Go Go Go - MGO - Marengo! (A$0.275; Target Price A$1.00; Investment Horizon: 18-24 Months)

Analyst: Peter Koay

Date: 11 March 2011

Target Price: ~A$1.00/share (18-24 months investment horizon)

MARENGO MINING LTD (MGO): The next OZ Minerals in the making

PNG can be considered to be the upcoming rising star as a mining destination of the 21^st century. It is a resources rich nation, soon to be able to get into the ranks of Australia and Chile.

Now, how do we get exposure to this upcoming mining giant country? Sifting through a number of PNG mining companies that are listed on ASX over a weekend, a very interesting stock had been discovered to have the potential to become the next OZ Minerals, i.e. MARENGO MINING LIMITED. (By the way, OZ Minerals had recently been a darling stock in ASX as it’s generating a huge pile of cash from its Prominent Hill copper and gold mine.)

OZ Mineral’s Prominent Hill mine has a remaining 8 year mine-life from now, with latest reserves (as at Jun 2010) of 5.5 billion pounds of copper (1.135 billion pounds Measured, 2.43 billion pounds Indicated, 1.88 billion pounds Inferred) and 3.1 million ounces of gold (0.5Moz Measured, 1.4Moz Indicated, 1.2Moz inferred).  Refer tohttp://www.asx.com.au/asxpdf/20101109/pdf/31trr9pnqgpjlc.pdf .

Assuming copper price of US$4/lb and gold of US$1300/oz, that means OZ Minerals has $22B of copper and $4B of gold, a total of US$26B of resources (Measured+Indicated+Inferred).

Comparing MGO’s resources with OZL’s resources (refer to http://asx.com.au/asxpdf/20110228/pdf/41x36stqj3wspq.pdf) , MGO currently has 6.5 billion pounds of copper (1 billion pounds measured, 1.9 billion pounds indicated, 3.6 billion pounds Inferred). Assume same copper price of US$4/lb, it has a whopping US$26B worth of COPPER!!

In addition, MGO has a total of 204M pounds of Molydenum (45M pounds Measured, 68M pounds Indicated, 91M pounds Inferred). Molydenum is a material used to manufacture high corrosion-resistance stainless steel (e.g. super duplex steel). Assume price of Molydenum of US$20/lb, this means MGO has US$4B worth of Molydenum!!

This brings it to a total of US$30B worth of resource!!! MGO’s resource can be even bigger than OZL!! Doing a sensitivity analysis, you may say that that’s just a lot of inferred category stuff in MGO’s resource statement. If the inferred category is taken out and a comparison is made, OZL should have US$14.3B of copper and US$2.47B of gold, which brings to a total of $16.8B. MGO should have US$11.6B of copper and $2.26B of Molydenum, that brings it to US$13.8B. Basically, the message is, MGO would be in the comparable league of OZL category of companies!

Now, current market capital of OZL is A$4.81B with 3.24B shares issued. However, MGO’s current market capital is only A$273.36M. OZL’s mkt cap is now 17 times greater than MGO. However, both companies have almost the same amount of resources.

The following are a few reasons on why you may want to buy Marengo Mining Ltd at its current level (i.e. $0.27-$0.30/share):

Comparison Category	OZ Minerals (OZL)	Marengo Mining Ltd (MGO)
Resource (Measured+Indicated+Inferred)	US$30B	US$26B
Market Capital	A$4790M (at $1.48/share)	A$274M (at $0.275/share)
# of issued shares (M)	3240	994

Risk is proportionate to returns: the higher the risk, the bigger the returns. But the higher the risks, the bigger the discount to the share price too. If there’s a huge discount to the share price due to inherent risks of the share, then, we ought to ask: What are the risks that MGO have?

A few of MGO’s risks can be outlined and summarized as follows:

1. Management Risk: Low – Les Emery used to be the managing director for Lynas Corporation. Lynas is doing very well now, all thanks to Emery, who helped guided Lynas to get the lease for the mines that they now own. Do you think he has the capability to repeat a success story with MGO? Quite likely...

