Mines Management: to Glencore
Silver Stock Report
by Jason Hommel, March 4th, 2014
I own Mines Management Stock; and nobody has compensated me, nor contacted me, nor contracted with me, to write this letter.
In 1992, twenty two years ago, Noranda did exploration drilling and final permitting for the Montana based silver/copper Montanore project, which is now owned by Mines Management: ticker MGN, a tiny market cap stock of $43 million dollars. Noranda in 2002, due to low metals prices, walked away from the project, which now contains $10 billion worth of silver and copper, because silver and copper have moved up in price, a lot.
So. Why hasn't Noranda, who drilled up the project, bought back in, or at least bought stock in Mines Management?
Noranda merged with Falconbridge in 2005.
Thus, the decision makers at Noranda, who knew about the Montanore project at Mines Management, are likely no longer making the decisions. This was also 12 years ago that they walked away.
Mines Management stock is trading around $1.50/share as of March 3, 2014.
Here are three ways to value the stock:
1. NPV: price target $27.5/share
Here is how I arrived at those values:
1. NPV method:
Net Present Value about $800 million. Source: page 10 of: http://www.minesmanagement.com/images/pdfs/2013/mmi%20presentation%202013-10-1-final.pdf
MGN Current market cap: $43.5 million at $1.50/share.
Math: $800 million / $43.5 million x $1.50/share = $27.5/share
2. Resource Ratio method.
MGN: $43.5 million market cap.
Silver Resources: 231.4 million oz. silver resources (Canadian NI 43-101) Source: p. 9 of the Company Presentation.pdf
Math: $43.5 million market cap / 231.4 million oz. of silver = cost of $.19 cents per oz. of silver in the ground when you buy stock. The leverage?
With silver at $21.50/oz., (21.50/.19) you get 113 ounces of silver in the ground for every ounce of silver's worth of stock.
That's leverage of 113 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 about 250 to 1.
3. Expected P/E ratio method.
Mines management, once in full production, can gross about $238 million (more or less) 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 x 90% recoveries = $238 million/year.
Expected P/E would be 10.
That implies a market cap of $2.38 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 $550 million, to increase dilution by double. They could also raise the money through debt financing, or partnering with a major, 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. So, as the market cap rises from $43.5 million market cap to $552 million market cap then the company issues stock raising $552 million, then the market cap goes from $1.1 billion to $2.38 billion at by full production.
This implies a stock price rising from 552/43.5 x $1.50/share = $19/share. Then, shares double, and the market cap is $1104 million. Then, 2380/1104 x $19 = $41/share ultimate price target with earnings at $238 million/year.
That assumes silver prices remain about $21.50/oz. as they are today.
So, to sum up, we have three methods of measuring stock price value.
1. NPV: price target $27.50/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: http://finance.yahoo.com/q/ao?s=MGN+Analyst+Opinion
Historic share price moves in the last ten years for Mines Management stock also provide good share price targets:
In 2003, when silver prices began to move up, then things got exciting. Investors jumped into Mines Management, driving the stock price up from under $1/share to $6-9/share between 2004 to 2006.
By 2008, there was a market crash in silver from $20 back down to $9. So the stock collapsed along with nearly all other silver stocks. This led Mines Management stock to drop to $1.40 by 2009.
Mines Management stock peaked again up to $4.18/share in 2011 when silver flirted with the $50/oz.
Since 2011, silver has been in a bear market, losing value for nearly three years now. And Mines Management stock has dropped along with that decline.
Investors lost patience, and counted opportunity costs, and got discouraged, and chased the latest trends, and forgot things.
I think they forgot that silver at $20/oz. today is not like silver at $5/oz.!
And it seems silver stock investors forgot that what was once barely economic and barely profitable at $5/oz. is now wildly profitable and wildly economic with silver at $20.
Also, over the last ten years, copper prices have dramatically increased from about $1/lb. to over $3/lb.
I believe that people who buy MGN today at $1.50/share will likely see the stock rise to $5 to $10/share quickly over the next year or so. Or, at least, more quickly than it moved last time in the 2003-2004 time frame.
What I really like about MGN today is that silver prices don't need to move up. $20/oz. will be wildly profitable.
===== Company Insiders:
I also like that company insiders hold so much stock. This tells me that they believe in the company.
Glenn Dobbs holds over 1.7 million shares as of Nov 20, 2013. This means that his interests are mostly likely going to be aligned with shareholders.
I also like the Institutional Holders listed. I like Sprott Inc, and Cambridge Investment Research Advisors--they both promote mining companies!
It seems that it's either silver industry insiders, or big money outsiders are among the top ten institutional holders. Many of the big money outsiders are multi billion dollar funds. Any one of them could step up and provide the funding, either in part or in whole, to finance the company's mine construction needs going forward.
AQR Capital Management, LLC has $92 billion under management.
