|Shares Out. (in M):||370||P/E||3.7x||2.0x|
|Market Cap (in $M):||152||P/FCF||3.7x||2.0x|
|Net Debt (in $M):||-45||EBIT||40||80|
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Monument Mining Limited (Ticker: MMY.V) – We believe Monument’s stock is conservatively worth $1 per share (2.5x its current price) with firm downside support at the current stock price of $0.41 due to its large net cash balance, strong (and growing) free cash flow, and its (out-of-the-money) warrant-heavy capital structure. The stock has been killed over the past year because of shareholder anger over a dilutive acquisition that may or may not have been a wise decision, but is in the rearview mirror at this point as it was fully equity financed and thus does not hamstring the company with any debt payments.
Monument is perhaps the largest gold land package owner in Malaysia (a stable legal jurisdiction) and one of the lowest cost producers of gold in the world at a cash cost of <$300 per ounce. The Company’s existing mill is doubling production capacity over the next 6 months (at a cost of only $8 million, simply by properly installing the equipment they’ve already purchased), leading to a free cash flow yield of over 40%. The stock is cheap mainly because of shareholder disgust at the appearance of empire building by management in a distressed asset purchase (Mengapur) using expensive equity financing. That financing is now a sunk cost (though the merits are still debatable) and there are several reasons to believe expensive equity financings will not be employed again in the future.
Here’s are press releases laying out the production facility expansion timelines due to be completed by May 2012, this is low-hanging fruit in our opinion: http://www.monumentmining.com/s/news.asp?ReportID=454811, http://www.monumentmining.com/s/news.asp?ReportID=491149, http://www.monumentmining.com/s/news.asp?ReportID=468614
Mengapur and the Private Placement – Shareholder Disgust
Although the CEO (who is also CEO of Yukon-Nevada Gold Corp, which we also believe is cheap) had clearly stated that the Company’s long-term objective was to become an intermediate miner by scaling its expertise and competitive advantage in Malaysia, it seems most shareholders would have been happier collecting dividends from the current cash flow stream rather than using equity to buy a massive polymetallic property (Mengapur). After being handed this huge opportunity, management decided to pursue a very fast purchase by issuing shares despite very low prices for two reasons: 1) the asset was in distress (and potentially a steal) as the previous owner was in default with a bank, and 2) Monument needed to prove it had adequate development capital from day one for the owner (who retains 30% ownership), the bank, and the Malaysian government to sign off on the deal quickly.
From our perspective, this is a sunk cost and we are treating Mengapur as a free option: we are fairly certain that the Mengapur project will at least be a break-even NPV from now on, allaying concerns about value destructive empire building capex. Our comfort here derives from the fact that the Malaysian government spent $40 million on a drilling campaign in the 1980s (only $10 million less than Monument’s adjusted purchase price) and completed a bankable Definitive Feasibility Study in October 1990 that showed substantial copper, gold, silver, and iron ore resources at much lower commodity prices. Here's a brief summary of the old resource report: http://www.24hgold.com/english/project.aspx?id=245218764F8350
The second forward-looking concern is that management may again choose to use expensive equity financing in additional future acquisitions. We believe this is unlikely for two primary reasons: 1) the Mengapur project represents multiple resources potentially worth $10+ billion at current market prices with a mine life of over two decades, which if successful will make Monument an intermediate miner as per management’s original objectives; 2) the private placement was entirely purchased by one investor who has now become a control person owning 30%+ of Monument. This shareholder is now in a blocking position should management want to pursue bad acquisitions in the future. There have been some concerns that this new investor (who is on the board of Yukon-Nevada Gold Corp) got a sweetheart deal. This is a moot point, in our opinion, not just because he could block another sweetheart deal in the future but also because shareholders could effectively participate by buying more share themselves on the open market at a 20% discount to what this investor is paying.
