Since our original valuation analysis in January, some things have changed at MMGG. Zinc has climbed from .9366/pound to $1.57/pound. UBS Securities, which is notoriously conservative in their metal price projections, has upped its target for the average per pound zinc price to $1.654 for 2006 and $1.85 for 2007, up 95% on the previous outlook. Look for them to up their targets yet again within a year. MMGG also has completed a private placement to raise the funds necessary to complete the feasibility study, which also increased the number of shares outstanding.
Using today's price of $1.57/pound (being more conservative than the UBS targets), we've updated the calculations we did in January on MMGG's zinc deposit, again using ballpark estimates, with the results of the 3 different valuation methods show below:
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 triple the 1999 price, and with gross profitability for a 25 cent zinc producer being over 6 times that of 1999, one could guess at a buyout price of about 6 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 49 million fully diluted shares outstanding after the recent financing, such a buyout would be equivalent to about $18-20/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 1.57 price of zinc, annual revenues would be over $620 million, gross profit over $520 million, and annual earnings (before taxes) of nearly $500 million. A 4x multiple would result in a stock price over $19 while a 5x multiple would result in a stock price over $26. Discounting the 4x multiple back 15%/year for 3 years to production would result in approximately a $13 stock price, while discounting the 5x multiple back 10%/year for 3 years would result in approximately an $20 stock. This method results in approximately a $13-20/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 over $2 billion, or over $22.50/share. Using a 10% discount rate results in nearly $28/share. Discounting further by 15%/year and 10%/year, respectively, over 3 years to get to production results in approximately a $15-21/share estimated value.
All 3 of the above methods result in a share price after the feasibility study of about $13-21 based solely on the zinc deposit. If the silver/copper side turn out to be more valuable than the zinc side, MMGG could be worth more than $40/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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