crunching the numbers

Time to sit down and crunch some numbers. As a large MHM shareholder, I have done alot of previous research on MHM and the numbers still blow me away. But, as always, I need to look at the upside vs the downside, and look to where I might start taking profits. At this point, I have only been buying, but it is time again to look at it in more detail.

I will state straight off the bat, that with the Victorian Plant earning $8.6M pa, the Silica Assets, and the base metals, I see little to no downside to the current share price.

With a PE of 10 (14 if you include tax), and a 20c asset value for the Silica/Base Metals (It ran to 40c based on the Silica news 12 months ago), I see a fair value of around 77c + 20c fully diluted. Allowing a 10% risk factor to the Victoria plant, this bring the valuation of 70c + 20c = 90c. (Based on the Aus assets).

So what about the Aluminium Upside valuation above this 90c Australian base case?

We know Alcoa has stated that the they are looking to stop landfills worldwide by 2015, and looking to partner MHM to do this. This means that all the worldwide Alcoa sites will have to have plants upgraded to MHM tech, or have new plants built. This will likely be debt funded, so no dilution required to be calculated.

The Victorian plant on a 100% basis is 60,000tpa and profit of $11.3m pa. This 60,000tpa includes processing of the landfills (25,000tpa is created from the Aus plants).

We know that the US creates about 1m tpa, and that a total 400,000 tpa of this is looking to sign contracts (being Alcoa I assume). There is also 8 large landfills that present immediate targets.

Given this, we could easily see 600,000 tpa being processed in the upcoming US deal. On a straight comparision to the US plant (60K vs 600K), we could see the US operation return a profit of $113m per annum. This would add around $9 a share of a PE of 10 for the Australian and US based plants. Total $9.90 a share.

So where is the upside past here?

We have another 600,000 tonnes (1mtpa - 400,000) of feed being created in the US every year (plus the additional landfills). Capturing the majority of the rest of the US, could lead to doubling of the US value to $18 or $18.90 total.

Looking at Alcoa Worldwide (remember global plan by 2015) here:

http://en.wikipedia.org/wiki/Alcoa

Shows that Alcoa have even larger smelters in Canada and Brazil than they have in the US. (It doesn't show the Aluminium Recycling locations though - and feed comes from both places). So it would be a reasonable assumption to state that there is at least 2-5 times the upside outside the US by 2015. This equates to another $36 to $90 a share.

But what about outside Alcoa, as stated in the above link... "Alcoa is the world's third largest producer of aluminum, behind Rio Tinto Alcan and Rusal"

So what happens if Alcan or Rusal get onboard? Or the Indian Giant Hindalco?(http://www.scribd.com/doc/22899351/Hindalco-Novelis-Acquisition-Creating-an-Aluminium-Global-Giant-Authors)

It gets to a point where the upside is just too big to calculate.

This also allows nothing for the NMP tech or the SPL tech. The NMP tech alone has been quoted at adding $50m pa to the Victorian plant. This is 5 TIMES INCREASE in the Victorian plant profit.

What happens when we apply a 5 times increase to the US as well to incorporate the NMP tech?

My mind just boggles at the POTENTIAL upside. I am NOT at any stage suggesting we will see $100 share prices in the next 2 weeks, or next year even. I am simply trying to work out the POTENTIAL. This allows me to work out where my exit might be. 10% of the long term upside.... 20%.... 50%....

At this point, I have no idea where my exit might be... but I know one thing for certain, it is not at these prices...

Good luck to the Long Termers, the Short Termers, and those about to enjoy the ride.

Remember though, this is NOT financial advice, and even MHM has risk. Maybe this is Firepower Mark 2, so DO YOUR OWN RESEARCH.