“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” – Warren Buffett
Despite producing a “worthless” hunk of metal, Monument’s stock is just too cheap based solely upon likely free cash flow six months from now, let alone the current run-rate free cash flows. In addition, at $0.41 an investor in Monument receives a free call option on the price of gold (as long as it remains above $1,000 per ounce at which point fair value may be impaired below the current stock price) and a free call option on the potentially large NPV of Monument’s recent controversial polymetallic project acquisition, Mengapur.
75% Net Profit Margin on Gold Production Until 2015
Monument currently generates $65 million in annual revenue (40k ounces of gold per year) at a cash cost of <$300 per ounce from its Malaysian processing facility. This represents annual free cash flow of approximately $50 million per year at gold prices of $1,650 per ounce. Production and free cash flow should double to 80k ounces per year and $100 million, respectively, after a 150% increase in the mill’s processing capacity is completed by May 2012 (construction began in September 2011; there is a three month payback period for the expansion). The Company’s existing tailing facility can already handle a decade of discharge at the new, higher processing rate and can easily be doubled to handle two decades of discharge. Monument’s current gold resources represent a decade of production at 80k ounces per year and are likely to double from exploration drilling over the next couple years to fill a 20 year lifespan at the existing processing facility. Monument pays no taxes until 2015 when its Malaysian government awarded tax holiday expires.
Here are the most recent quarterly financials: http://www.monumentmining.com/i/pdf/fs/MMY-FS-2011.09.30.pdf
Historical Revenue, Net Income (ex-items), Gold Sold, Cash & Equivalents:
4Q12: $21 m, ? , 12.8k ounces, ? (full results not yet released)
3Q11: $14.4 m, $9.8 m, 8.2k ounces, $60 m
FY 2011 (June 30th): $56.6 m, $34 m, 40.4k ounces, $49 m
*FY2010 (June 30th): $16.3 m, $9.8 m, 13.8k ounces, $3.7 m
*Commercial production began in September 2010 (FY 2011)
Monument’s Properties – All in Malaysia
Monument has built perhaps the largest land package of any gold miner operating in Malaysia and is the lowest cost producer in the country. In addition, all of Monument’s gold properties are 100% owned (or have rights to earn up to 100%). The recent $60 million Mengapur polymetallic acquisition was for 70% ownership (and $10 million of iron ore on the property).
Monument’s operating open pit mine and processing plant are located on its Selinsing property (100% owned; 170 acres). Impressively, Monument took the project from acquisition through construction to first production in roughly 27 months and commercial production a year later. The open pit resources are growing with added exploration drilling and the operation is fairly likely to produce 80k ounces of gold per year at a cash cost around $300 per ounce for a decade or two. Currently this property has 618k ounces of gold Indicated and Inferred with major expansion potential in the existing pit; management’s goal is to boost these resources to over 1 million ounces in the near-term through additional exploration drilling. The processing facility has consistently been achieving gold recovery rates of 92%-95% and ball mill availability of 95%+. Below is a link to the most recent quarterly production data (and revenue): http://finance.yahoo.com/news/Monument-2012-Second-Quarter-cnw-1527889847.html?x=0
Major gold resource upside exists at the adjacent Damar Buffalo Reef (100% owned; 2,050 acres), which is in advanced gold exploration and already has 223k ounces of gold Indicated and Inferred. In addition, the Company has the Mersing Gold Project (600 acres; 100% owned after earn-in) and Famehub Properties (100% owned; 32,000 acres). Management has already proven that it can quickly execute on construction and production plans, now all they have to do is install already purchased equipment to double production capacity and continue a successful drilling program to increase gold resources to feed the mill for its operating life.
