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Monday, January 16, 2006


MMGG Valuation Analysis

As the price of zinc continues to climb (.9366/pound vs. .8599/pound at the beginning of the year when we wrote our first report), MMGG's zinc mining property becomes more valuable. We've done some further analysis on the valuation of Metalline Mining's zinc mining property. While many variables remain to be firmed up during the rest of the feasibility study, we've used ballpark estimates in the calculations below.

Let's look at 3 different ways to value MMGG's zinc mining property:

1. Skorpion mine value -- The Skorpion mine buyout in 1999 valued Skorpion at about $150 million. MMGG's zinc deposit is very similar in size to Skorpion's, and likely has a lower capital cost. With the price of zinc now about double the 1999 price, and with gross profitability for a 25 cent zinc producer being about triple that of 1999, one could guess at a buyout price of 2-3 times the Skorpion buyout price. If the zinc shortage continues to worsen and the zinc price continues higher, MMGG's zinc becomes more valuable. Given approximately 37 million fully diluted shares outstanding after the current financing, such a buyout would be equivalent to about $8-12/share.

2. Multiple of annual earnings -- While it won't be known until the feasibility study is complete, the cost of going into production (building the mine and extraction plant) has been estimated at between $250 and $400 million (Skorpion was over $450 million). Assuming $400 milliion is needed, and is financed with 60% bank debt financing (standard with a bankable feasibility study) and 40% equity financing, 40-50 million shares of dilution would be required at a stock price of $3.20-$4/share (a 50% joint venture for someone to provide only 40% of the cost to go to production would be even better for shareholders). Assuming an 11-year life of the plant, 180 million metric tons/year processed, a 25 cents/pound cost to produce zinc, and the current .9366 price of zinc, annual revenues would be over $370 million, gross profit over $270 million, and annual earnings (before taxes) of well over $200 million. A 4x multiple would result in a stock price over $10 while a 5x multiple would result in a stock price over $15. Discounting the 4x multiple back 15%/year for 3 years to production would result in approximately a $7 stock price, while discounting the 5x multiple back 10%/year for 3 years would result in approximately an $11 stock. This method results in approximately a $7-11/share estimated value.

3. Present value of earnings stream -- MMGG's management is negotiating with Mexico (for the mine) and other countries (for the extraction plant) for tax breaks. The present value of an earnings stream of 80% (to net out taxes) of the earnings calculated in #2 above over 11 years using a 15% discount rate is nearly $1 billion, or about $12.50/share. Using a 10% discount rate results in nearly $16/share. Discounting further by 15%/year and 10%/year, respectively, over 3 years to get to production results in approximately a $8-12/share estimated value.

All 3 of the above methods result in a share price after the feasibility study of about $7-12. The over 1.5 billion pounds of zinc in the Smithsonite manto should add significantly to MMGG's value, probably extending the life of the plant by several years. If the silver/copper side of MMGG turns out to be more valuable than the zinc side, MMGG could be worth more than $25/share, especially if the prices of zinc, silver, and copper continue higher.

Lots of assumptions are built into the above calculations, so take them with a grain of salt. However, many of the uncertainties will be removed during the completion of the feasibility study over the next year or so, and the numbers will become clearer to all. Some may be better than assumed and some may be worse. However they turn out, it looks like MMGG at the current price level is extremely undervalued and poised to move much higher.

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