|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||81||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
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At around $2 Canadian per share, Western Prospector is both a value investment and a warrant with multi-bagger potential. They own the Gurvenbulag uranium deposit in
The Gurvenbulag deposit was originally discovered by the Russians who abandoned it when uranium priced fell after the HEU deal (in which the Russians flooded the market with uranium from decommissioning its nuclear arsenal). The historic resource there was 42 million lbs and the deposit was open ended, but it wasn’t measured to western standards. Note: Russian geologists tended to be conservative, as they risked the gulag if the minerals weren’t there!
Western Prospector reassembled this deposit from a number of local claims and is in the process of proving the deposit to western standards and expanding the deposit. WNP has set a target of having 100 million lbs. uranium resource, which I think it too ambitious in the near term, but think 50 million lbs is a reasonable near term target leaving upside for the future. Under the following rough assumptions, you get a NAV of just under $10 (in CAD).
Ux to sell: 50 mil lbs.
Mine life: 10 years
Cap Ex: $200 million
Cash Costs: $12/ lb.
Tax rate: 35%
Mongolian “strategic stake”: 34%
Production: 2010 is first full year
Ux Price: $51 (the current term price)
FD shares: 47 million
The market seems to value uranium mining companies, particularly those with near term production potential at a premium to NAV of 1.25-1.75x, so if we use a slightly more conservative range of 1.0-1.5x we could get to a $10-15 stock price, absent the two issues above. WNP is fully funded thru feasibility with a cushion, so there’s probably no need for dilution before mine development. The company will be coming out in a few months with a scoping study and the final feasibility study is expected mid ’07, with a preliminary feasibility study in early ’07. This is inherently rough, but my goal is to get people in the ball park and can get more precise in the Q&A, if necessary. The stock trades at such a low percentage of our intrinsic value that laser precision isn’t as relevant.
On the surface this looks scary, but we don’t feel this will amount to much at all. Maximum is claiming that that had a verbal agreement with Ken de Graff to give them a chance to buy the portion of the Gurvanbulag deposit he owned (30-40%) and that he breached that agreement in selling it to WNP. Sounds a bit frightening that WNP may not own 100% of the deposit, however, if once you understand Canadian law (where this is being tried), you’ll see that this probably won’t amount to much. Our understanding is that there are several critical flaws to Maximum claims
- these agreements need to be in writing, not verbal
- if these claims are in fact true, Maximum may have breached disclosure obligations (as it is a public company and never mentioned any of this)
- Maximum should have come forward with these claims earlier, e.g. at the time of several of WNPs prior offerings. This is both a legal point as well as for credibility.
Even if Maximum were to win its case (which we think is a very long shot), it’s seems its Ken de Graf who’s liable for damages, not WNP. WNP should have good title to the assets unless they were aware of the agreement with Maximum and conspired to get around it. As WNP says that Ken de Graf represented at the time of sale that there were no such agreements, this looks like its de Graf’s issue not WNP’s and Maximum is just including them to get leverage on de Graf. We’d encourage you to hire your own legal counsel to evaluate this. We found it very amusing. In addition, WNP’s website has all the relevant docs on its website in a very user friendly manner.
That said, it looks like the worst news is out there now and the strategic mineral clause was very controversial even among Mongolian ministers, as many of them realized that these laws would destroy the future of mining, their biggest industry (see interview with MP S. Oyun below; Note this was before the final law was passed, but note further that the strategic clause was struck by a sub committee). Mining executives feel that existing deposits that are still economic under these new conditions will still go forward, but new exploration will cease.
While I’m using the 34% in my modeling, there is some chance that
The long term price of uranium is debatable. Some say high 20s others say high 30s or mid 40s. While I’m more in the latter camp, it not that important as the investment will be driven by the current contract price, at which WNP can lock in sales as far as a decade out. Last I checked (and the market has strengthened in the interim), it was fairly easy to get a market based contract (to capture any Ux spike in the near term) with no ceiling and a $45 floor. The most recent term price from UX Consulting was $51 and this is the official number that the market is using. They noted however, that that this was the floor of a market based contract (i.e. no price to use in their index) and if a utility wanted a plain vanilla base escalated contract, they’d pay $10 more, indicating the real market price might be $61.
Until and unless Mongolia changes its behavior to western mining companies, I just don’t think we’ll see the $10-15 price where this would trade absent these issues, but I do think that you could see NAV less 34% or around $6 (in CAD) as they move forward with feasibility studies, mining agreements with Mongolia, and ultimately enter production. I’d only take a small haircut, say 2-3%, to make the Maximum suit go away. I note that we have only assumed 50 mil lbs of UX, leaving upside to our assumptions. You could get a target in the $20 range if you assumed a negotiated outcome with the Mongolians, increased reserves, and the UX Consulting base escalated rate, none of which is unthinkable.
Sanity check on valuation: Just to show that our NAV #s are reasonable, I crossed checked these with what the sell side had. The national bank analyst had a NAV of 9.54 @ $30 UX discounted by 10% and Sprott (Nov ’05) had a $7.65 NAV using a 13% discount rate. Given the delta between the stock price and our calculation, I want to show that we weren’t in a different zip code.
Sept-Oct ’06 scoping study
Discovery of additional resources
DISCLOSURE: We and our affiliates are long Western Prospector, and may buy additional shares or sell some or all of our shares, at any time. We have no obligation to inform anyone of any changes in our views. This is not a recommendation to buy or sell shares.
Interview by MP S. Oyun, published at mongolia.neweurasia.net
LD (Interviewer): Now there is only a week and a half left in this spring session of Parliament, are the ’97 mineral law revisions going to be finished this session?
LD: When we were just talking about the ’97 mineral law revisions and the windfall profits tax, many people talk about foreign or western companies leaving. Now there is really heavy interest from the Russians concerning Tavan Tolgoi, and Chinese as well, what happens if western companies leave?
SO: This is really about foreign policy. One of the aspects of
After weeks of minimal protest activity in
Today Eagle TV and Montsame both reported on the developing protests and the setting up of another ger on the square.
The Healthy Society civil movement, the former stallholders of the burnt SAPU trade center, the victims of the savings-and-credit cooperatives, the national miners, and the Free Union of Mongolian Senior Citizens held together a protest demonstration on Wednesday on the
While protesters have been calling for the resignation of the Government since January, there have been no changes in Parliamentary seats.
These latest protests are being spearheaded by O. Magnai, leader of the Healthy Society civil movement. Even though the protests that started in April and lasted through most of May were led by other civil movement leaders, Magnai has recently entered the media spotlight on more and more occasions. Today, he stated:
“The law on savings-and-credit cooperatives was adopted by the MPRP, when it was ruling the state in 2000-2004. Due to this rough law, more than nine thousand citizens have been harmed. There is no justice in
In regards to the loan and credit savings cooperatives, the Government has set up a working group as well as an investigation. How effective they will be will only be determined over time.
Magnai also comments on the windfall profits tax and the fact that mining companies with stability agreements will not have to pay this tax. However, there are only four companies with stability agreements and not all of them are copper or gold companies. While a few companies will not be subject to the new tax, hundreds of Mongolian and foreign companies will pay the tax in this coming year.
With the influx of foreign tourists already becoming visible in
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