|Shares Out. (in M):||55||P/E||n/a||n/a|
|Market Cap (in $M):||31||P/FCF||n/a||n/a|
|Net Debt (in $M):||12||EBIT||0||0|
This is the quick thesis for a long recommendation for the common stock of NEMI Northern Energy & Mining Inc: The market has not reacted to recent management changes and what I believe will be a very positive liquidity catalyst for this company in the near future. The stock trades in fairly low volumes on the Toronto exchange under the symbol NNE.A, and on the pink sheets under NNEMF.pk.
NEMI's main asset is its 12% interest in the Peace River Coal Limited Parntership, ("PRC") which operates a large metallurgical coal property in northern British Columbia with current production estimated at 1 million metric tonnes per annum ("MTPA"). For a more complete description, I recommend taking a look at: www.peacerivercoal.com
PRC is majority owned and operated by Anglo American plc (75%) with smaller pieces owned by Hillsborough Resources (13%) and NEMI (12%). With Anglo as majority owner, the NEMI shareholder has always been along for the ride, dependent on Anglo's time table. However in October 2009, in a major restructuring, Anglo announced their intentions to divest several assets, including PRC.
I think the typical VIC reader eschews commodity plays, especially ones with layers of minority and liquidity share discounts. In addition, prior to a recent management change and board shakeup, NEMI management lived up to the ill repute typical of many Vancouver based "penny stocks." As previously alluded to, however, the darks clouds of minority share discounts and corporate governance issues may be turning towards sunnier days ahead.
Management and the board were replaced in March 2009 after a proxy contest initiated by a California based shareholder, and now current Chairman, Michael Cooney. Cooney charged prior management with squandering NEMI's resources and pledged to make prudent capital allocation decisions. In the ensuing nine months, new management swiftly retired nearly 3 million shares of NEMI at an average price of .39 cents per share, and made a timely investment in fellow PRC partner Hillsborough Resources. In addition they settled a long standing dispute with PRC majority partner Anglo, netting over 1 million dollars.
So corporate governance issues have been cleaned up, and it looks like there will be a liquidity event in the near future that should unlock some value for NEMI. NEMI has stated their willingness to evaluate their own divestment of PRC, and it would be logical to assume that they would ride the marketing coattails of Anglo. What is PRC worth?
Hillsborough Resources was acquired by Vitol Anker International on December 21, 2009. The takeover materials included an independent valuation report prepared for the Hillsborough board. The report valued Hillsborough's PRC stake at between 30 to 48 million. Extrapolating, this would value PRC at between 225 and 344 million. It is important to note that the price of coal used as an input in the valuation was the stale price of 135 per tonne. Recent estimates of coal pricing suggest that pricing for 2010 could come in much higher. Spot prices at the moment are closer to 170$ per tonne. An extra 35$ per tonne when estimating 1 MTPA production is meaningful.
An additional data point. NEMI reports total PRC partner equity, as of September 30, 2009, at 355 million, for another data point.
The coal year starts on April 1, 2010 and price negotiation is lead by dominant supplier BHP Billiton. Steel producers will be scrambling to lock up supply in the near future. Anglo will be marketing PRC into this environment at an opportune time, and recent history displays surprising upside volatility.
At NEMI's current stock price you can buy into this asset at a valuation of 200 million, or roughly half of "book value." I arrived at 200 million by coming up with an enterprise value for NEMI of 25 million. 25 million divided by 12% = 200 million valuation for PRC.
Of course Met coal is volatile, perhaps too volatile for the average VIC reader. Here is a brief history of the benchmark contract coal price.
2009 - 129/t
2008 - 295/t
2007 - 95/t
I think that given Anglo's short time line here, that you can stomach this volatile underlying asset in the hope that it hovers at this price until Anglo sells PRC.
Anglo sells PRC, creates liquidity event for NEMI.