Calculation of mine profitability using disclosed C1, C2, C3 mine cost data

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In our book 'Global Mining Investing' we offer some explanation of how to create mine cost calculations so that you can calculate the earnings of a company. Well, in this blog I want to provide some additional resources so that you can in fact practice with your appraisal of mining company earnings.

Consider Millenium Minerals (MOY.ASX). The company has just released its earnings for the March 2013 quarter. They were $10million, or $40 million annualised. This compares favourably with a market capitalisation of $60mil (according to Google Finance); however you might want to confirm that. It addition they have $11mil of cash and bullion on hand, so effectively worth $50 million. Now, you have to consider the impact of:
1. Mine expansion - generally justified by successful resource drilling - or extended mine life
2. Future capital raisings - to cover large capital expenditure like a mine expansion
3. Gold price outlook - price recently fell, but appears to be consolidating
4. Hedge book - a new mine will have some hedging to consider
5. Mining costs - High costs make the company sensitive to gold price fall, but greater upside to a recovery in gold prices.

But I identify this company to provide a case study in how to appraise mine costs and revenues, because it offers you all the information. When you buy most equities, you will have no idea what their commercial viability is because you don't see their 'unconsolidated' operational accounts. This is not the case if you buy miners because:
1. Prices are evident
2. Mine operating costs are disclosed - This is because they are 'price takers' (there are many producers in the market) - so you are more readily able to appraise them
3. Price outlooks can be forecast up to 1-3 years out - whether hedged or open to forecast

These are of course compelling reasons to invest in mining stocks. So what are our sources of information:
1. Quarterly report - see here offers the quarterly cost, production levels, etc.
2. Mine cost model - see here for base metals, here for copper, and here for gold (Oz Mineral's Prominent Hill project)
3. Google Finance - for the latest number of shares and market capitalisation - you should confirm this number with the Quarterly Cashflow reporting because unlisted shares are often not included, and this will also tell you their cash holdings.

Here is another gold project which you could model to test your skills establishing the value of companies. This is an emerging gold miner in New Zealand, listed on the NZX and ASX, called New Talisman Mining. I did not look at their broader corporate interests.

Of course if is desirable if you can model these spreadsheets on Google Documents or Excel. I will eventually do this for a stock so that people can access it, or share it. 

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Nautilus Minerals faces project setbacks

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I scarcely have the time to scan the Canadian market, however there are occasionally those opportunities which just cross by eyes and demand a comment. Nautilus Minerals (TSE.NUS), a mineral explorer listed on the Toronto, London stock exchanges, is seeking to develop subsea exhalative mineral occurrences. These deposits present some unique problems, however the history of engineering development, say to the oil & gas industry, conveys that there need not be such a huge obstacle exploiting these deposits. 

The stock has over the years disappointed enthusiastic investors who have pushed the stock from $6 to just 32c today. This capitalises the company at $76million, which strikes me as a very low value given the potential for these types of deposits. Consider that the stock price has collapsed in more recent times because its JV partner, the PNG government through its investment vehicle has ended the relationship after it spend $70 million for its 30% equity. The implication is that the capitalised value of NUS's retained equity would be something of the order of $180mil. This of course is only a historic cost, and ignores any farm-out advantage. The stock price has found a short-term bottom, and has been selling recently on high-volumes, which gives us confidence. I am very suspicious of the PNG governments termination of this agreement. Given the abundance of corruption in PNG, one is inclined to think that some party of investors is involved in market manipulation, whether:

1. Personal investment gains

2. Strategic stake building

Time will of course tell what is the case. None of this really detracts from the appeal of the investment. The matter has gone to arbitration with the Australian government. I fully expect that some Western Australian  or Chinese company will take a stake in the company. This strikes me as a very good entry. The latest presentation describing the company's activities and mining method. The clear advantage of such mining is that:

1. It does not produce waste - it merely displaces it

2. It recovers only the valuable portion - the waste is the same silt that was deposited, in the same anaerobic environment, so there is no chance for oxidation.

