Stocks Unleashed (ASX): Marengo Mining (MGO): A Future Takeover Target?

By Peter Koay

Comparison of Marengo Mining (MGO) and Equinox (EQN)

With the news of the US$6.5B bid for Equinox from MinMetals hitting the markets yesterday, timed at a point where copper price is still hovering above $4, this helps provide confidence to the markets that there is a brighter future to copper beyond the immediate future. This suggests that copper price may well be set to be above $4 in the years to come (this confirms my earlier assumption of $4/lb average copper price for the years to come). Demand for copper is forecasted to be outstripping the supply for this year and the following year, and it seems that this scene won’t be changing in the near-term as it does take quite some time to prove and bring out copper resource from the ground.

I’ve done some comparisons of Equinox and Marengo considering that Equinox is a pure-copper play.

A summary of the comparison:

§  MGO’s M&I copper resource is about 50% of Equinox’ Lumwana Project

§  MGO’s capital cost is twice the capital cost of Lumwana (this may be due to cheaper construction costs in Africa compared to PNG).

§  MGO has the potential to become the top 15 largest copper producer in the world when it ramps up to 50Mt (at ~0.5% Cu), i.e. production rate of 250ktpa, making it to be in the league of Equinox.

§  MGO and EQN’s operating costs are similar.

§  Note the ratios (highlighted in green) to compare Yandera Project with Equinox’ Lumwana or Jabal Sayid projects. This indicates that MGO in 2-3 years time shall at least be 8-10 times the market price of today.  

§  Note the comparison of Jabal Sayid’s project with Yandera project: This shows the potential that MGO has to become at least a $1B mkt cap company (even before achieving production). My thoughts is that it’ll reach $1B market cap when DFS is released, EPC Lump Sum contract signed, project financing completed(targeted for Nov’11) and offtake arrangement contracts signed. So, $1/share for MGO by end of this year is not an unrealistic target.

 

Note that MGO share price has been hovering between $0.30-$0.32 over the past week, with a breakout today to finish at $0.335. The share price was consistently capped by ~1M shares buying at $0.31 and 1M shares selling at $0.32. It is believed that some big funds are accumulating MGO shares to force out weak holders of the share in anticipation that the share price shall go up when the DFS is released.

These two caps have been removed today, with dad & mum investors to provide the next push to $0.40. The share has recently been also reported on the HeraldSun newspapers, promoting public awareness of this share. Refer to:

http://www.heraldsun.com.au/business/in-the-black/another-twist-on-copper-story/story-e6frfinf-1226034986286

So far, Eureka and HeraldSun have reported on this share. I’m expecting to see ‘BRW’, ‘AFR’, ‘The Age’ and ‘The Australian’ to report on this share shortly. This will provide some additional boost to the share price ahead of the DFS announcement.

DRB-Hicom Call Warrants: Simple overview

I just did a simple calculation on the call warrants for DRBHicom, for those who want to have a higher leverage on DRBHicom. From the table above using simple calculation for the target prices (I'm not incorporating any time value to the target prices, requires some time and data to calculate, dependent on when and what price DRB can reach as well), DRB-Hicom-CE appears to be the most attractive. Nonetheless, one should take note of the expiry date as the closer the warrant gets to the expiry date, the less worth it will be. Thus, the faster the mother share (i.e. DRB-Hicom) moves, the more accurate the table would be and DRBHicom-CE would probably move the fastest in percentage terms as compared to other call warrants.

I'm just beginning to explore these instruments. Welcome any thoughts and suggestions. Thanks :)

 

Another dubious report??? MAAB's sale to Zurich, too good to be true?

Btimes just issued a news report (Click here for the report) on MAA's sale of its 70% stake in Malaysian Assurance Alliance Bhd (MAAB) to Zurich at a price of RM1.2bil!!! This just sounds too good to be true to me. RM1.2bil just for 70% stake in MAAB. This could mean that MAA's 100% equity stake in MAAB could be worth RM1.7bil or RM5.58 per share!!! This price sounds even more puzzling when the price excludes its Takaful business, unit trust business and a host of other subsidiaries and associates (Mithril, Maybach and other international insurance businesses).

Expectantly, MAA came up with a statement to deny the report, a usual case of M&A denials which were highlighted again and again by Moolah. I'm very curious as well about the authenticity and credibility of the authors of these reports. Maybe the financial regulators should just look into the stakes these authors have in the shares they feature. Some people must be making big bucks out of these reports.

Anyway, MAA did confirm that they are talking with Zurich about the sale of MAAB. But the question is how much? For me, I wouldn't want to fork out RM1.2bil to acquire a business that hardly generates any decent earnings (Volatile earnings and very low margins, P/BV of >>4x, PE can't even be used). Last year, MAA even talked with AmG to sell its MAAB's general insurance business for RM180mil but even at that price the deal didn't go through, what's more with this incredulous RM1.2bil for just 70% stake in MAAB? Normally, takeover price is expected to be about 1.5x-2.0x P/BV for less quality insurance companies (Jerneh sale was at P/BV of about 2.1x (Not 1.2x as written earlier). Attaching P/BV of 1.5x to MAA's net asset/share of RM0.94 should draw the share price closer to RM1.41, provided that this sale is highly possible.

RM1.2 bil for 70% in MAAB? Nah..RM200 mil looks more like it.