MAWSON WEST MWE
September 18, 2013 - 2:53pm EST by
value_31
2013 2014
Price: 0.43 EPS $0.00 $0.00
Shares Out. (in M): 168 P/E 2.5x 1.1x
Market Cap (in $M): 72 P/FCF 0.5x 0.5x
Net Debt (in $M): -16 EBIT 35 80
TEV ($): 56 TEV/EBIT 1.6x 0.7x

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  • Mining
  • Underfollowed
  • Commodity exposure
  • Potential Buybacks

Description

BRIEF SUMMARY

Mawson West (MWE) is a copper miner trading at 0.5x EV/EBITDA.  MWE is currently in a net cash position and meaningfully free cash flow positive.  Cash Costs of $0.55/lb (H1’13 actual) provide protection against adverse metal price movements (current spot copper price is $3.25/lb).  The Company has reached an inflection point which the market has been slow to recognize. 

 

THESIS

1. Compelling Valuation

  • 0.5x EV/EBITDA; 1.6x EV/EBIT
  • MWE generated ~40% of its current EV in Free Cash Flow last quarter
    • 2Q’13 Free Cash Flow: $22m (Operating Cash Flow: $29m)  
    • Current Enterprise Value[1]: $56m (Market Capitalization: $72m)
  • MWE is currently in a net cash position
    • $16m net cash at 30 June 2013 (22% of current market capitalization[2])
    • Net cash expected to be ~$30-35m (42-49% of current market capitalization[3]) by end-September 2013 (next reporting date)

2. MWE Has Reached an Inflection Point 

 

  • Commercial Production commenced in Q4’13 – game changing for the company’s risk profile
  • Production has been consistent (and in line with guidance) since commercial production commenced
    • Q1’13: 11.5Mlb copper; Q2’13: 11.4Mlb copper (Guidance: 11-12Mlb per quarter)
  • Low cash costs ($0.55/lb in H1’13) result in MWE generating sizeable cash flow vs. current enterprise value
  • Free Cash Flow Generation is improving: Q2’13 was $22m vs. Q1’13 of $7m. Q3’13 should approximate Q2’13 (flat-to-increasing production and similar costs expected; metal prices have been in line with Q2’13)

3. The Market Has Been Slow to Recognize MWE HAs Reached an Inflection Point

  • MWE’s history, under previous management, wasn’t pretty – they failed to deliver operationally, had capex blow-outs, financially leveraged the company and almost ran out of liquidity
  • A new management team was appointed 12 months ago.  The new team has: (i) gotten MWE into production; (ii) increased free cash flow; (iii) repaid debt; (iv) moved MWE into a net cash position (net cash is growing)
  • MWE is a very different company versus 12 months ago – the market has been slow to recognize this

4. Stock Has 125%+ Upside vs. Current  

  • DCF valuation (15-20% WACC): ~$1.00 - $1.25/share (+133% to +191% vs. current)
  • Best comparable to MWE (Tiger Resources) trades at 2.1x EBITDA; 3.6x EBIT[4]: using Tiger’s multiples implies a $1.10-$2.00/share valuation for MWE (+156% to +365% vs. current)
    • Note: Tiger is also the least expensively valued comparable.  Using multiples for other peers would result in higher valuations
  • MWE’s net cash position and FCF generation make capital management likely if current valuation persists
  • New CEO (Bruce MacFadzean) has created shareholder value previously  
    • 30 years of mining experience.  Most recent executive role was CEO of Evolution Mining (ASX:EVN) 2008 to 2012.  Total Shareholder Return during his tenure was 29% CAGR

WHY DOES THIS OPPORTUNITY EXIST?

  • Stock is not well known or widely followed ($74m market cap; concentrated register; limited equity research coverage)
  • Company’s history (under previous management) still weighs on the stock (in my opinion). More than once I have had this described to me as a ‘show me’ story
  • Assets are located in the Democratic Republic of Congo.  This is clearly a risk but as explained in more detail below MWE’s closest comparable (whose sole asset is also in the DRC) trades at a material premium to MWE’s current valuation (~2-3x MWE’s valuation depending on the metric)

 