3. It has no apparent impact on the seafloor since there is little aquatic life (at depths below sunlight penetration) at such depths and the areas affected are quite minor in comparison to the vast sea floor. 

4. There is no extensive impact to existing land uses, i.e. The impact on fishing would be minor. Even sediment 'siltation' can be reduced by dispensing at deeper levels (below fishing trawlers).

The company has outlined a resource at Solwara 1 & 12 of 3 million tonnes grading 7.8% copper , 5.5g/t gold (some silver & zinc). This is very high grade ore. The company is backed by a number of industry majors is there is no shortage of funding. The company is well-cashed up with $90mil in the bank. 

Salwara in the New Britain area of PNG is the most advanced project, however the company is also assessing another far larger, lower-grade, nickel, cobalt, rare earth deposit in the waters of Tonga.  

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Union Resources - best bet in bad market

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Looking for some short-term upside as well as some long-term serious upside? Look no further than Union Resources (UCL.ASX). For an update of its fortunes look to the latest quarterly report. But let me summarise:

1. The company has a 45% stake in one of the largest and easily accessible phosphates in the world; well-positioned to supply South American and European markets, if not Africa, where increasingly food production is important. The deposit has resources to last over 100 years; its a world-class resource which can be extracted using offshore dredging; the same technology used to recover diamonds. The difference is - the grade is 19% phosphate, not 0.2 carats per tonne. The resource is not fully-appraised, however 25-years mine-life is good enough for any commercial consideration. Its important because there is scalability.

2. Marawid Mining, a subsidiary of an Oman state-owned engineering enterprise, has acquired a 19% stake in UCL, as well as buying out Minemakers Ltd's stake in the Namibian offshore phosphate deposit for $25mil. That values UCL at twice its current valuation...that's the short term upside. The current AGM announcement suggests there is scope for more capital raising and a placement to Marawid Mining.

3. UCL has a long-standing 34% stake in one of the largest undeveloped zinc-lead deposits in the world. The problem is that the project is in Iran; and the state-enterprise is not recognising its equity-contractual interest. It looks like nationalisation or corruption; but no one is calling it as much. Iran is of course a target for political reform, regime change, or otherwise. That project interest must be worth $350-500mil; which is further upside to UCL, given its uncertain stake. Fortunately, given the promising Namibian project, and the likelihood of a deal over that, this is a 'no-brainer' investment. I frankly am wondering why the market is not responding. 

In the next few weeks I was expecting the following to occur....maybe it still will in the light of the recent appointment of a Marawid(?) director and placement. I have no inside information; but I would have thought that the companies would seek for:

1. Marawid Mining to become the London-based investment vehicle for the Namibian offshore phosphate deposit

2. Union Resources would sell its stake in the phosphate project to Marawid in exchange for equity in that company.

3. Marawid Mining I expected to seek a listing on the Alternative Investment Market (AIM) in London, and raise equity in the project. This should attract a lot of investment attention, and being based in London, it will be a precursor to a London capital raising to advance the project.

4. Eventually we might expect the company to be taken over in some fertiliser market rationalisation/ consolidation

5. I suspect that Union Resources will continue to exist with its Iran project, its passive stake in Marawid Mining, and I suspect it will probably go after more exploration targets.

That is what my crystal ball was saying; but now I'm inclined to think that the companies are taking some other course. Its possible that Union simply needs the case, and Marwid Mining hopes to convert its equity in Union into greater control of both Union and the phosphate mine. Well, the stock I believe has fallen to support, so I will top up a little at 13c. 

