Palladon Ventures PLL (TSVX)
April 10, 2008 - 6:54pm EST by
angus309
2008 2009
Price: 0.55 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 53 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Domestic Iron Ore Production and Mining Opportunity:

Palladon Ventures (PLL) .55 / share

76mm shares issued/OS

96mm fully diluted when you add 3.8mm in management options, and 15.9mm in warrants. Many of these warrants are in the money at .50

Mkt Cap Full Dilluted: $52.8mm

$9mm note held by Luxor. Pays quarterly at 9.25% interest. Due September 2010.

$1mm in cash.

Palladon will need to raise approximately $5mm in short order to ramp up run-of-mine production (vs $50-60mm for a full procession plant). 

Please see:

www.palladonventures.com

PIC, or Palladon Iron Corp, owns a 150mm metric ton iorn ore mine in Utah which is stripped and ready. This mine was developed decades ago by Geneva Steel and all necessary infrastructure is in. PIC is 50% owned by Palladon Ventures (PLL), and 50% by Luxor. Besides Iron Mountain, the company also owns the Rex deposit which is not stripped, and is of lower grade ore. Rex is believed to contain 90mm metric tons, but is clearly a project for the future. The company also owns 2,000 acre feet of water rights. Water rights in the area have sold for as much as $10,000 per acre foot, though the company’s current intention is to hold this asset. There are some other odds and ends, but the Iron Mountain asset and what it can do for the company and shareholders is the focus of management, and the main driver of value.

On April 1, PLL announced a contract with China Kingdom International Minerals & Metals, LTD to sell to China Kingdom, run-of-mine ore, to be delivered FOB Port of Long Beach California. I do not have direct knowledge of China Kingdom, but have been told they have operations worldwide, and are a major trader, shipper, and processor of commodities. CKI’s Australia division is taking the ore from PLL. Sales are set to being in Q3 of this year. The contract with CKI runs from 2008 until 20013. For year one, the price is fixed at $70 per metric ton. Following this fixed period, the price will be adjusted (see the Sales Agreement filed on SEDAR April 2) to reflect changes in the World Benchmark For Iron Ore. The contract calls for a minimum shipment to CKI of 2mm metric tons per year, or $140mm in gross revenues. I have been informed that PIC believes they can ramp up to 4mm tons per year of production in year 3.

Discussion regarding direct and indirect costs at the mine suggests a net margin of $30 per metric ton. Even accounting for STB’s (S*%t That Breaks), and cost snafus, the contract should be highly profitable to the company. Keep in mind, that in the uber-rosy scenario of $140mm in revenues (2mm tons x $70) and a 40+ % net margin or $60mm, one half of the economics will accrue to Luxor. This asset was acquired by Luxor out of bankruptcy in 2005 for $10mm, so this has been a very high IRR for them, and lends some credibility to the speculation that Luxor will sell their interest in PIC to a strategic. If PLL can execute, the earnings and cash flow per share are so silly compared to the share price that I do not feel comfortable writing it here. I respectfully leave it to VIC community mining/extraction experts to shoot holes in this. I believe with 100% certainty there will be issues that impair the rosy scenario, but heavily discounting that, the shares still appear to be undervalued on their own, and  in light of their comps. Also, the company will not be a taxpayer for sometime after profitability due to offset.

As for comps, the company pointed me towards Baffinland (BIM), Consolidated Thompson (CLM), Labrador (LIR), and New Millenium (NML) as comparables. It has been suggested that Labrador might be the best comp. Labrador has similar tonnage, but evidently of higher quality, and it is also 43101 compliant whereas PLL is not. Labrador expects to begin shipping ore in late 2009 or early 2010, beginning at 800k tons per year, and ramping to 2.9mm tons by 2013.

Risks:

Execution. STB’s.

Management does something stupid with their cash flow; I would point out though that some of the largest holders are expert natural resource investors who are and will remain very engaged with management.

I have missed something entirely as I would never pretend to be a mining guru.

 

Catalyst

Shipment of run-of-mine ore this year.

Luxor selling their interest to a strategic concern who can help take this to the next level of development and build a full processing plant?
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