RISKS

  • Democratic Republic of Congo (DRC) Risk
    • This might be a deal breaker for some. I understand that.  My personal view is that at the right price (and with the right position sizing and diversification) I can accept some geopolitical risk
    • In this case the upside/downside looks attractive and the low valuation multiples make the capital return/payback very fast (limiting the risk window / duration)
    • As an aside this is part of the Glencore business model – they take diversified geopolitical risk as long as the returns justify it
  • Copper Price Risk.  A material fall in the copper price will impact MWE’s valuation
    • MWE’s current cash balance (>40% of current market cap at end-Sep) plus its low production costs ($0.55/lb in H1’13) mitigate this risk to some degree
  • Execution Risk
    • Kapulo commissioning delayed – would impact NPV but should not jeopardize capital structure given current net cash position and FCF generation
    • Reserve / Resource updates don’t extend mine life – would reduce DCF valuation (as Resources not converted to mineable Reserves) and mean drilling expenditure was wasted.  I see zero mine life extension as a very low probability risk

 

CATALYSTS

  • Continued operational performance and cash flow generation – MWE is trading at 2.6x last quarter’sFCF.  This valuation disconnect obviously can’t continue for very long
    • Q3’13 operating results should be available in early October and full financial results a few weeks afterward
  • Reserve Updates / Mine Life Extension
    • Dikulushi Mine (3Q’13) – will probably add another 1-2 years to mine life
    • Kapulo Mine (4Q’13/1Q’14) – will probably add 2-3 years to mine life
  • Dikulushi Underground Feasibility Study to evaluate longer term underground mining (Q4’13) – could increase mine life to 4-5 years
  • Kapulo Mine Commissioning (Q1’14)
  • Capital Management Initiatives – the company will implement some form of capital management (dividend, buyback, etc.) if the valuation disconnect does not correct

 

 

BUSINESS OVERVIEW & HISTORY

OVERVIEW

  • Copper miner.  All assets located in the Democratic Republic of Congo (DRC)
  • Assets were acquired in 2010 from Anvil Mining (MWE was a private company at that time).  MWE listed on the TSX in 2011
  • The Company has three assets. Brief Summary:

1.  Dikulushi Mine (currently producing)

  • Very high grade deposit => current reserve is 6.1% copper and 182 g/t silver
  • Produced 23Mlb of copper (at 6.8% head grade) and 925koz of silver (at 205 g/t head grade) in H1’13.  Full year guidance for 2013 production is 44-48Mlb of copper
  • Cash Costs were $0.55/lb in H1’13 (including silver as a byproduct credit)
  • Open pit mining operations have been completed (~6mths of stockpiles – mined and sitting on the ROM pad – remain to be milled).  Underground mining operations have commenced
  • Updated reserves expected imminently(3Q’13/4Q’13). Will add 1-2 years to current mine life.  Reserve update to both underground and above ground (satellite) ore bodies
    • Underground – Reserve for 1st phase of underground mining
      • Note: there is currently ~0.5Mt of underground Resources (at >6% copper grade) at Dikulushi[5]
    • Above Ground – Resource & Reserve for satellite deposits (Kazumbula & Kabusanje)
      • Note: Kazumbula ore body already has 0.3Mt of Resource[6]
  • Going forward production will be a mix of high grade (6-7%) underground ore and lower grade (~2%) ore from above ground satellites.  The mine life of this operation is likely 5+ years
    • MWE scheduled to release a feasibility study for longer term underground mining in Q4’13. This along with the above ground satellite deposits will support a 5+ year mine life

2. Kapulo (Producing from Q1’14)

  • Open pit mining operation scheduled to commence production in Q1’14
  • Production: 35-40Mlb p.a. over a 8-10 year mine life
    • Original feasibility study contemplated ~35Mlb p.a. over a 7 year mine life;  Recent management guidance is for 45Mlb p.a. over 8-10 years  
    • Original feasibility study only contemplated mining the Shaba ore body.  New mine plan will mine both Shaba and Safari ore bodies. The addition of Safari drives the increased annual production and longer mine life (Safari Reserve to be released in 4Q’13)
  • Cash Costs: ~$1.80/lb (excluding silver by-product)
  • High grade deposit => current reserve is 280Mlb of copper at 3.6% grade
  • Material Upside to Reserve => Total Resource 585Mlb of copper at 3.2% grade
    • Reserve does not include any Reserve from the Safari deposit => a Resource upgrade and maiden Reserve for Safari is expected to be released in Q4’13
  • Majority of Capital Expenditure has already been spent ($67m out of $105 total capex already spent)  
  • More Detailed information (including project economics and NPV / IRR) available in the NI 43-101 Technical Report (available here: https://www.dropbox.com/s/320dwtnkplpdhse/MWE%20CN%20-%20Kapulo%20NI%2043-101%20%28Jun%2711%29.pdf?m)