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Archer Exploration and Alkane Exploration

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Comment from another of my blogs:

In late 2013, we might expect those base metal stocks, including explorers, to look really good, as well as rare earth stocks like Alkane Exploration. Too early now though. Its always best to go for those exotic elements in these times; as they are relatively under-priced. i.e. Vital Metals might have advanced its wolframite (tungsten) project by this time. China produces 80% of the world's tungsten, and this company has the Japanese government as a partner. This is because the Japanese government invests where security of supply constraints are posed. Another appealing exotic company is South Australian based Archer Exploration....not yet though. Wait for the military strikes.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Base Metals Ltd (BSM.ASX) - off support

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Base Metals Ltd (BSM.ASX) offers one of the best exposures to the base metals industry if you believe that industrial metal prices are going to stay high. i.e. That China and the third world are expanding at such a rate to offset weakness in the developed world, and that the developed world is about to be transformed by globalisation....nevermind what is happening in Greece. I am in the Philippines as we speak. The economy here is very strong. Property prices are booming, and yields are still very reasonable compared to the rest of Asia. There are a lot of people working in the coffee shops, whether call centre agents, programmers or the like. Suzuki has a 80,000 motorbike plant here, and has committed to a new 200,000 unit plant.

So why BSM? The company has an established treatment plant at Hellyer, Tasmania. This is an old mining centre operated by Aberfoyle before if I'm not mistaken. The new operators are modifying the plant and recommissioning it on the basis of extensions to worked out operations. I see a lot of upside if they can 10 years more operating life from the project area. The company is only capitalised at $42mil according to Google Finance, and they have $15mil in cash, they own the treatment plant. I think these are pretty humble numbers, so I agree with the CEO...there is potential for a revaluation up to $500mil; with excitement for traders on every drill hit. Some drilling results out already look good. I jumped on this stock because the technicals look good. The 20c support level looks good...so I've grabbed some. Their moving average is about to cross, and sellers have backed off.

I'd not be surprised to see a Japanese, Korean or Chinese trading company back this company with further development finance. i.e. Any new development headings will cost money, and I'm unsure how much of the $15mil is left. Besides, I do need to do more research. But looks ok so far. More info - File 1 - File 2

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Union Resources (UCL.ASX) - making a move

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Union Resources has attracted some interest of late. Clearly there are several reasons for this:

1. Resource value: Union Resource's holds a 43% stake in an offshore Namibian phosphate deposit, and a pre-feasibility study has placed a value on the project of $310mil, that's $140mil for UCL, and that's on pretty conservative parameters, particularly with respect to resource thickness and size. A larger resource might justify a larger scale of operations, so we might expect an a $500mil development instead. Depth of mining might give a great deal more upside again. So there is a lot of resource upside as a result of improving the technical merits of the project. Miners start from a conservative position. The greatest risk is actually about 3 months after they have started to mine. i.e. When they announce the first delivery of metal or product; that is the time to sell. There is only downside from there in terms of cost and market risk, and CEO risk, as a great many of them will deceive the market. ASIC doesn't care about shareholders unless more than 20,000 investors or 300 jobs are affected. Phosphate mining though is a pretty safe bet as its bulk mining.

2. Takeover potential: Minemakers Ltd (MAK.ASX) has a 14.9% stake in Union Resources. Expect a consolidation of these interests. I think we are no far off from MAK making a takeover offer for Union Resources. Mind you I think MAK will itself be taken over in future, so hang on to that script as well. I would not be surprised to see MAK use the next issue as an opportunity to acquire a lot of shares. UCL will need to fund a feasibility study. That will cost $10 million I guess, so their share is $5mil.

3. Director buying: You have the newly-appointed CEO of the company buying shares. That is always a good thing. A sign of confidence. Mind you, at this point, his investment is token. Just $25,000 worth of shares. I expect he will add to that, but maybe he will wait for a rights issue.

4. Zinc upside: UCL retains a 25% stake in the Mediahebad Zinc-lead project in Iran. I believe this is the largest undeveloped zinc project in the world, and it might stay that way for another 20 years, or their might be an overthrow of the Iran govt in the next year or 3. Who knows. Obama never said he wouldn't invade Iran. Anyway, war or revolution is good for UCL. That project is probably worth a billion, or $250mil to UCL, and much more when its in operation. Its a very attractive resource...but then I guess the Iranian govt knows that.

