sp to 21.30 in 3 to 5 years

IMO Murchison sp may go to $21.30 in 3 to 5 years

I have previously commented on valuations of mmx and have since revisited the recent mmx announcements. I revise my calculations with heaps of assumptions as follows:

Within 6 weeks, before the end of September 2007, MMX and Mitsubishi will sign an agreement for Mitsubishi to buy 50% of MMX iron ore reserves at Jack Hills and Weld Range. The amount paid by Mitsubishi will depend upon the size of those 2 resources. So how much is Mitsubishi likely to pay?

Jack Hills - 500 million tonnes at 62% Fe.
JH estimate is currently 380 million tonnes. However, recent drilling reports reveal far more ore than this. My assumption (calculated guess) is about 500 million tonnes. The quality is a very good average of about 62%.

Weld Range - 500 million tonnes at 58% Fe.
WR has been estimated at 300-400 million tonnes. More drilling is taking place now. My assumption (calculated guess) is about 500 million tonnes. Quality does not seem to be as good at about 58%.

If mmx has 1 billion tonnes at average 60% Fe then some sort of value can be attempted.

ASSUMPTIONS:
1. 1 billion tonnes at 60% Fe;
2. Ore prices = US$60/tonne;
3. Costs = $20/tonne;
4. Profit = US$40/tonne

If they have 1 billion tonnes then the question becomes: How much does Mitsubishi pay for their 50% [1/2 billion tonnes]? The answer to that question may be assessed by now working backwards.

The ASX report states that the total investment will be $3 billion.
Assume Mitsubishi and Murchison are each prepared to invest $1 billion in infrastructure being a total investment of 2 billion. That leaves $1 billion for Mitsubishi to pay mmx for 50% of the JH & WR mines.

In other words:
Mitsubishi pay mmx $1 billion for their share of the mines.
Mitsubishi pay $1 billion for their contribution to infrastructure.
Murchison pay $1 billion for their contribution to infrastructure.
Total investment $3 billion.

If Mitsubishi pay MMX $1 billion for 500 million tonnes of ore then Mitsubishi are buying the ore at $2/tonne. What a fantastic deal for Mitsubishi.

Mitsubishi have already paid $150 million to mmx which has been used by MMX to retire bank debt. So I assume in September 07 Mitsubishi will pay MMX $850,000,000.

MMX cash position
Mmx raised $113 million in recent placement plus the $850 million = $963 million cash.

MMX will contribute 50% of costs of infrastructure. Assume the rail and port costs $2 billion to build then mmx will pay $1 billion. Thus leaving mmx with a relatively small debt.

In 2011 mmx will earn $40/tonne of 12.5 million tonnes / year [the other 12.5 million tonnes belongs to Mitsubishi]. This would mean mmx earnings from Jack Hills mine and Weld range to be about $500 million per year.

INFRASTRUCTURE PROFITS
They would also earn 50% of the profit from the rail and port. Assuming rail and port charges were $10/tonne and costs were $5/tonne leaving a profit of $5/tonne then mmx will receive $2.50/tonne. As the rail and port will take 150 million tonnes per year mmx will earn $375 million per year.

Total mmx annual profit in 2011 and continuing thereafter may be $500 million + $375 million = $875 million.

If you assume that the value of the company is 10 times annual profit then mmx value of mining and infrastructure operations in 2011 will be $8,750 million.

There are 410 million shares and options now on issue. Assuming no further issues then mmx sp value of mining / infrastructure = 8750 mill / 410 mill = $21.30 / share.

Thus mmx SP in 2011 could be $21.30. Of course the market may move to that level before 2011 as happened in the case of FMG.

However, there are some considerable assumptions and risks such as ore prices into future, WA govt giving go ahead for infrastructure, international share market volatility etc.