3. Lufukwe (early stage exploration)

  • MWE’s most significant exploration target
  • MWE has had some exploration success here to date but it’s still early stage
  • If successfully delineated this could be a very material and valuable asset.  Some think Lufukwe has very similar characteristics to Ivanplats’ Kamoa Project[7]
  • Given the early stage nature of this asset I have not included it in my valuation, considering it a potential free option

 

More information on the company and its history:

 

HISTORY – OLD VS. NEW MANAGEMENT

  • MWE disappointed repeatedly under old management. A new senior management team was appointed in September 2012
  • A selection of what old management ‘achieved’ is summarized below
    • Dikulushi Production Commencement: originally expected to be in production by mid-2012.  Production actually commenced in December 2012
    • Kapulo Completion: originally expected to commence commissioning in mid-2012.  Commencement was pushed back a number of times.  The current expected completion date is Q1’14
    • Kapulo Capex: original capex budget was ~$70m.  This was increased to $105m in May’12
    • Funding:
      • At IPO MWE was supposed to be fully funded (i.e. with cash on hand) for its strategy which was: (i) complete Dikulushi (material cash flow generator); (ii) complete Kapulo (incremental growth and cash flow); and (iii) fund aggressive exploration 
      • Because of the delays to production commencement at both Dikulushi and Kapulo as well as the capex blow-out at Kapulo MWE ran out of cash.  As a result of this it needed to take on debt financing (2012) and complete an equity raising (also in 2012)
  • The new management team, led by Bruce McFadzean, has steadied the ship and has delivered on its promises.  For example:
    • Dikulushi Production: brought the mine into production (in Dec’12).  Subsequently delivered consistent production in line with guidance (11.5Mlb in Q1’13 and 11.4Mlb in Q2’13 vs. guidance of 11-12Mlb per quarter)
    • Cash Flow Generation: MWE has generated $29m of FCF YTD ($22m in Q2’13). The company has moved from a net debt position of $16m at 31 December 2012 to a net cash position of $16m at 30 June 2013
  • Bruce McFadzean is an experienced mining executive who has created value for shareholders in the past.  McFadzean’s most recent role was CEO of Evolution Mining (ASX:EVN).  During his time as CEO (2008 to 2012) total shareholder return was 29% CAGR[8].   

VALUATION

  • Summary: DCF and multiples based valuation both support >$1/share (vs. current price of $0.43/sh)
    • DCF Valuation: $1.00 - $1.25/share (+133% to +191% vs. current)
    • Multiples Based Valuation: $1.10 - $2.00/share (+156% to +365% vs. current)
1. DCF Valuation ($1.00-$1.25/share)
  • Production: Current Reserves + 50% of Resource Conversion (zero valuation for exploration properties, including Lufukwe)
  • Metal Prices: forward curve
  • WACC: 15-20% (high & low valuation respectively)
2. Multiples Based Valuation ($1.10-$2.00/share)
  • There are a number of mining companies operating and/or developing mines in the DRC
  • However several of these companies are large and/or multi-mine operations (e.g. Glencore, ENRC, Freeport, Lundin).  As such, they are not really comparable to MWE
  • The best comparable to MWE is Tiger Resources(ASX:TGS)
    • Tiger has a single operating mine which is located in the DRC (MWE’s assets all in the DRC)
    • Tiger’s production approximates MWE’s production
      • Tiger: 2013 Guidance: 41-43Kt (90-95Mlb); 2014 Guidance: 21kt (46Mlb)
      • MWE: 2013 Guidance: 20-22kt (44-48Mlb); 2014 Guidance: higher than 2013 (Kapulo comes online and Dikuluski continues, however no numerical guidance provided yet)
      • Tiger’s cash costs approximate MWE’s cash costs
        • Tiger: H1’13: $0.67/lb (2013 Guidance: $0.48/lb) 
        • MWE: H1’13: $0.55/lb
  • Despite these similarities (geography, number of mines, production & costs) MWE currently trades at a material discount to Tiger (table below)
    Tiger MWE MWE vs. Tiger
Equity Value (local) ($) $196m $74m  
Equity Value (US$) ($M) $183m $72m  
Total Debt ($M) $10m $22m  
Cash ($M) -$13m -$38m  
Enterprise Value (US$) ($M) $180m $56m  
         
Share Price change (YTD 2013) (%) -2% -45%  
Share Price change (3 Months) (%) +38% -10%  
         
EV/EBITDA        
LTM (x) 3.2x 1.0x -69%
2013 (x) 2.1x 0.5x -75%
2014 (x) 1.1x 0.5x -59%
         