Northern Trust has assets of $97 billion, and manages $807 billion.
Calpers manages $257 billion
Vanguard Group, Inc. (The) manages $2 trillion.
Bank of New York Mellon Corporation has $1.4 trillion in assets under management and $27 trillion in assets under custody and administration.
See the list of major holders here: http://finance.yahoo.com/q/mh?s=MGN+Major+Holders
For such a tiny market cap company of $43 million, to have come to the attention of all of these large funds, enough for them to actually buy stock, is impressive and noteworthy.
Glencore Xstrata PLC market cap: $43 billion.
If email@example.com is the wrong email to send this to, please tell me who at Glencore I should send this to, or just forward this letter to them.
Disclaimers: To avoid omissions of material facts and potential risks. I'm not a registered broker or investment advisor. There are risks that stock values can go to zero value for a wide variety of reasons, such as:
The company might lie. The company might go bankrupt. The company might be sued. The company might be attacked by terrorists. The company might be put out of business by impossible to meet regulatory burdens of the governmental jurisdiction in which they operate; at federal, state, county, or city level, or other federal agencies. Your broker might lie. Your broker might go bankrupt. Your broker might steal your stock from your account. People might slander, libel, and lie about the company, without ever being prosecuted by the law. The company might become a victim of short selling. The exchange where the stock trades might go out of business, or go bankrupt. The DTCC that holds stocks on behalf of your broker who holds the stock on your behalf might go bankrupt.
The dollar may lose value or gain value. The dollar might be inflated away to zero value through excessive money printing. There could be a cascading financial collapse involving interest rate derivatives within or without the US financial system; there could be wild deflation of dollars instead of the expected continuing inflation of dollars. There might be civil war. There might be revolution, and change of government that might not recognize historical law, including mining rights. There might not be a judicial system to go to in order to resolve mining claims and rights. There might be acts of God or acts of Satan. There might be acts of nature such as earthquakes, volcanoes, tornados, wildfires, floods or other natural disasters.
Mining companies have particular challenges. They must obtain and maintain mining claims and permits. They must often innovate and create new engineering solutions to the particular challenges that their particular ore body presents. Mines can collapse, and there can be fires. There might be cost overruns from unexpected changes in inflation or values in the things they need such as oil, gas, energy, tires, trucks, steel. The capital cost, or the cost to go into production can go up. The cash costs, which is cost of actual mining can go up. Administration costs, acquisition costs, maintenance costs, legal costs, promotion costs, and other costs can go up and materially impact potential profitability and returns to shareholders. Mines can be beset with work strikes, nationalizations (confiscations by governments), windfall tax burdens, environmental risks, environmental opposition, and other things.
Management can also make many mistakes; they can go into production too soon or too slowly. The prices of the commodities they produce can go up or down. They might hedge and lock in prices for a year or five years and take a hedging loss. Debt burdens and interest payments can bankrupt a company. Terms of debt financing may require hedging and locking in prices well beyond the time periods that would create a liquid market, such as 5 years out, for their commodities during a time of wild inflation, and the company might be bankrupted by the bankers who both financed them and who create the very inflation that can bankrupt them.
It is entirely up to you to calculate whether each of these risks, and other not mentioned risks, may be large or small since I am not selling stock as a broker, since I'm not a broker, not your broker, and since I'm not a registered investment advisor, since I'm not managing your money as your fiduciary manager.
Jason Hommel risks: I'm biased in that I believe silver will wildly increase in value, and I will remain optimistic on silver, regardless of actual silver values being high or low. I'm biased in that I believe the dollar will suffer inflation. I'm biased as a Christian prophecy researcher and leader, which also leads me to believe that silver and gold will have a high value in the end times due to the texts of Ezekiel 38, Zechariah 14, and Revelation 3. I'm biased as I am an optimist. Optimists tend to take extra risks because they over estimate chances of success, and tend to minimize risks. I was a downhill ski racer. Most people are pessimists and over estimate risks, and this makes me different, by nature, than most other people. I am biased towards my own self interest, which is the stock I own. While a newsletter may simply repeat company information, it may also include opinions and beliefs of the writer, including bias and mistakes.
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This letter is intended as a summary, and is not a complete prospectus, and might not list all of the material facts necessary for you to make a fully informed investment decision, or it may have briefly covered a risk in summary that might turn out to be a catastrophic risk. A full and official prospectus may be obtained from the company itself. See the investor section of the company website. Review the latest corporate presentations, and review the latest company annual reports, and quarterly reports.
There is, of course, also the risk of doing nothing, the risk of missing out on a good investment due to overestimating the risks, the risk of not protecting your wealth from inflation, the risk of inflation, the risk of interest rates being below the real inflation rate.
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I own Mines Management Stock; and the company has not compensated me, nor contacted me, nor contracted with me, to write this letter.
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