current LME3m future USD 33000, cash prices significantly higher). I.e. the stock is trading like an out of favour coal mine rather than a rare pure play on a critical metal for new technologies (semi, EV, batteries…)

Why the opportunity exists

The former management acquired the Nifty Copper Mine (Western Australia) in 2016. The acquisition was a spectacular failure and in 2019 Nifty was put on care and maintenance. Nevertheless, just the expenditures for Nifty’s care & maintenance were still A$ 3m to 5m per quarter (EBITDA of the tin mine was A$ 4m to A$10m in the last four quarters, so Nifty was clearly a major drag), so this was a substantial cash drain and ultimately led to a covenant breach in summer 2020. Therefore, until Nifty was sold in March 2021 nobody wanted to touch the share.

The March 2021 quarter was “below plan due to short term operational issues with a torn underground transfer conveyor belt, fault in the mines’ High Voltage (HV) power supply network, and poor ground conditions in a stope in a remanent mining area that was scheduled to allow progress of the Area 5 capital ventilation development. Further production flexibility was limited by a delay in backfilling of mined stopes that directly affected commissioning of future stopes”. On June 22 Metal X again confirmed its Q2 2021 guidance of more than 2000t of tin production, i.e. production back to normal.

Finally, Argyle Street, which acquired its stake when Metals-X was trading as a distressed stock, is selling down its holding (they more than doubled their money). There are still around 45m shares (5% of shares outstanding) left of a position which was 128m shares (14%) in May 2020.

So what’s changed?

New management

APAC resources, which holds a 15% stake in the company was instrumental in an overhaul of the board in July 2020, which let to the installation of Brett Smith as Executive Director.

With the tailwind from surging copper prices he managed to sell the Nifty Copper mine for A$24m in Cash and A$36m in convertible notes of the acquirer, Cyprium Metals. The latter conducted a large capital increase to fund the development of Nifty as an open pit mine (previously underground). The deal structure has immediately solved Metals X balance sheet weakness, eliminated a cash drain while retaining some upside post a successful execution of the open pit plan for Nifty. Cyprium’s gross cash of A$ 54m is sufficient to cover the A$50m pre-production capital requirement that MLX calculated for Nifty in its 2020 scoping study. MLX gave a NPV10 for Nifty at A$8500/t copper (current price A$ 12500) of A$ 240m. In light of A$ 5600 /t AISC for the Nifty operations, the current copper price would translate into NPV10 of more than A$500m. The notes that MLX holds can be converted into 101m Cyprium shares (current share count 549m), i.e. around 15% of capital after conversion. Thus, in case of a successful restart of Nifty and a continuation of the favourable copper price, MLX should be able to more than double the value of its convertible notes (in addition MLX holds 20.27m options with strike price A$0.3141, exp. 30 March and 20.27m options with strike price A$0.3551, exp. 30 March 2023).

Furthermore, Metals X is in the process of spinning out the Wingellina Nickel Cobalt project. Effectively the Wingellina asset is implicitly only valued with A$ 5m in the transaction, however this should draw attention to the project and thus on the one hand increases the likelihood of Wingellina getting at some point in time developed and on the other hand allows Metals X to position itself as tin pure play (a name change containing “TIN” would also make sense)

Growth

So far, the earnings power of MLX has been barely visible, indeed only the Sep 2020 quarter gave a first impression due to the higher grade. With the production issues to be resolve in Q2 2021, I expect a strong EBITDA jump in the quarter (although I still assume elevated sustaining capital spend). Even based on conservative assumptions we should see output grow in FY 2022 to around 8000k while AISC is to decline to A$19300, thus providing a healthy margin at current tin prices of well over A$40k. Thus, I expect EBITDA in FY 2022 (ends June 30) to nearly double to A$ 78m or an EV/EBITDA multiple of just around 2.

Even beyond the tin price induced earnings growth in FY 2022. There are several avenues for growth. Firstly, the high grade Area 5 zone is currently developed (1.82% Sn compared with 1.36% total mine). MLX has so far spend around 40% of the necessary capex of A$ 50m to A$55m. This is to lead to a substantial grade increase by FY 2025 at the latest. Furthermore, management is currently evaluating the installation of a tin fumer, which has the potential to increase the recovery by 10PP - 15PP to 85% - 90% from the current 76%. I have included A$40m in the growth capital assumption for this project and assumed a 85% recovery as of FY 2025. Taken together, the increase in grade and recovery should lead to 45% EBITDA growth from FY 2022 to FY 2025.

Source: company presentation April 2021

Finally, exploration. While Renison is an old mine there is still ample potential for resource growth. It should be noted, that Renison has an excellent track record of growing the orebody. Since 2005 the resource has more than tripled and reserves doubled. 

Source: Sept 2019 quarterly report

Even better, the 2021 resource update contains two important messages. Firstly, MLX has a resource replacement rate of more than 100% and thus continued to increase its resources in the last year. Secondly the grade of the added resources is substantially above the mine average; 3.95% Sn compared with an average grade of 1.57% and a mined grade of 1.25% in the twelve months to March 31 2021. Thus these tons will be more profitable to mine. 

Valuation

I value the stock based on a DCF for the Renison mine. I assume no terminal value, but rather only discount the cash flows during the current mine life of 10y. Given the historical resource replacement track record and 100y of existence of the mine that is certainly conservative (assumes mining of less than 40% of resources). 

Key driver for the decline in AISC to around 17000-18000 AUD is the increase in grade with the high grade Area 5 ore contributing a higher share of the ore feed. Mining and processing costs are forecast to increase by 3% p.a. on a per ton basis. Furthermore, I assumed A$ 20m sustaining capital p.a. which is to grow 5% p.a., this is the main difference to management’s mine plan which assume only A$ 8m to A$ 10m in sustaining capital. That said I think that is an appropriate buffer to cover the inevitable unforeseen circumstances in mining.

While already the NPV of the Renison mine of A$488m (or A$ 0.54 per MLX share) provides strong upside. The Rentails growth project, the Wingellina Nickel Cobalt project and A$ 51m in net financial assets (based on March 31 2021 data) come on top.

The 2017 DFS for Rentails (reprocessing of tailings) gave an NPV8 of A$ 440m pre tax at an average tin price of A$32000. Assuming a tax rate of 30% this leads to post tax NPV8 of A$ 308m. I use 30% of this NPV which leads to a value of A$ 46m for Metals X 50% share.

Therefore I calculate the overall value as A$ 488m for Renison plus A$ 51m net financial assets plus A$ 46m for Rentails=