You can download the latest presentation by Union Resources here. The rights issue might not be too far off given the need to raise money, and the recent strength in the share price.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Resource rent tax back down will buoy mining stocks

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The SMH Online seems to be alluding to the prospects for a backdown by Kevin Rudd on the mining tax. It is safe to say that Rudd will be sparing the precious & base metals industry. I suspect that the govt will instead target the bulk materials industries like coal, iron ore, though its fair to say he will be given a token if they are to stay happy, because those industries are the ones with all the money. The smaller metals are the one's who would be severely impacted by the tax from an operational perspective. Any news ought to have a neutralising impact on the governments prior stupidity.

The implication is that it is a really good time to re-enter mining stocks, with the expectation that Rudd will be backing out of this tax proposal with his tail between his legs. A1 Minerals I think represents good buying on that basis, as it has the most to gain from this tax. I think it has curtailed plans for an expansion of gold production after the tax was announced. It is a high grade producer, and it has broken out, and fallen back to support, i.e. previous resistance, so we can expect a move by it when Rudd announces the backdown. A1 Minerals is WA based.

Other Australian miners and project developers will of course benefit. i.e. coal seam gas producers or developers in particular. Its possible iron ore miners will concede a minor tax increase. Anyway, I do not think this tax will be going ahead as the Liberals will reject it.

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Andrew Sheldon www.sheldonthinks.com

CBH Resources (CBH.ASX) and Perilya Mines (PEM.ASX)

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CBH Resources is a growing producer of base metals with a number of advanced projects throughout Australia, as well as some $178mil in cash to fund capital expenditure which will expand their earnings power. There is no question that those plans look less appealing than they did 12mths ago since metal prices fell. But with such great projects, still high prices, 24% hedging in place and huge cash reserves, CBH have alot of capacity to expand mine life through more exploration. Their asset holdings are strategically very strong. With a market capitalisation of $353 million, and $179mil in cash, their mine holding are undervalued.

I think it is very likely that discussions between Perilya Mines (PEM.ASX) and CBH will result in a merger of the two companies. There are a number of reasons to think this transaction will proceed:
1. Both companies share alot of synergies
2. The executives of both companies have a long history
3. The CBH & Perilya operations at Broken Hill are closely intertwined, and the East-West spread of operations even makes sense since Perilya in Perth based and CBH is in Sydney.
4. A merged entity would command a significantly greater market premium that the separate entities.
See my discussion forum for these two companies - Perilya and CBH Resources.
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Andrew Sheldon www.sheldonthinks.com

Jabiru Metals (JML.ASX)

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JML has been one of my better performers since I recommended them in the 18-22c area. They rose to a peak of $1.70, but have since fallen back to $0.72 in recent times, along with other base metal miners. The attraction was always their high grade volcanogenic base metal deposit in Western Australia. Such deposits also hold the potential for a cluster of deposits, so there was always alot of upside. So reading now the latest report.....there seems little appeal with the Benambra-Stockman project in Victoria, but too early to write-off the exploration potential around the Jaguar-Tectonic Bore project areas.

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Andrew Sheldon www.sheldonthinks.com

AIM Resources - buy

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AIM Resources (ASX.AIM) is an Australian based company publicly listed in Australia and if I remember correctly, its also listed on the Alternative Investment Market (AIM) in London, but I could be confusing acronyms. This company is developing a zinc deposit in Burkina Faso, West Africa. It has a 12 year mine life. The stock peaked at 46c and has since fallen to 15c - a huge drop considering the project is moving closer to production. No doubt the reason is the weaker commodity price outlook. The stock has fallen back to a major (strong) support, so I thought it worth a quick trade. If you would like to participate in a forum on this stock - see Google Finance.

- Andrew Sheldon www.sheldonthinks.com

Some good buys in base metals, gold

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We have had a good pull back in gold and base metals, but after a bit of trepidation, the signs are starting to look good for another rally. Its easy to get side-tracked by the sub-prime fiasco, but there are several compelling factors supporting the market:

1. Low interest rates - with the Fed likely to reduce rates I think before Xmas, but i think that will be the last one because of inflation concerns

2. Excess liquidity - there is still alot of dollars sloshing around in the global economy. Until those dollars are eroded by inflation or debt liquidation, I think the market is not going to collapse, but rather go sideways for a long time. But there will be rallies to trade. This is actually not a new assessment.