EV/EBIT        
LTM (x) 4.6x 3.6x -21%
2013 (x) 3.6x 1.6x -57%
2014 (x) 1.8x 0.7x -63%
         
EV/Reserves ($/lb) $0.18 $0.16 -14%
EV/Resources ($/lb) $0.08 $0.07 -14%
         
Reserve: Copper Grade (%) 1.66% 3.91% MWE grade more than double
Resource: Copper Grade (%) 1.57% 3.53% MWE grade more than double
         
2013 Guidance        
Production (Mlb) 92.6 46.3  
Cash Cost ($/lb) $0.48 $0.35 MWE lower cash cost
 
  • The current valuation discrepancy is partly due to Tiger’s recent share price outperformance relative to MWE.  Tiger’s share price has increased almost 100% over the past 3 months
 
  • Using Tiger’s current valuation multiples implies a share price range of $1.10 to $2.00 per share for MWE (+156% to +365% vs. MWE’s current share price)
      MWE Ent. Val MWE Net Cash MWE Equity Val. MWE Per Share
  MWE Input(A) Tiger Multiple (US$M) (US$M) (US$M) (C$/sh)
EV/EBITDA $120m 2.1x $252m $16m $269m $1.64
EV/EBIT $86m 3.6x $310m $16m $326m $2.00
P/E $0.17 6.5x $163m $16m $179m $1.10
             
Average         $258m  
Average Per Share            $1.58
vs. Current           259%
(A) Bloomberg 2013 Consensus for MWE for each of EBITDA, EBIT and EPS
 
  • Other companies with mines in the DRC all trade at higher valuations than MWE.  As mentioned above I don’t believe these are especially good comparables because they are larger companies typically with multiple mines 
  • However for completeness the valuations of these companies are shown below
  • These companies are all trading at a premium to Tiger Resources.  As such using multiples from the group below would result in a more aggressive valuation
    EV/EBITDA EV/EBITDA EV/EBIT EV/EBIT P/E P/E
  EV (US$M) (2013E) (2014E) (2013E) (2014E) (2013E) (2014E)
Glencore XStrata 123,603 10.1x 8.3x 18.3x 14.1x 18.0x 13.3x
Freeport McMoRan 57,492 7.2x 5.3x 10.8x 8.2x 14.0x 10.8x
Eurasian Natural Resources 10,598 5.2x 4.4x 8.5x 6.3x 7.7x 6.3x
Lundin Mining  2,390 8.2x 6.9x 23.1x 16.7x 17.8x 14.5x
Katanga Mining 1,597 5.6x 3.5x 7.6x 3.7x 13.6x 8.4x
               
Average   5.4x 4.2x 10.2x 7.2x 11.0x 8.0x
Median    5.6x 4.4x 8.5x 6.3x 13.6x 8.4x


[1] Close of Business on 17 September 2013 and net debt at 30 June 2013 (latest available)

[2] Close of Business on 17 September 2013

[3] Close of Business on 16 September 2013

[4] Bloomberg consensus estimates for 2013

[5] Additional information on Reserves and Resources available on slide 23 of this presentation (http://www.mawsonwest.com.au/IRM/Company/ShowPage.aspx/PDFs/1426-43952680/CorporatePresentationApril2013)

[6] Additional information on Reserves and Resources available on slide 23 of this presentation (http://www.mawsonwest.com.au/IRM/Company/ShowPage.aspx/PDFs/1426-43952680/CorporatePresentationApril2013)

[7] http://www.ivanplats.com/s/Kamoa.asp

[8] BM joined Evolution Mining (then called Catalpa Resources) as CEO on 10 June 2008 (share price $0.06/sh) and stepped down on 25 January 2012 (share price $1.68/sh).  During his tenure the company completed a one-for-eleven share consolidation.  Total Shareholder Return over this period was 255% or 29% CAGR.   

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Continued operational performance and cash flow generation – MWE is trading at 2.6x last quarter’sFCF.  This valuation disconnect obviously can’t continue for very long
    • Q3’13 operating results should be available in early October and full financial results a few weeks afterward
  • Reserve Updates / Mine Life Extension
    • Dikulushi Mine (3Q’13) – will probably add another 1-2 years to mine life
    • Kapulo Mine (4Q’13/1Q’14) – will probably add 2-3 years to mine life
  • Dikulushi Underground Feasibility Study to evaluate longer term underground mining (Q4’13) – could increase mine life to 4-5 years
  • Kapulo Mine Commissioning (Q1’14)
  • Capital Management Initiatives – the company will implement some form of capital management (dividend, buyback, etc.) if the valuation disconnect does not correct
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