Description
There are a lot of mining companies that look cheap on a cash flow basis. Here is another. If you are not bullish on metal prices, you may want to pass, but I think that even with some decline in metal prices, this is ridiculously cheap.
Mines Management owns the Montanore project in Montana. When complete in 2010, it will be the largest Silver-Copper project in America and one of the largest in the world. Large projects have large economies of scale, and this one is no different. In addition, unlike most mining companies, these guys have been smart about dilution and only have 12.9m shares outstanding and 16.3m fully diluted. Glen and Doug Dobbs who manage the company are much respected in the industry and own a significant chunk of the equity through common stock and options. I think they are incentivized to continue doing the right thing with minimal dilution.
The company intends to process 12,500 tons per day and produce 8 million ounces of silver and 60 million pounds of copper a year over a mine-life in excess of 20 years. Using company estimates, the cost per ton will be around $23 and the cap-ex will be around $400m. The ore will have an average grade of 15 lbs copper and 2.5 oz silver per ton.
Here’s a quick cash flow calculation using $12/oz silver and $3.00 copper and 330 operating days a year. All numbers in $USD.
Value/Ton 75
Cost/Ton 23
Gross Margin/Ton 52
Tons/Yr 4,125,000
Gross Margin/Yr 214,500,000
Corp Overhead 10,000,000
300m debt @ 9% 27,000,000
Net pretax 177,500,000
31,300,000 FD shares 5.67/shr pretax
after equity financing
I assume that they can finance most of the project with debt (probably implies some hedging, but at current metal prices, I can live with that) and that they have to sell 15 million shares at 7 to finance the equity portion of $105m. I personally think they’ll get better prices and experience a good deal less dilution. I also think that when the final mine-plan is released, operating costs may actually DECREASE because of better mining methods. This is one of the few cases where we may see improvements in mine costs. At worst, they probably hold constant. Cap-ex is conservative at 400m. Management guided towards 300-350m, and these numbers were rather recent.
At 10/oz silver and 2.50 copper, they have 3.82/shr in pre-tax cash flow, however, at 15/oz silver and 3.25 copper, they have about $6.80/shr in pre-tax cash flow. Clearly this is cheap. The question is why? I think the first thing that stands out is that the management is not promotional. Mining is a business where guys thump their chests loudly every week. These guys stay quiet and focus on getting their permits in order. There also is not a lot of news-flow as they are not currently doing much drilling. Without news, volume trails off and since they have not done many financings, bankers have no reason to mention the shares. This is all about to change.
The other issue is that the mine is in Montana. For those of you who are unfamiliar, Montana is the most unfriendly state to mine metals in what is generally an unfriendly country to begin with. The state has a ban on cyanide use and a ban on open pit mining. Montanore is an underground mine that will not use any cyanide. If anything, it is environmentally friendly. I have looked hard for an environmental group that will protest this mine, and still have not found much opposition. The governor of Montana supports the project which is a strong show of support. This is not to say that the permitting process will be easy, but I think it is doable. The company has made some good progress and is fortunate that they have a number of the key permits already in place from the past owners.
History
Montanore was discovered in 1983 by Borax and underwent 70,000 ft of drilling before being sold to Noranda in 1988. Noranda spent an additional $100m on exploration and got as far as building a 14,000 ft evaluation adit (tunnel) before low metal prices forced them to abandon the project. Before abandoning it, Noranda was able to complete the permitting process. This is important, because we know the mine is permittable. More importantly, when they transferred their interest to Mines Management, they passed a number of their permits along which will greatly speed up the permit process.
Going Forward
The company recently acquired a successor company to Noranda which contained the permit allowing the company to re-open the exploration adit. The company is now in the process of examining the adit in preparation for de-watering. Once de-watering is complete, the company will advance the adit 3,000 feet until it is under the deposit and then commence 35,000 feet of drilling to better define the project. This will likely help improve the project economics and lead to a possible sale to a larger player who can more readily take care of the financing.
Unfortunately, the above plan will cost money and the company has filed a $60m shelf. I believe this has put a lid on shares in the near-term and is responsible for them not participating in the recent rally in metal shares. This also creates an opportunity. As they get closer to the pricing, they will do a road show and get their name out there in front of potential investors which should help the share price and volume in front of this offering and afterwards.
Once the financing is complete, they will have the funds to better explore the project and get all their permits. This ultimately gets them to the point where they can make a decision on if they want to operate it or sell it. With a significant ownership stake, Glen and Doug should make the right choice for shareholders. If they do not intend to sell it, it is cheap enough for the shares to perform well, even if you’re not too optimistic about metal prices. I am of the optimistic camp on silver and agnostic on copper.
I have tried to keep this short. Feel free to ask questions on anything I have glossed over.
Catalyst
Completion of pending financing.
Completion of permitting