"Quick Facts ASX Code: MHM.AX Fully diluted shares: Approx. 135m Listed options MHMO Current price: $1.10 Current market capitalisation: $148.m Cash: Approx. $10m Price Target: $12.23 (see end of post for details)
Aluminium Division Project Background
Macquarie Harbour Mining Limited (ASX:MHM), through wholly-owned operating subsidiary Alreco Pty Ltd, owns the exclusive global rights to a proprietary technology for the processing of aluminium salt slag, a waste product from the aluminium industry.
Alreco's proprietary technology, the ALNAK technology, processes salt slag and separates it into its individual components of aluminium metal (10-20%), aluminium oxide (30-40%) and a salt and potassium chloride blend (50%).
The technology results in total waste treatment and production of aluminium and other saleable products. The technology removes the need for any portion of the salt slag to be sent to landfill.
Current Contracts
MHM's subsidiary Alreco processes all of the Aluminium salt slag produced in Australia under contracts with Alcoa Australia Rolled Products Pty Ltd, a wholly-owned subsidiary of Alcoa, Inc. (NYSE:AA), and Sims Aluminium Pty Ltd, a wholly owned subsidiary of Sims Metal Management Limited (ASX:SGM). Alreco also processes other wastes for Sims including non-salt slag and aluminium dross.
MHM's plant in Geelong which processes the Sims Waste is currently being upgraded ot use the proprietary MHM technology. Once complete, MHM expects to earn $US8.6m per annum, which is 60% of the profits from these Australian operations.
MHM is also working to expand into the US and have flagged they expect to begin construction in mid-2011:
Alreco has signed an agreement with US-based Smelter Service Corporation to conduct a feasibility into the construction of America's first closed-loop salt slag processing facility. Smelter Service Corp produces approximately 90,000 tonnes of salt slag per annum and has a 350,000 tonne single-purpose (mono-fill) landfill that appears to be suitable for reprocessing. It is also believed there are additional sources of salt slag in the region.
The company has also flagged they are working on reaching a Global agreement with Alcoa to process their waste around the world. This has the potential for processing 400tpa in the US alone.
Potential Earnings
MHM estimates earnings of $US8.6m pa from its 60% share of Australian operations. Some quick calculations allow us to estimate earnings of approximately 0.43m / ktpa, assuming operating expenses are the same across all processing plants.
The SSC partnership has flagged 90,000 tpa that could be processed (ignoring the 350kt of landfill). This would translate into earnings of $38.7mpa.
A partnership with Alcoa, just in the US, I expect would provide for initially processing 200ktpa, quickly expanding to 400ktpa. The company has stated they have taken registrations of interest for the full 400ktpa which would translate into earnings of $US172mpa.
In addition to the above MHM has two other technologies to increase the earnings from the waste processing; SPL and NMP. SPL is some time away, however the company recently announced that NMP has been fast tracked and added to the current Australian operations. The impact on the above earnings estimates is still unknown, but should be announced once an off-take agreement is reached. Some on the HotCopper forum estimate that earnings will double due to the NMP technology.
As you would expect, there are a number of unknowns regarding the above. What will be the capex for US expansion? How will it be funded? How long will it take to build? Will the earnings remain the same as the Australian operations?
For now I'm assuming that the operations will be 100% debt funded or through a partnership with local governments who have a large amount of community pressure to stop the landfill of the waste.
Potential Timeline
This is the rough timeline of events I expect that will help reduce the risk and increase the value of the company:
Q1 2011: Completion of technology upgrade of Australian operations Q2 2011: Completion of SSC feasibility study and announcement of project financing / partnership Q2 2011: Announcement of successful implementation of NMP technology and upgraded earnings impact H1 2011: Announcement of global partnership with Alcoa H1 2012: First US processing plant operational H1 2012: Commencement of construction of first 200ktpa plant with Alcoa H2 2012: Second US processing plant operational Silica Project Project Background
Silicon metal is a strategic high-tech commodity: applications in the production of photovoltaic cells, computer chips and diverse range of products that increase efficiency and reduce energy consumption.
Demand for silicon metal increasing exponentially due to high-tech and renewable energy applications of the commodity.
