a goodly report, page-4

a goodly report --here The post on motley fool
By
'PottsPoint' who originally posted this in PaulyPilot's Pub on Fool.co.uk"

I acquired shares in Consolidated Minerals (CNM.L and CSM.AX) in June 2002 as a contrarian/value investment and I'm still holding. I'm now offering them up for your consideration because:

- I think CNM's a reasonable GARP stock; and
- it's my pick in NickyFraser's share comp, currently in 11th place and I'd be ecstatic if I finished the year in the top 10 after competing with you lot – so, I figured if I could convince you lot to start buying some…

…which would require some figures, I suppose (my calculations based on actual reported data and recent press/market releases):

Historic p/e: 15.8
Forward p/e: 7.8 (Australian financial year ending 30-Jun)
Historic Yield: 3.9%
Forecast Yield: 6.3% to 8.2%
Gearing: -20% (i.e. financial debt is a lot less than the Company's cash pile)

What does CNM do?
Consolidated Minerals mines Manganese and Chromite – key ingredients in certain types of steel production. The Company accounts for 5% of world manganese supply and 2.5% of chromite supply from its two mines in Western Australia.

What would CNM like to do?
According to management, the company would like to become a one-stop shop for steel producers. To this end, CNM currently has:
- a joint-venture developing an iron ore mine (Mindy Mindy) in Western Australia;
- a 15% stake in Portman Mining, an Australian iron ore producer;
- a 17% stake in Mithril Resources, an Australian nickel sulphide explorer;
- a 20% stake in Reed Resources, another Australian nickel explorer;
- a farm-in joint-venture with Cazaly Resources, yet another Australian nickel explorer, currently developing its Kunnanalling nickel project (CNM can earn a 65% interest in the nickel rights by spending up to A$1.4 million over 4 years); and
- a joint-venture with Austminex, still another Australian nickel explorer developing a nickel mine (Nepean, in which CNM can earn a 65% interest in exchange for spending A$6 million on exploration over 5 years).

What else is there to recommend this company?
A lot, IMHO. Including:
- On the back of rising commodity prices and the China-steel-ingredients-vacuum-cleaner-effect, operating cash flow almost trebled in the year to 30 June, 2004 (to A$40 million).
- Inventory turnover increased from 6.3 times to 7.1 times in the year to 30 June, 2004.
- It should increase even more as manganese production capacity is upped to 800,000 tonnes per annum from this month following a plant expansion (funded entirely from operating cash flow with the capex expected to be recovered within 12 months).
- A Hong Kong based company as major shareholder – responsible for arranging long-term off-take agreements for CNM's resources in China.
- A management team that has succeeded with the manganese operations where two previous teams failed (and they subsequently expanded into chromite).
- Current ratio of 1.8 (up from 1.3 last FY).
- Acid test ratio of 1.6 (up from 1.0 last FY).
- all of the company's mines (and all of its prospects, too) are Australian based (which is comforting in these uncertain geo-political times).
- Measured resource (the best type) at the Manganese mine is 5.3 million tonnes (or about 6.5 years at the expanded production rate). Add Indicated manganese resource (the next best type) of a further 5.7 million tonnes and the mine life goes out to 13.75 years. Throw in the additional Inferred resource of 0.6 million tonees and the manganese mine life tops 14 years. (CNM's exploration program has been successful - the company delineated an additional 3 million tonnes of manganese resource last year, and numerous additional targets).

What is there to be wary of?
On the downside:
- I can't find any information about the anticipated life of the chromite mine (and production trebled last year, so you've got to wonder how much is left)
- the aforementioned Chinese raw materials vacuum cleaner effect. If the Chinese economy tanks, so too, I think, will the CNM share price. Personally, I think that a long-term bet on China is a good one, but the short-term is anybody's guess. (Although, to be fair, CNM supplies Indian, Japanese and European steel makers, too – but commodity prices are being driven by Chinese demand, I understand. And, only 2 years ago, prices for many metals were at all time lows).
- CNM currently relies on just two mines and anybody who has experience of investing in mining companies can tell you that's not good. Admittedly, they're open-cast, so technically less complex than underground mines. But, there are still all sorts of problems that can (and sometimes do) occur which can limit or halt production.
- CNM reports in A$, but steel ingredients are, I think, transacted in US$ and the A$ is currently going from strength-to-strength versus the US$.
- CSM management are fond of options - and the issuance is continuing apace! There are approximately 2.5 million in-the-money options on issue (versus 182 million shares outstanding).

That's about enough, I think. But, what do you all think?

All the best,

Gareth