I am notsure what made me do the comparison below but the more I looked at BGL and ADTthe greater the similarities, but they have very different valuations as decidedby the share market. ADT and BGL have a lot in common including financials, characteristicsof mine and risks with some differences (e.g. different metals).
Thecomparison below looks at ADT’s valuation from a different perspective but Iarrive at the same conclusion ie ADT is very undervalued and has potential upsideof upwards of 3 times current share price and potentially more.
The comparisonbelow is based on publicly available information and in particular ADT’s DFS fromAugust 2021 and BGL’s FS from September 2021 and updated FS in June 2022. Some informationwas not included in the last BGL FS (e.g. NPV etc) but I have been able to drawcomparisons using the September 2021 FS.
I have adjustedthe figures in the FSs for the latest metal prices which for ADT reduce revenueby 7% and increase them about 20% for BGL. I have not allowed for hedging whichwill probably make little difference to ADT but will reduce BGLs cash flowbased on current metal prices (have not checked what hedging each has in placeif CC any).
Thesimilarities, both:
-underground mines
-high grade resources
-very high margins with ASIC about one-third ofrevenue (using latest metal prices)
-have a 10-year mine life
-have excellent prospects to significantly expand resources
-will be in production at a similar time with BGL a few months further progressedthan ADT (maybe about 3 months)
-are exposed to similar risks regarding future operational costs, minedmetal grades, metal prices and commissioning issues
-Total net cash flow after tax over the 10-yearmine life is very similar and an NPV which looks similar in size (see detailsbelow)
-ADT payback period is about 7 months while BGL is about 1 year
Differencesinclude:
-ADT has nearly doubled resources since DFS andwill probably double mine life (but not included in metrics allowed for inmetrics below)
-country risk with Bosnia not known for mining vs WA best in world
-different metals but ADT has about half revenue from precious metals sonot as big a difference as one may think.
-ADT has an additional project in Serbia whichbased on CEO comments it should add significant value to ADT in time (haveassumed $0 value to ADT) whereas BGL has no other project (ADT looking forother add on other projects as well)
-ADT is exposed to primarily 4 metals (Ag, AU, Zn and Pb plus 2 verysmall amounts for Cu and Sb) with about 50% exposure to precious metals (Ag andU so the difference to BGL is not as big as one thinks)
-One could argue ADT has a lower exposure to metal prices as ADT has 4primary metals, but BGL is exposed to just one and so should have predictablerevenue and profit
-ADT capital cost was about $A100m less than BGL
-ADT may have a higher IRR due to lower capital costs - in DFS was 134% post tax (lower now due to lower metal prices) while BGL in 2021 FS was 68% pre-tax but that does not allow for the upgrade in June 2022 FS or 20% current higher POG
-ADT NPV used an 8% discount rate while BGL adopted 5% - the differenceover a 10-year mine life reduces BGL NPV by 15%
-ADT will only ever pay unfranked dividends while BGL’s will be frankedwhich should result in a higher value on BGL for the franking credits – BUT minersare not known for paying high dividends.
Overallcurrent financial metrics are very similar based on FSs. But the big differencenow is ADT now has nearly double the resource the DFS was based on. This willhave a major beneficial impact on ADT’s financials with double the mine life ata low relative additional capital cost.
Current MCof BGL is $A1.96B and ADT is about $A0.93B.
In theoryADT should have at least a similar MC to BGL but with potential double BGL’s minelife one could argue AT maybe should have a MC 4 times higher MC using BGL as abase. However, allowing for risk maybe we should reduce that to 3 times but thatignores the Serbia project.
BGL hasupside in its valuation as investors are normally somewhat wary of stocks withnew mines until they each steady state production and costs. The same upsidepotential should apply to ADT.
All thissuggest ADT has major upside in its SP, perhaps by a factor of up to 3 times overthe next 12 to 24 months. This was what happened to EMR over the last 2 years.
My view isthe difference in valuation between ADT and BGL is due to different country locationof mine and country risk/perception, less promotion of ADT in Australia by ADT(CEO and board) ie less media and visibility at conferences) and perhaps due todifferent metal mix (Zn, Ag and Pb and probably more out of favour than Au).
As anillustration of the much better valuations of WA mines is to look at lithiumprojects compared to those in Canada and South America. Lithium projects in WAseem to be valued by the share market at multiple times overseas projects intier 1 countries (look at WR1 and LRS compared to WC8 and AZS).
Financials
BGL
-FS on POG $A2,500 vs about $A3,000 now. This adds about $930m cash flowover mine life. BGL’s stated net-cash flow before tax in FS is $A2.1b adjustedfor higher current POG less tax of 30% the LOM free cash flow after tax isabout $2.1b
ADT
-LOM after tax free cash flow about $US1,450 i.e. about $A2.0 to $A2.1b atcurrent exchange rates and metal prices very similar to BGL.
