millennium development looks marginal at best

I have had a look at MOY in the hope it was a small cap gold company in the stage of transitioning from an explorer to a miner that would be rerated once the mine was up and running. While I stress the following is my opinion only, it looks to me like MOY will really struggle to develop the mine, and if it does there will be heavy further dilution of shareholders, and even then, the upside is fairly limited and does not compensate for all the risk. My reasoning is outlined following. I welcome feedback where I may have got the analysis wrong:

1. There is a material funding gap of around $35m.

Based on the latest disclosure, MOY needs $80m to development the mine and fund pre production cost, before a contingency. Lets say $90m including a prudent contingency. They have $45m in debt facilities (not sure if the latest $10m is fully committed but lets give them the benefit of the doubt). They have $20m in the bank, but I would say they need $10m of this for exploration, working capital and the like, so the gap is $90m - $55m = $35m (maybe $30m on a good day). How are they going to raise this amount? I very much doubt they will get more debt which leaves equity, but their market cap is only $35m so raising $35m would mean more than 1:1 taking into account the necessary discount.

2. The recent 1:1 rights issue at 3.1c was a disaster and indicates to me most shareholders also think the chance of development is low, and will require further dilution at best. Take up was only 40% or 250m shares, of which 140m were taken up by Linq (looks like 100m entitlement plus subunderwritten). Underwriters ended up with 60% or 450m shares and are now severely underwater. If you back out Linq, takeup by shareholders was less than 25%. Not good.

3. Lets assume the company can raise $35m in additonal capital (debt or equity) plus draws on existing debt ($45m) plus current market cap ($35m) and successfully developes the mine on budget. Lots of IFs but that gets to an EV of $115m. Current reserves are 567,000 oz which implies an EV/oz of $215. This is not particularly cheap given MOY's high cash costs of $757/oz (budget). Proven miners like Saracen (SAR) with bigger reserves, lower cash costs, bigger resources, no debt and at least as good exploration upside (I don't currently hold SAR either)trades in the high 200s/oz reserve. CAH and SBM trade on even even lower multiples of reserves(I dont current own shares in either of these companies). Therefore even if MOY manages to develop the mine, based on existing reserves, there is not much upside in my view, at least relative to alternatives which are much lower risk.

4. I think management and the board know all this and that is why they are going to use part of the $20m to try and increase reserves and make the development more attractive before they try and raise more capital and fully commit to the project. I expect they will do regional deals (maybe the oxide resources of NWR etc) and hopefully the exploration will be successful. However, I was looking at MOY as a producer, not an explorer. IF they find/buy more reserves, reduce cash costs and make the economics more attractive then the future capital raising should be easier and there could be more upside.

5. Based on the above, absent decent exploration success, I cannot see how the mine development can go ahead right now as they just don't have the money to fund full development and have limited ways of raising the funds required. If they do raise the money, there is likely to be significant dilution so I don't see the need to buy today. Add to that the overhang from the previous rights issue and it all looks pretty ugly to me.

I stress this is just my opinion and I would welcome feedback.

Monty