2. Capital Funding Risk:
1. Risk of getting the money to fund the capital cost to build the plant is low with China NonFerrous Metal Industry’s Foreign Engineering and Construction Co. Ltd (“NFC”) offering to provide at least 70% of the capital cost or help MGO connect with Chinese banks to lend their capital. If 70% of the funding is obtained via a Chinese bank debt, that means NFC has to fund it by equity issue of US$480M. With current share price, it needs to issue up to 1.8 billion shares – making it similar to OZL’s # of issued shares. But of course, the better option is to fund it all entirely with debt and pay it off. However, it is quite likely that NFC would try as much as possible to negotiate a higher % of equity stake in MGO.

3. Yandera Project Risks:
1. Risk of cost blow-out: Low, due to the arrangement of a lump sum EPC Project with NFC. In a lump-sum project environment, the real exposure is to claims lodged by the EPC Contractor against the company. However, with the partnering arrangement in place, this risk is minimized. The Chinese would not want to risk a backlash by Australian company when they are the ones needing the resource, and they wouldn't want to sink a company which they themselves have a huge stake in (when they participate in the equity offering and arrangement of bank debt). US$1.6B capital cost is needed to get the plant to 25M tonnes/year production.

2. Geological Risk: Low. PNG is a geologically active area (lots of earthquakes). However, this risk is low considering that there are so many major companies which are already investing into PNG on the same main island, e.g. ExxonMobil. If ExxonMobil (very conservative oil company) is comfortable with the risk, I think we should be quite comfortable with it too.

3. Environmental Risk: Medium. This is the only risk that could be a bigger challenge for the company. The possible ways for MGO to manage the mining tailings is to build a dam, use DSTP (Deep Sea Tailings Placement) similar to Ramu Cobalt-Nickel Mine and Lihir Projects, or to build a processing plant to treat the wastes. The PNG govt is quite likely not to have a huge appetite to build a dam to contain the mining waste as OK Tedi’s dam was damaged in an earthquake back in 1984, which was a factor contributing to OK Tedi dumping mining wastes straight into the river systems leading to a huge environmental disaster. Having a potential damage by earthquake of a dam, and end up releasing tonnes and tonnes of toxic wastes into the environment would be quite unacceptable. Possibly, the DSTP method may work for MGO.  

4. Product Sales Risk : Low. NFC has already offered to off-take a portion of the product from the Yandera project as part of the MOU signed with NFC. MGO has already secured a big customer!! And with the rising world demand for copper (China being a big driver of this demand), there shouldn't be any concerns on whether they could sell the product.

5. Political/Sovereign Risk: Low. MGO has very good political connections. It has the former PNG Mining Minister (Samuel Akoitai) and the former PNG PRIME MINISTER (Sir Rabbie Namaliu) within its board of directors!! These men would be able to help MGO in navigating to get the mining licenses/leases renewed and to assist in getting the environmental approvals required.

6. Construction Risk: Low. With NFC successfully constructing the nearby Ramu Cobalt-Nickel mine, NFC should have the capability to construct and deliver the project in PNG on time for a early 2014 start-up.

7. Resource Upgrade Likelihood: High. MGO still has $71M in cash as of 31 Dec 2010. This money is enough for it to continue its drilling program around the resource and prove more of the inferred resource into the indicated category. As drilling continues, the company shall keep on adding value to the company. When good news is released on any upgrade in the resource, this will drive the share price even higher.

NPV Analysis:

A basic Yandera project NPV analysis based on available information shows us how much the share price should be. Based on a 10% discounting factor (i.e. 10% cost of capital), this will give it a current NPV of $2.67/share based on the following assumptions: 

1. 0.57% grade copper equivalent (including Mo)
2. Copper/Mo recovery factor: 0.8

3. 20 year mine life (with startup in 2014)

4. 25M tonnes of ore per year 

5. Net profit margin of 56% (as per OK Tedi most recent net profit margin)

6. 10% discounting factor

7. US$1.6B capital cost

8. AUD to US$ conversion ratio = 1:1  
9. Copper price: US$4.30/lb

Sensitivity analysis:

Even if the capital cost of that plant is US$2.5B (assuming another extra US$900M to deal with the mining tailings), the NPV for the project will lead us to $1.76/share. This is not taking into account that the company will find and prove more reserves with its continuous drilling program.

