fundamentally undervalued

The latest announcement (29 Dec 2011) to sell a 25% interest in Mineral Hill to Chinese GMR confirms my thoughts that this stock is fundamentally undervalued.

For those who don't know, KBL has two key assets. Its Mineral Hill mine and Sorby Hills project. Mineral Hill is a refurbished copper gold mine that has recently recommenced production. Sorby Hills is a lead silver development of reasonable size that will be open cut and soon to go into pre feasibility with a strong view to mine in the next couple of years (stage 1 per annum 800,000 oz silver and 25,000t Pb). See recent announcement linking a presentation on 30 Nov for a good summary of both.

Current market cap at 27 cents if $45M.

The deal provides $80M cash for a 25% interest in Mineral Hill and related leases plus 15% share issue at 25% premium to last six month average. This should be about 34 cents based on my quick calc’s which means $8.6M more cash (168M shares times 15% = 25M shares @ 34 cents).

Therefore, after the deal, KBL will have $88.6M cash plus 75% of operating copper gold mine with discovery potential plus plans for lead/silver mine with production in 2014.

$80M for a 25% interest in Mineral Hill implies a value of $320M for Mineral Hill. Not bad for a company with a current market cap of $45M.

The only negative that I can see is that the deal includes sale of copper at a 25% discount to London Metals Exchange Price. I’m not sure if this is because copper being produced is only in concentrate form and the per tonne price of copper in concentrate should therefore receive a discount from the standard copper price. If anyone can confirm if this is normal it would be appreciated.

In short, based on closing price on 29 December 2011 of 27 cents, market cap after the issue of extra 15% would be $52M for a company that has $88M cash plus 75% in copper/gold mine which appears to have a value of $320M plus 75% in Sorby Hills silver/lead project.

If the market cap was $328M then the share price would be $1.70 (allowing for extra new 15% issue). Even if it went up to half that, that’s still three times its current price. Note also that the $328M is based on $88M cash after GMR deal plus 75% of Mineral Hill at $320M and does not include any value for Sorby Hills.

You can do your own math and any feedback welcome.