3. Strong China - There has always been a strong propensity for China to overproduce to get economies of scale. So I can see China doing this over coming months, resulting in a resurging commodities demand. Base metal prices are starting to recover on the basis of falling metal inventories in China.

As a side note on gold, bond yields are falling again because of the Fed cutting rates, so expect this, higher inflation, Iran/Iraq to drive gold prices higher.

So the stocks I like are:

1. Austindo Resources (ARX): This you might label a 'spec' but its not far off production after having technical glitches during project development. Having bedded down a large issue, and rallied after, they have since fallen back with the retracement in gold prices. They are currently trading at a PER of just 2 next years full earnings. Mind you they only have 4-5 years resources, but upside on exploration. The pull-back to thei Moving Average makes this an appealing trade over the next 3-4months. You should be able to double your money.

2. Gippsland Ltd (GIP): Everytime I touch this company I do well. This would be about the 5th time I have been in this stock. All successful short term trades. The attraction is the completion of the feasibility study, and the finalisation of an off-take agreement for essentially all of the tantalum (600,000 lbs/year) to a German trader HC Starke. This should turn this stock into a growth stock, though I would not hold it long term because of its location in Egypt. As we can see below, GIP has recently dropped off as traders dumped it after the German sales contract. Traders are not inclined to wait 1yr through construction, but investor interest will grow in a stronger metals market.

3. Matrix Metals (MRX): As much as I like this company I was forced to sell it at 13c the other day. Not my best exit decision in as much as it was a late one, but a least I was rewarded since I was able to pick up 150K of MRX at 12c on Friday. I do believe this is the bottom. I sold purely because of the negative news on Wall Street, but also because the price slide was eroding my asset base and the copper price dipped below $3/lb technical support. With stocks falling in China, and all metals rallying on Friday, I think this is a turning point, so time for a re-entry. The other reason to like these stocks is that lower metal prices translate into lower $A, so moderating any $A earnings. One need only look at the $A gold price on http://www.kitco.com/. The $A price hardly dipped belo $900 during the gold price retracement, as the $A slipped from $840 to $772. Well its back to $823/oz now, and in Aust terms over $A940/oz. Matrix is copper, but same principle.

As we can see below, MRX share price has fallen to a support at 11.5-12c. So I essentially got a very good re-entry, albeit it was a poor exit.

4. CBH Resources (CBH): CBH is an attractive purchase because it is developing another 2 new mines which are expected to more than double base metals output - with the new mines to be commissioned in 2008 and 2009.

As we can see from the chart below, the recent fall in base metals has pushed them down, but with prices on the recovery, they are trading at their medium term trend line, making them a favourable BUY. From 2009 they will be producing 250,000 tonnes of zinc equivalent. And they have a substantial resource base (4Mt Zn equivalent), and base metal deposits tend to occur in clusters. They are forecasting 5c earnings per share (EPS), thats a 15% earnings yield, with the promise of significant expansion in earnings over the next 2 years. Mind you the conversion of $200mil of convertible notes into shares will dilute the EPS by a third. Still they have $219mil in cash. The Endeavour resource has alot of potential at depth too! Plus the Western Mineralisation of the Broken Hill Lodes, which was actually the core project when I visited Broken Hill in 2001 to look at this mine. They wont need any more equity raisings since $219mil cash is enough to carry the Panorama project, so its looking good for its mid-2009 start. There are alot of other targets in the cluster at Panorama.