MHM owns what we believe to be the only areas of high purity silica mineralisation in Tasmania that could provide feedstock for a silicon smelter.
The company is targeting an 80ktpa operation.
Current Contracts
None as yet, but the company has been saying for 2 years that discussions are taking place with potential off-take partners. MHM have previously stated that they would not conduct any further drilling until off-take discussions reached a level that warranted the expenditure.
The recent quarterly update has stated that drill rigs are being sought and they have had additional enquiries.
Potential Earnings
Assuming the company sells the Silica directly to a third party that will smelter it to produce pure Silicon metal, MHM is expecting $US400-$US600 per tonne. How much will it cost to dig it up? Well it will be an open cut mine and has good infrastructure, so it's doubtful it would be huge but lets be ultra conservative and go with $US100 per tonne. Since someone else will build the processing plant and convert the product into Silicon metal the capex for MHM should be minimal.
The company has a resource estimate of 2.87mt of Silica, however a study by Comalco who owned the tenaments in the 1970's estimated 1,000m tonnes. The company has previously described the Silica mining as being in perpetuity.
80ktpa X $US300 / tonne = $US24mpa 80ktpa X $US500 / tonne = $US40mpa
Potential Timeline
A timeline with the Silica project is difficult, because it depends largely on the ability to secure an off-take agreement on favourable terms for MHM. The company has shown great patience and has repeatedly assured shareholders that they won't do a deal unless it's strongly in their favour. Here is a very rough timeline that is likely to be very error prone:
Q2 2011: Announce commencement of drilling H2 2011: Announce off-take agreement on favourable terms H2 2012: First sale of Silica Other Upside Potential The company also has a 75% stake in an African gold project with 500k oz, 0.5%g/t cutoff. This project is on the back burner while the other two projects are full steam ahead.
The SPL technology has the ability to further increase earnings from the companies Aluminium operations. According to the company:
The revenue potential from the treatment of SPL is substantial
There is approximately 1,000ktpa of salt slag generated every year in the US, plus likely just as much in landfill that may be suitable for processing. In Europe land filling of salt slag is also being made illegal allowing further opportunities for earnings growth. The company has stated they have taken some expressions of interest from Europe, however are currently focussing on the US market.
Summary 2011 is shaping up as a pivotal year in MHM's growth from micro cap to a medium cap company on the ASX. In fact the company themselves have a stated goal of being in the ASX300 within the next 12 months.
I have conservatively demonstrated that by H2 2012 MHM could have earnings of $24m from it's Silica operations and $US133.3m from it's Aluminium operations ($8.6m from Australia + $38.7m w/ SSC + $86m w/Alcoa).
There is still a large potential of upside in a higher Silica price and the introduction of the NMP technology to potentially double the figures above.
The difficulty in valuing MHM is that it's Aluminium operations should be valued on a price/earnings basis, whereas it's mining operations should be valued on a DCF basis. However, given the in perpetuity status of it's Silica operations and for the sake of simplicity we'll value MHM's earnings purely on a PE basis.
It could be strongly argued that, if the above events occur, the company should demand a premium PE ratio on the market, due to it's International expansion opportunities. However, I will assume a PE ratio of 15x after tax earnings of $110.1m (($US24m + $US133m) X 0.7).
NPAT: $110.1m PE Ratio: 15 Target Market Cap: $1,651.65 Target Price: $12.23 Target Timeline: H2 2012 Target Gain: x11.12 over approximately 2 years (although I would expect most of this to occur in 12 months given positive news flow)
Important Notes: It's likely the company will need to raise further capital in the future and that will have an impact on the above targets. MHM is speculative in nature and none of the above may eventuate. It is likely that some (or all) of the assumptions outlined will prove to be inaccurate. Please read the About page for a full disclosure on this post, NOT being financial advice or a recommendation to buy or sell this stock.
Disclosure I currently hold and trade MHM."
This website is NOT financial advice and should not be considered as such. All comments, discussions and ideas here are solely for the authors own benefit and should not be used to form any opinion on the stock market, your own finances or any individual stock mentioned.
MHM Price at posting:
$1.01 Sentiment: LT Buy Disclosure: Held
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