A very positive announcement and finally some major progress for a company that is in dire need of a change of productive and fruitful direction after their lack of luck in their drilling attempt to become a lithium miner in the DRC. Like a lot of posters here I tend to follow the pattern of the “hot money” from Perth since seeing the massive gains in WFE and also being punished by this stock and VEC, so I am very pleased to see announcement as a hope like many of us a redemption of my funds.
The market was previously alerted to this rich silver and lead acquisition recently but seemed to foolishly ignore its potential probably due to previous experiences of the companies headed by Jason brewer whom confidence in has been eroded in 2019. I however saw it as a chance to buy at the ridiculously low levels of .01-.011 and average out my holdings.
This off take deal is a game changer for Force as it gives them a potential net cash flow of around $A2.25m ( say $1.1m after JV sit ) per month for the venture or $24m per year. Firstly the sale amount to the offtake partner, the respected Transamine Group from Switzerland would be probably much higher than the original say $Us1800-$2000 based on current LME prices. The $us1,400 per ton announcement in its initial acquisition of the silver lead play in May 2019 was low and a quick impulsive deal just to test the product. You would presume that the formal deal struck with transamine is higher. If you take the cheap cost of direct mining of the ore onto the truck which is known as DSO ( say $350-$400 per ton; diesel, wages, plant and machinery hire, management, royalties ) and then logistic shipping costs of around $80 we get a cost of say $450-$500 per ton.
This leaves Force with the potential profit of around $Us1500-$1900 per ton ( $A2,150 - $2,700 ). The shipment of DSO or 1,000 ton plus per month which is easily attainable in my opinion as a truck is 40 t and it would be easy to load 6-8 trucks per week to be sent off on the 3 day trip to Beira in mozambique.This is a tidy potential profit of $25m-$32m per year .
We also must allow to deduct our share of the venture as you must remember Force does not own 100% of the venture it owns 51% ( can be increased later) so this profit attributed to Force is reduced to $13-$16m per year.
So what’s it worth in terms of shareholders wealth and share price? Let’s put a quick Price earning ( PE ration) valuation on this. I would conservatively assume it would have a value or 2.0-2.25 x P/E ratio as it’s an African asset and it has no formal resource estimate as yet ( we need to do a indicated JORC and not inferred which is a word for “maybe it’s this amount”) . This would give it a valuation of a min of $26m and max of $36m or $0.055-$0.07 per share without giving it value to further exploration and graphite prospects which could see the share price flirt with $0.10-$0.12 after proof of ore shipments in sept / oct 2019 as investors wake up to the huge silver, lead and graphite potential. As well there could be a pump in the silver prices in early 2020 which could see silver rise in parallel with gold’s predicted bull run . That’s another story.....
So you can see from my opinion and analysis this company is very undervalued at $0.03 share price and has the chance to rise to 0.07-.10 once easy milestones are met. I have not also allowed for the huge potential upswing if the planned drilling results are highly successful in proving there is a huge resource of silver and lead reserves to give a medium -long term mining life of 10 year plus. This is where the huge wealth growth potential lies for shareholders; Not only do we have a massive monthly cash flow in the short term, we also have a war chest for further exploration over the next 12 months to determine the size of the deposit for JORC purposes and to give investors a estimation of the mine life. Once drilling is complete ( say 9-12 months time ) shareholders will know more about the ventures life span so to allow a more generous P/E ratio and higher estimate valuation of say $50m. At this rate we would have a estimate mine life of 4-5 years without drilling and looking for the famed “Motherload “ of the source of the silver. If the source of the silver is found then Force would be skyrocket into valuations that are only dreamed of.
Remember the 700g/ ton of silver is a rich amount and it comes from a source somewhere hidden in the area, waiting to be discovered through drilling and luck. Drilling work paid from cash flow from the Transamine deal will be ample to pay for search for the famed mother load and investors will not need to cough more capital raising in order to pay for it, hence no dilution of shareholders capital and funds.
There is the potential for Graphite exploration as the lease lies in a rich and constant seam of graphite. This is a huge future strategic resource in the electric car revolution, even though prices are low at the moment. It’s there for exploitation by Force when the prices of graphite rise
The secure and favorable off take agreement with a prestigious and proven European international trading house of Transamene gives the company the security that it always has a buyer in the immediate mine life so reducing market pricing risks. Malawi is a new frontier in the resource space and largely unexplored with huge potential to acquire and uncover more resources such as rare earths, uranium, copper and cobalt. Who knows what Brewer and the expected cash reserves from sales could bring in time once he gains Local mining contacts?
There has been some serious recent buying rumoured to be by the Chinese Government of Silver Futures speculating of a near term upswing of the currently depressed silver prices. See this recent article ; https://www.zerohedge.com/news/2019-07-11/whale-accumulating-silver-futuresCurrently Gold to Silver ratio is very high of 90:1 which last time it was at this level in 2008-2009 at the GFC, Silver took off from $Us15 to $50 per Oz and Silver miners jumped 5-10 x . History could repeat itself shortly again with a long over due silver bull run. It’s only DSO mining operation ( direct shipment ore) meaning that it’s basically its a group of excavators ripping easy access ore that 5-8 meters in clay below the surface, then its crushed and screened on site with a mobile crusher and then loaded straight onto a truck bound for a 3 day journey to a Port in South Africa or Mozambique where it’s assayed for quality control and then loaded into 40ft containers for export. Simple, cheap and no expensive processing costs. Leave that to others as the cost of refining is huge and would require tens of millions of capes and time to set up.
Now this march to a higher valuation prediction by me is not with its potential hurdles on its path to make the milestones to become a decent junior silver and lead producer. I have thought about it a while before and have come up with the following risk factors for investors
1. Can Jason Brewer and management deliver their promises to the shareholders based on recent failures to perform in companies such as VEC, Winmar, ect? This is Brewer’s last chance to rescue his reputation from his disgruntled loyal followers and he has skin in Force so he has a lot to lose if this project fails.
2.I will breathe easier when I see the ore being loaded onto trucks and shipped to port for export to China. I will basically believe it when I see it. This will be a major milestone for the company; the first shipment to China. Proof that Brewer can do it and cash in the bank is the key here. Once this is achieved, expect a major price re-rating upwards. If he keeps on delaying and breaking promises; then expect the market to punish the stock price.
3.The Drilling program results for a resource estimation are hard to predict. At the moment Force has only a guesstimate by Geotechnical consultants of how much ore there is to mine and sell. The area has been secretly artisanal mined for years by locals but that’s about it. This could run out quicker than we think if the resource is not officially estimated through drilling and JORC and expanded to a 5-10 year mine life. This will take time and money to estimate, and from experience I would say a budget of $us500-$750k drilling budget and 9 months be given to management to prove the resource. There is no guarantee of success of these drills so beware of this risk. High risk is High return, it’s either you make a huge gamblers win or you lose how much you can afford for most. If this high risk does not suit go buy boring but safe low return blue chips like CBA or Woolworths. At least you will sleep at night with your low risk and very low returns.
4. Geo-risk of Malawi; even though Malawi is a
peaceful and fairly political stable African country, it is very poor and infrastructure is not the best, it’s still in “Risky Africa “ and if this asset was in australia we would have a valuation double if not triple to what i assume is its fair.
Good luck to all shareholders, especially those long term holders thought their investment was a write off. There is finally some light now .
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