Share Price Risk Analysis:

§  MGO has recently issued 110M shares (fully subscribed) at a price of C$0.25/share (which is about A$0.255/share) to institutional investors. This helps set a floor price. Major institutional investors will generally not allow the share price to go below the price for which they’ve obtained the shares.

§  Share price has a huge potential to spike up as soon as Definitive Feasibility Study (DFS) is released (targeted for 1Q’11). It’s now getting to mid-March, so the DFS report is not far away (in the next 2 weeks). 

§  Strong institutional shareholders participating in recent offerings, implying low risk of share price falling any further than current levels:

Biggest shareholder: Sentient - 22.2%

Sentient has proven themselves to be very astute stock-picker of stocks that have potential to be a takeover target. MGO can be one soon! Refer to the following article on the track record of Sentient Equity fund: http://www.theglobeandmail.com/globe-investor/investment-ideas/private-equity-fund-shines-in-spotting-takeover-deals/article1918226/

2^nd biggest shareholder: Quantum Partners – 18.9%

Quantum Partners is a fund owned by George Soros. George Soros is a man who knows how to profit from financial crises. He still managed to earn $1.1 billion while the rest of the investment companies were reeling from the recent 2007/08 GFC. 

3^rd biggest shareholder: OMERS (Ontario Municipal Employees Retirement System) – 6.1%.

Supposedly, a retirement fund usually should be quite risk-averse. This gives us another comfort factor that the risk of investing in this company is low.

Conclusion:

From market capitalization comparison, MGO will soon become another OZL with market cap in the order of $3B. This would mean that MGO will have to be $3/share to be a $3B market cap company with current # of shares issued. Assuming that 3B shares have been issued then, it has to be at least $1/share for it to be a $3B Market Cap company. 

From DCF analysis, MGO will also be $1.76-$2.67/share provided that all risks mentioned above are managed properly.

From PE Ratio analysis, at 25M tonnes/year production, MGO will generate a net profit in the order of US$600M per year!  Assuming a 3 billion issued shares (similar to OZL now), and at the price of $2.00/share for MGO, the PE ratio will just be 10. When it ramps up to 50M tonnes/year production, the PE ratio will just be 5! 

Hence, MGO share price will be able to go up to at least to $1.00/share in 1.5-2 years time (very conservative estimate). This is not taking into account all the upsides that MGO has by its continuous drilling program in the 1900km2 tenement that it has in PNG. 

Do you want to be a part of the exciting story of Yandera Project in PNG? It's your decision... 

Note: Marengo is Napolean’s favourite horse who had faithfully served him for 35 years. I’m sure MGO will also faithfully serve those of you who’re willing to buy a stake into it!! 

Note 2: Additional Chart from http://www.asx.com.au/asxpdf/20100901/pdf/31s8g5wswdv31j.pdf 

You can see that Marengo is forecasted to be one of the lowest cost producers of copper (on a per lb basis), almost next to OZ Minerals. 

Disclosure: The analyst is a long-term shareholder of MGO. This share analysis does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided here is solely your responsibility. You should consult your investment adviser before making any investment decisions.

Want your returns to be in multiples, not percentage terms? Try OZ mining stocks!

Link for OZ mining stocks, especially Frontier Resources (FNT):

http://stocksunleashedau.blogspot.com

Stocks Unleashed for ASX

Anyone interested in Australian stocks (Especially mining stocks) can take a look at Irene Koay's blog here.

Happy investing!

Ho Wah Genting Bhd: Potential to fly like Australian mining counters??

By William Koay

In Australia, there are some mining stocks which were trading at very cheap prices around 10-20 cents before they found the minerals underneath the mining land. However, their shares rocketed to the sky once they found the minerals such as gold, copper, tin, gas or rare earth.

There is a stock named Sanfire which traded at 9cts in May last year and had since sky-rocketed to more than A$7.00 now as they found big deposits of copper in its mine worth about A$5-6 billion at current market value. Another stock named Karoon Gas drilling for oil and gas off N-W part of Australia, has its share price zoomed from a few cents to more than $8 now!! In year 2005, a share called Redback Minerals Resource which has a very small market cap found gold in West Africa and saw its market cap. zoomed to $6 billion currently traded in Canada stock Exchange. In view of this, many Malaysians might not be aware of the craziness of share prices of mineral companies overseas. Will this happen to Ho Wah Genting Bhd (HWGB)?