Here is what management says about Buffalo Reef:
“Robert Baldock, the President and CEO of the Company said: "Buffalo Reef is an extension of the mineralized trend that commences at the Selinsing deposit south of Buffalo Reef and extends for at least 4.2 kilometers along trend. These results are the first phase of our exploration programs that are designed to increase our resource base along trend. We have secured agreement with local farmers to be able to extend our exploration program to the East. This entire resource area is within economic haulage distance of the Selinsing treatment plant.” http://www.monumentmining.com/s/news.asp?ReportID=459809
“The overall objective of the current exploration program is to convert existing inferred resources to reserves, add replacement ore and increase reserve and resource ounces with a target to exceed 1,000,000 ounces to demonstrate at least a 10 year mine life. This will be facilitated through the drilling of approximately 19,000 meters of drilling (mostly diamond drilling) in the next 12 months with four in-house rigs and one contract diamond drill rig.” http://www.monumentmining.com/s/news.asp?ReportID=454811
“President and CEO Robert Baldock stated "These drill results are very positive and show us that at a further 220 metres below the current pit the mineralization is continuing. Together with our recent NI43-101 report filed on Buffalo Reef and the in-fill drilling program, the Company is targeting of a new NI43-101 compliant resource statement during Q3, 2012 fiscal year, which will consolidate the resources from two properties including converting inferred resource to measure and indicated resources and historical resources to NI43-101 compliant resources. Our current gold processing plant expansion to increase production capacity to 1,000,000 tpa from 400,000 tpa will fulfill the expected gold inventory in the ground." http://www.monumentmining.com/s/news.asp?ReportID=468909
Monument’s Moat and Margin of Safety
Management discusses their edge in Malaysia in the following video: http://www.youtube.com/watch?v=KyYjyj4TERU&feature=related
Monument has ultra-low cost gold production ($300 per ounce) and existing resources to fill its mill for a decade with the high likelihood of exploration doubling that lifespan. In addition, Monument is scaling its demonstrated success in Malaysia and local connections to become an intermediate sized miner within the next few years. The five year tax holiday on its existing properties and 10+ year tax holiday on the newly acquired Mengapur project are indicators of their positive relationship with Malaysia and the competitive advantage of getting things done quickly and cheaply in a country with a British based legal system. If the Mengapur project reaches just a fraction of its potential, it will prove to have been a positive NPV project and will diversify Monument’s revenue stream away from just gold (the property also contains lots of iron ore, sulfide, copper, and silver). Any operational disappointments over the next few years may be somewhat buffered by a large supply of out-of-the-money warrants that would expire worthless if the stock was below $0.50-$0.70. Below is the current capital structure:
= 617 million shares fully diluted w/ additional cash proceeds of $165 million
Future Earnings Power and Value
Bull Case #1 – gold at $1,750/ounce, 80k ounces/year (20 years), stock price >$0.70 (i.e. full dilution), Mengapur NPV of zero
Net Cash: $200 million ($165 m due to warrant and option conversion)
Total Diluted Shares Outstanding: 617 million
Enterprise Value at $1 per share = $417 million
EV/EBITDA = 3.6x
P/E (fully taxed but excluding net cash) = 7x
DCF at 15% = $1.18 per share
Bull Case #2 – same as #1 but Mengapur successfully developed for $600 million total capex, generating $130 million in incremental EBIT after 4-year development (tax shield for first ten years)
Net Cash: $0 (assumes all cash is invested in a positive NPV Mengapur development)
Total Diluted Shares Outstanding: 617 million
Enterprise Value at $1 per share = $617 million
EV/EBITDA = 2.3x
P/E (fully taxed) = 5x
DCF at 12% = $1.39 per share (we use a much lower discount rate because a successful Mengapur project would substantially diversify Monument away from just one facility as well as away from just gold revenue)
Bear Case – gold at $1,000/ounce, 40k ounces/year (10 years), stock price < $0.40 (i.e. warrants expire), Mengapur assumed to have NPV of zero
Net cash: $35 million
Shares outstanding: 324 million
Enterprise Value at $0.39 per share = $90 million
EV/EBITDA = 3.5x
P/E (fully taxed but excluding net cash) = 7x
DCF at 20% = $0.37 per share (we use a very high discount rate because this production levels signify serious problems with the mill and resources)
Mengapur Polymetallic Project – Free Option
