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Thursday, January 26, 2006


Why we think Anglo American (AAUK) will try to buy MMGG's Zinc Deposit

In our valuation analysis of MMGG, we mentioned the Skorpion mine buyout in 1999, when metals prices were depressed and the seller of the 60% interest in the mine (to Anglo American--AAUK, the 40% owner) was in need of cash:
"Unfortunately, it did not have the resources to fund these diverse operations and was bought out by one of the majors (Anglo I think) for a knock down price."

Anglo American is now one of the largest natural resource companies in the world, with huge profits and cash flows. They recently changed strategic direction, and will be selling off underperforming assets while increasing their investments in metals such as zinc. Given their huge success with the Skorpion mine, producing zinc for .25/pound and selling over $1/pound now (vs. about .46/pound in 1999 when they bought Skorpion), the blurbs we found (at the bottom of this update) indicate they'll be looking to buy the next Skorpion mine.

With MMGG's zinc deposit being similar in size to Skorpion's, and GTI (the same company that did the feasibility study for Skorpion and took them into production) doing the feasibility study for MMGG, it seems very likely that Anglo American will try to buy MMGG's zinc deposit once the feasibility study's done in about a year. They know the process very well and have done it before very successfully with Skorpion, so it would be a very low risk, high return situation for them. With the zinc shortage becoming more and more obvious as the price of zinc continues higher and zinc inventories keep dropping, other companies will also likely be bidding for MMGG after the feasibility study, possibly creating a bidding war. As the biggest zinc deposit nearing production at likely the lowest cost per pound with all the plans laid out in the feasibility study prepared by the same GTI team that got Skorpion into production, creating almost a turnkey solution, it looks like MMGG will be in the right place at the right time as more and more people understand the zinc supply gap situation...

If MMGG sells their zinc deposit, we'd like to see them hold on to the silver/copper side and develop it, or at least get a good price for it in a transaction.

Here are the indications that Anglo American will be on the lookout for projects like MMGG's zinc mine:
"The strong cash flows currently being generated from operations will enable Anglo American to pursue its $5 billion capital expenditure programme and to consider further growth projects."
Jim Jubak of MSN seems to think it's positive..
Here is the text:
Anglo American (AAUK) is undergoing a restructuring that will eventually involve selling its steel, paper and packaging, and gold mining business. Why invest in a gold mining company that's selling its gold mines? Because Anglo American gets twice the bang for its gold buck by selling its 51% ownership in AngloGold Ashanti over the next year or so. First, the company will sell an underperforming asset at a premium price. AngloGold Ashanti accounted for 8.6% of Anglo American's revenue, but only 4.8% of earnings in 2004. And second, by selling the gold, steel, and paper and packing businesses, Anglo American will free up capital for investing in its other commodity business that produce better returns. The businesses marked for sale make up 45% of invested capital, but generate an average return on invested capital of just 5%, according to Morgan Stanley. Without them, the company's return on invested capital would climb from today's 10.6% to 15.6%. The businesses that will be left for Anglo American to reinvest in are exactly the kinds of hard asset businesses that I'd like to own right now: platinum, diamond, coal, base metals and iron ore. As of Jan. 13, I'm adding Anglo American to Jubak's Picks with a target price of $49 a share by December 2006.

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