The current 3rd or 4th richest man in Australia who is worth a few biillons was once a farmer before he found one of the biggest deposit of iron ore in its farm land. He concluded the deal with a Chinese company to develop it into one of the biggest iron-ore mine in the world and thus his company share sky-rocketed and made him a billionaire.

Ok, back to HWGB, it has 35% stake in a magnesium company called CVM Mining which is listed in HKEX and is worth at about $110m. The current market cap of HWGB is worth about this sum as well. Thus, its 100%-owned factory in Indonesia producing copper cable/wire and 100%-owned HWGB Tin Mining company as well as some properties coupled with tour bus business are not priced into its share price yet. In other words, if you buy its shares at 28 cents, these businesses are basically free!!

Nonetheless, aside from this, the main impetus is actually tin mining. The boss said that it has reserve of 50,000 ton of tin which is worth about 50,000 x RM 80,000/ton = RM4 billion at current price of tin. But how true the statement is remains unknown. Assuming that it's half true, the tin beneath could worth RM2 billion which is shocking.

So, let us watch to see whether HWGB could become another Sanfire or Karoon Gas company of Australia!

Wish you all the best in investing!

Click here for some info on Malaysian mining.

The Star Article on Tin Mining:

The lucrative revival of tin mines

Commodities Talk - By Hanim Adnan

A full revival of tin mining operations can potentially be lucrative ventures for governments in states with high tin deposits. Malaysia’s tin reserves – ranked the third largest in the world – are estimated at RM350bil or about one million tonnes currently.Perak, for example, used to be the centre of tin mining activities, supplying to over 40% of the world’s tin market.

The collapse in tin prices back in the early 1980s had resulted in the closure of many tin mines in the state.

However, a recent upsurge in tin prices amid a global supply shortage had prompted many state governments to open their doors for more exploration and prospecting of high-income generating minerals.Perak stands to benefit significantly from these current encouraging developments; hence its recent announcement of an indepth study being taken on its tin deposits and other high quality minerals, like kaolin, limestone and ball clay, was timely.

This move can lead to the reopening of the many defunct tin mines scattered all over the Kinta Valley which still have ample tin deposits. The re-activated mining operation can also provide a multiplier effect for other activities such as property, manufacturing, logistics, landscaped townships, ports and railways. This can lead to a boom in Perak, which needs to actively spruce up its economic activities.

Only a handful of companies with big financial muscles are involved in tin mining in Perak. Malaysia Smelting Corp Bhd via its unit Rahman Hydraulic Tin Sdn Bhd has the country’s biggest hardrock tin mining operations in Klian Intan, Hulu Perak, since 1907.

Last year, a 30-year mining concession was awarded to Rahman Hydraulic for prospecting tin ore and other minerals in a newly identified 14,000ha at Pengkalen Hulu near Ipoh. Perak also stands to receive a 5% royalty from the tin ore and minerals to be mined. A 10-year mining lease was also awarded to HWG Tin Mining Sdn Bhd, a unit of Ho Wah Genting Bhd in 2008 to mine tin and other minerals on 500 acres in Pengkalan Hulu with a potential for a further 500 acres as work on the initial area progresses.

Unknown to many, mining operations contribute about RM2bil annually to Malaysia’s GDP, according to the Malaysian Chamber of Mines.To ensure efficient and effective implementation of tin or other mineral mining operations, state governments keen to open up mining areas must strictly adhere to the newly revised Second National Mineral Policy (NMP) which was launched last year, as well as the State Mineral Enactment.

Previously, mining was perceived as damaging to the environment, hence the reluctance of many state governments to issue new mining licence to potential operators.Environmental-friendly mining including environmental protection, sustainable development and the management of social impacts are vital to modern day mining activities.In fact, the thrust of the NMP is on optimum exploration, extraction and utilisation of resources using modern technology as well as research and development with strong emphasis on the environment.

Apart from tin, it is worth noting that Malaysia is also endowed with gold, coal, feldspar and industrial minerals like river sand, granite dimension stone, clay and silica sand for prospecting and mining.

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.