In our valuation analysis, we assume Mengapur carries an NPV of zero in our Bear Case and our Bull Case #1. Our reasoning for this is simply that management was able to buy a distressed asset in quick fashion (after doing confirmation drilling) and that the property had a bankable feasibility study showing substantial resources twenty years ago when commodity prices were much lower. In our Bull Case #2 we simply assume that total development costs much more than planned and takes several years longer than management has guided for first positive cash flows. Specifically, we model it being a $600 million/4-year development project that then generates a mediocre $130 m in EBIT net to MMY which would equate to net income for the first six years at least due to the lack of debt financing and the 10+ year tax holiday awarded to Monument for the property. In terms of analyzing the specifics of the project, we turn to quoting one of the several other discussions of Monument out there:
"According to the Study, the Plant Facilities were expected to provide capacity for the treatment of 2,500,000 tons per year for a mine life of 23 years... Other activities including further acquisitions and area exploration could further increase this mine life as the resource was found to be open in all directions. In addition, the Plant Facilities could also produce other by-products such as 600,000 tons of sulfuric acid per year or downstream products as indicated by the Study such as fertilizer for the Malaysian and other palm oil industry participants in neighboring South East Asian countries… Based on this outdated NI 43-101, the Mengapur project is estimated to bring revenues of $100 million with cash flows of approximately $40 million over the next two decades. To bring this project into production, it will cost approximately $179 million… First, it appears that even after I arrive at $300 million of top line revenues, I am way too conservative. The Mengapur project was owned by the Malaysian government with the intention of mainly producing sulphur, which is used to make fertilizer. The 43-101 was prepared for this reason... the Malaysian government is still interested in seeing Monument Mining produce sulphur for its fertilizer industry, and as an incentive, it will provide the company with a 10-to 20-year tax break, which is pretty significant... Second, the sellers of the Mengapur project are in default with their bank. It is the bank that is in control of the disposition process. When the management approached the bank with the offer to buy the Mengapur project, the bank put certain restrictions on them. Because of the small size of Monument in relation to the Mengapur project, the bank will not allow the company to close the deal by taking on debt. The company also has a limited time frame to come up with the money... the management believes that the first cash flows can be generated by the end of 2012. Currently, there is a plant designed for production of iron ore. It was commissioned in November 2010 and operated until July 2011. It was shut down because of a lack of capital. The management believes that they can restart the production of iron ore by the end of 2012 after some modifications and modernizations to the plant. At this point, I have no idea how much it will cost but I was told that it is within Monument’s capacity. Then, the cash flows from iron ore, gold production from Selinsing, and warrant exercises should be enough to build out the rest of the Mengapur project." http://classicvalueinvestors.com/i/2011/12/monument-mining-should-you-vote-yes-or-no-for-the-mengapur-project/
Here is a brief interview the CEO gave regarding the project’s resource potential: http://www.miningweekly.com/print-version/monument-to-decide-by-2013-on-new-malaysian-mine-2011-08-15
- Hundreds of millions are spent developing Mengapur and it is a complete disaster.
- The price of gold falls to significantly below $1,000 an ounce.
- Unforeseen property nationalizations in Malaysia.
- Monument’s one gold processing plant is hit by a devastating disaster.
- Although Monument’s CEO (Baldock) has flawlessly executed at the Company, there is a chance his efforts are stretched too thin by simultaneously serving as Yukon-Nevada Gold Corp’s CEO.
Other information about Monument Mining
Corporate presentation: http://www.monumentmining.com/i/pdf/ppt/CorporatePresentation.pdf
Annual shareholder report: http://www.monumentmining.com/i/pdf/ar/2011-AR.pdf
1) New NI 43-101 compliant resource report with substantial growth in resources to fill up the Selinsing facility's lifespan.
2) A successful doubling in gold production at the existing plant.
3) Political “solutions” that continue debasing currencies, driving gold prices higher.
4) Monument relisting on a U.S. stock exchange (after a reverse split, perhaps)
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