- Andrew Sheldon www.sheldonthinks.com

Stock Selection

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Its not easy to make a stock selection at this time given the state of the US market, the volatility in commodity prices. I think its a good time to hold a swab of cash. But having said that, there is some compelling buying opportunities:
1. Matrix Metals (MRX.ASX): Matrix commissioned their 5500tpa copper mine in west Qld last June, and its already at nameplate capacity. There are plans to expand output to 9000tpa, and they have upside from further copper and uranium exploration.
2. Austindo Resources (ARX.ASX): This company is commissioning a gold mine near Jakarta, Indonesia in the next 6mths. The mine has struggled to date because it was not engineered correctly, but with a new consultant and contractor, things are back on track, and after the low-priced equity issue to recapitalise the mine, and the promise of higher gold prices longer term, this stock has some upside. The company doesn't have the resource security that I would like to see, so go easy.
3. RED 5 Ltd (RED.ASX): Red 5 is developing a gold mine in Mindanao, Philippines. The Open cut development goes underground from year 3 unless further OC gold resources can be found. There is a great deal of appeal to the UG as broad zones of high grade gold, and zinc credits have been found. The project lies along a promising mineralised structural trend, so there is upside from further regional exploration, which is being led by Anglogold. The Net Present Value of the gold project is around $90mil, so there is alot of upside in this company.
4. AIM Resources (AIM.ASX): AIM is developing the Perkoa zinc-lead mine in the state of Burkina Faso, Africa. When you consider they just raised $A90mil by issuing 290mil shares at 31c, at 20c support this stock looks highly appealing. The Mumbwa copper project with BHP Billiton could be attractive bulk sacle target as well. The project has a respectable 12yr mine life based on a resource of 6.3Mt at 14.5%Zn, thats 1.1Mt of concentrate. They will start production of 70,000tpa of zinc metal in 2009. I dont place any value on the platinum project in RSA. Market cap is $220mil with $85mil in cash, which is being used to develop the mine, and on exploration. Its a long time to wait for production though. The best entry into this stock might be the Jun'09 options currently trading at 14c, which have 10c to pay. Based on the current 22c price, the options have about 2c of time value. Not bad considering the leverage and 8mths to expiry.

Timing will be important buying these stocks. Its readily apparent that AIM is falling back to its 20c support, RED has previously rallied with gold to 17c, but seems likely to be sold back to 12-13c, and represents a good long term bet at these prices. MRX has alot of appeal on a corporate level, though I would like to see copper prices hold above $3.20/lb. Nevertheless any falls in copper will be offset by a falling $AU, and its now a cashflow-yield story, with the added appeal of copper and uranium exploration upside.

Remember MKY - a uranium explorer I recommended about 3-4 mths ago. Its up significantly today (20%). At this point its hard to say whether they have anything real or its just fluff. You can be highly selective with rockchip sampling, and trenching too. But it might turn out to be a significant deposit...lets watch! There was something I liked about the geology...on a structural trend I think, which gives me more confidence than a remobilisation of uranium from weathering of granites., which might be superficial, but widespread (12km2).

- Andrew Sheldon www.sheldonthinks.com

Gold Aura (ASX-GOA)

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I love grassroots exploration because its the opportunity to see value before everyone else can see it. Several months ago I bought GOA at 9c in anticipation of attractive drilling results from its Anomaly A & B drilling program in the Carpentaria region of North Qld. This region of course hosts some VERY significant resources with a value of $100+billion - so its a good place to find elephant-size deposits. There are the Mt Isa Cu-Ag-Zn deposits, the Cloncurry Cu-Au deposits and the Cannington Zn-Ag deposit.

GOA is targeting a geophysical anomaly and is discovering zones of multiple veinlets running 2-4% zinc and 60-140g/t silver. For preliminary drilling these results strike me as highly significant. Ok the negative is that the minralised zones are being struck at 300-400m depth. The upside might be a Mt Isa size underground deposit. So when you consider this company is capitalised at just $9.3 million, its quite possible this company has huge upside. Its still early days but the tenure of the grades and widespread occurrence of mineralisation I think point to a future mine. The question is whether there is something more significant at 800m depth. Ultimately we are not going to know for another 6months - by which time they should be looking at drilling some much deeper drill holes. In the interim they will be drilling shallow holes to determine the structural controls. But with gold & silver about to go very high over the next few years, the market is going to find very few prospective silver stocks. There is just Macmin (MMN) offering significant silver exposure, so I see this as an opportunity to get in early. Nevertheless I've never been one to buy and hold. So try to avoid those capital raisings. That is hard as capital raisings tend to be paired with drilling results.

- Andrew Sheldon www.sheldonthinks.com