MGN: $1/share to $20 or more?

(Mines Management Stock)

Silver Stock Report

by Jason Hommel, February 13, 2014 (ticker: MGN)

Mines Management. I own shares. The company has not paid me in any way, neither in stock or cash.

Mines Management stock is trading around $.98/share as of Feb 13, 2014.

Here are three ways to get a projected share price for an advanced stage mining project stock such as Mines Management.

1. Net present Value of projects (NPV).
2. Comparative value of resources. (resource ratio)
3. Expected Earnings & Price to Earnings ratio. (PE Ratio)

1. NPV: price target $24/share
2. Resource leverage: price target $4.25/share, to compare with other stocks, and to give us a target where it may make sense to diversify into other similar stocks.
3. Expected PE ratio: price target $45.55/share

I will show how I arrived at those values, below.

Each of the three ways has benefits and drawbacks.

1. The NPV method is the easiest. You compare the market cap to the net present value. The drawback is that you have to rely upon the bean counters in the company, and so you don't always really know how they calculated their NPV.

2. The resource ratio is next. You compare the cost of the company to what you get in the ground, and compare across companies, too. This is an attempt to compare apples to oranges in many cases, as some resources are barely economic, whereas other resources can be wildly profitable. But in a bull market of rising metals prices, what used to be barely economic becomes wildly profitable.

3. Expected Earnings and PE Ratios is probably the most realistic, but it's also the most difficult, because you have to try to factor in so many unexpected and unanticipated costs. Also, companies typically understate "cash costs" as they don't count administration costs, marketing costs, exploration costs, permitting costs, or capital costs, nor acquisition costs in the cash cost which includes only the cost of actual ore mining. But in the real world, mining can't happen without all the other costs as well. They also might just lie about the cash costs, making this even more difficult. This also breaks down and fails as a method for two other reasons, namely, small companies typically never achive the standard PE ratio of 10, maybe only reaching 3 to 5. And also, and in a bull market, PE Ratios can reach from as high as 20 to much higher.

The following calculations are how I arrived at three projected stock share prices for Mines Management using all three ways.

1. NPV method.

Net Present Value about $700 million. Source: page 10 of the Company Presentation.pdf

MGN Current market cap: $28.4 million at $.98/share.

Math: $700 million / $28.4 million x $.98/share = $24/share

2. Resource Ratio method.

MGN: $28.4 million market cap.

Silver Resources: 231.4 million oz. silver resources (Canadian NI 43-101) Source: p. 9 of the Company Presentation.pdf

Math: $28.4 million market cap / 231.4 million oz. of silver = cost of $.12 cents per oz. of silver in the ground when you buy stock. The leverage?

With silver at $20.43/oz., (20.43/.12) you get 170 ounces of silver in the ground for every ounce of silver's worth of stock.

That's leverage of 170 to 1! That's not counting the copper values, which are worth more than the silver. If the copper were counted as "silver equivalent" ounces, then the leverage would be over 350 to 1!

Comparison: SSRI has a $797 million market cap with 1,520 million ounces of proven, probable, measured, indicated and inferred resources of silver. That's $.52/oz.

Based on that comparison, MGN stock could rise from .12 to .52, or from $.98/share to $4.25/share.

(But I think the Mines Management Montanore project is better than SSRI's key project. Both have a $700 million NPV, but the cost to start SSRI's big Pitarrilla project is more than the Montanore project. Also, the Pitarrilla project is 3 oz./tonne silver but with .75% zinc which is half the price of copper, whereas the Mines Management project is 2 oz./tonne silver but with .75% copper, which is twice the value of zinc.)

3. Expected P/E ratio method.

Mines management, once in full production, can gross $264 million or more per year for 30 years.


"The project has already undergone extensive engineering, and is designed with an initial production capacity of approximately 12,500 tons per day estimated to yield 8 million ounces of silver and 60 million pounds of copper, with the added potential to increase production."

And what's the projected gross profits? The company estimates an operating cash cost of $22.51/tonne. (page 10) of the Company Presentation. But the ore contains $90/tonne worth of silver and copper. (page 9) of the Company Presentation.pdf

The implied math: $90 - $22.51 = $67.49/tonne x 12,500 tonnes/day x 365 days/year x 6/7 days/week = $264 million/year.

Expected P/E would be 10.

That implies a market cap of $2.64 billion.

The Capex, which is the amount of money Mines Management needs to raise to start mining is $552 million, from p. 10 of their Company Presentation.pdf.

I assume the company will raise most of that money by about the time the market cap is about $500 million, to increase dilution by double. They could also raise the money through debt financing, or through pre sales or futures contracts of silver, but that has caused the bankruptcy and failure of other mining projects, and I hope will be avoided. vSo, from $28.4 million market cap to $552 million market cap then raise $552 million, then market cap goes from $1.1 billion to $2.64 billion.

This implies a stock price rising from 552/28.4 x .98 = $19.05/share. Then, shares double, and the market cap is $1104 million. Then, 2640/1104 x $19.05 = $45.55/share ultimate price target with earnings at $264 million/year.

That assumes silver prices remain about $20.43/oz. as they are today.

So, to sum up, we have three methods of measuring stock price targets.

1. NPV: price target $24/share
2. Resource leverage: price target $4.25/share, to compare with other stocks.
3. Expected PE ratio: price target $45.55/share

Oh. And a fourth way, the easiest of all. There is an analyst at yahoo finance that is projecting $4/share. See the page here:

I assume that analyst is using the resource leverage industry comparison method of analysis.

Mines Management. I own shares. The company has not paid me in any way, neither in stock or cash.