BLK EV and Valuation, page-7

It was a shocking quarter, no excuses, but then again it has been the same story the last 3 quarters. Each quarter there was some story, some problem, high strip ratios and processing low grade waste ore. I did have some hope for this quarter, since the price had not drifted down beforehand like in previous, but I can not say I was surprised. Even worse is that there is no transparency and no warnings. All their presentations show everything rosy. Look carefully at the wording and they seem to be covered though I think talking about "access to" or exposing high grade ore, not actually mining it! This is not a transparent investment grade mining company. However, I have decided however not to sell for now, it is high risk speculative stuff, can they turn it around? Here are my reasons.

1. I think their new loan facility they have organised was just for this purpose of this quarterly, and it (surely?) must have been done with full notice of their production difficulties. Under this assumption they are not going to go bust this quarter, nor have the uncertainty of a capital raising.

2. Most of the capital spending has been shifting dirt to get at the ore and there is only so much dirt to shift. Eventually, they will get to the higher ore grade body even if they work by trial and error.

3. They have been giving details in each quarter on the waste and ore movements, and forecasts, and their numbers do add up. The total waste to move FY18 has not gone up, the ore is still there it just has less dirt over it.


4. What if they meet their FY18 guidance which has not changed. This quarter had higher grade 'HG' ore at 1.4g/t , they just did not get much. Forecast now is 1.6/1.7 g/t for 75koz, or 25koz per quarter. 25koz is $1M for every $40 margin. This quarter the cash margin was $200, 2 quarters ago it was $500. That is $5M to 12$M cash

5. The strip ratios left are 3:1 and 5:1 which is good so both the capital spending and the cash cost should go down, even if the AISC stays a bit higher with amortising the previous capital costs, this should drop in second half.

Now the above is quite a positive outlook, but certainly possible. Given their track record it might be high risk, but soon it will be hard for them to find any dirt to dig up that is not ore! There is still the possibility their mine plan fails completely, or the mill falls apart ... so still high risk.

Valuation, look at the 75koz remaining, well within the 100koz capacity of the current operation. If their costs are kept right down then it could be $30M profit from operations with minimal capex, without even an increase in gold price. Not enough to pay off their debts but a good chunk. This is against a market cap of $60M or an EV or $90M though. Even if the share price just follows the cash increase that would be a 50% increase in share price. Actually less since it would be a 1/3 increase using EV.

One or two quarters though would completely re rate the company, most producing mining companies are valued so that their cash returns are about 15% of their EV. Pulling in $30M cash profit would rate an EV of $180M or double what it is today by the end of FY18. The $30M cash earnings cut out a lot of the debt so the market cap could be close to the EV, or 3 times current price. There may be some dilution, also add on exploration and some capital spending ... but there is also upside from gold (reading gold miner forums you must be a gold bull!)

So in summary potential value end of year I see maybe 50c potential. Zero value is possible for sure, but given the loan facility taken out in the midst of all this lack of access to HG ore headache I think it is quite unlikely to go under this quarter or even FY without a major disaster. Year to date it drifted between 15c and 25c so I think that is a limit if nothing changes from previous quarterlies.

So high risk speculation at best. Don't spend anything you can not afford to loose and don't blame the market or the company if you do loose since all you need to know is written in the last 3 quarterlies. Please DYOR on this dog ...
(seriously this does not just mean "don't blame me if I am wrong" in my analysis, but if you speculate on stocks like this you need to do more than read hot copper. You need to really read all the reports and use a spreadsheet or at least a calculator. You need to have some idea with what cash they could potentially make or loose, compare their guidance with previous quarters etc.)
PPS You also need to understand probabilities ... x% chance I triple my money vs y% chance I lose it all. If x is 40% and y is 60% then is it a good deal. (it is but you need to truly understand that math to gamble in speculative stocks)