Income and Share Price Potential of Mustang Resources

DYOR. Not qualified to give financial advice.​

Purpose

The purpose of the analysis is to improve the awareness of the Income and Share Price potential of MUS for a range of auction results and taking into indicative plans and strategy stated by MUS through corporate presentations, announcements to market and investor sessions.

Graphite has been purposely excluded from the analysis since we don’t have any detailed data on the the resource yet. Estimating income and hence share price potential of the Graphite is difficult without feasibility studies or production plans.


Analysis Overview

I have spent weeks if not months and endless late nights analysing potential Income and Share Price Potential for Mustang using a number of sales scenarios. Even with conservative values for sales results ( USD $/ct ), the analysis indicates MUS will have quite respectable income. Please treat the analysis as indicative as it is based on assumptions. That said a reasonable and quite comprehensive set of assumptions has been used for recoveries, mining costs, sales / clearance / commissions, overheads, finance costs, royalty payments to Regius and taxes. Where possible assumptions from independent analysis of MUS have been used, with that research having access to MUS personnel.

A conservative P/E of 7.18 has been used for share price analysis, with this P/E being calculated from data sourced from the Independent Investment Research May 2017 Analysis. This is explained in the analysis for Scenario 1 detailed below.

The following scenarios have been used for analysis of the Ruby resource:

1. Scenario 1 - Reconstructed Income model reusing production, cost and sales assumptions from the May 2017 Independent Investment Research Analysis ( IIR May 2017 Analysis ). Net Income projection has been calculated for an average sale price of USD $279/ct.
2. Scenario 2 - Income model for FY 2017/18 assuming 2 auctions with a total carats tendered of 350,000 carats. Net Income Projections have been calculated for average sale prices of USD $100/ct, USD $200/ct, USD $300/ct, USD $450/ct and USD $600/ct.
3. Scenario 3 - Income model for FY 2018/19 assuming 4 auctions with a total carats tendered of 600,000 carats. Net Income Projections have been calculated for average sale prices of USD $100/ct, USD $200/ct, USD $300/ct, USD $450/ct and USD $600/ct

It’s essential to understand that Mustang are focusing on the secondary deposits which yield the highest quality rubies through natural processes. If new to MUS you are also encouraged to read the following threads:

• 8245L & Alpha = Mugloto = Top $ ( https://hotcopper.com.au/threads/8245l-alpha-mugloto-top.3520314/#.WYbcw9N97Uo )
• Secondary deposits are referred to in this article as Ruby Traps. This is key for understanding Mustang Strategy ( https://www.gia.edu/gems-gemology/spring-2015-mozambique-ruby-discovery-21st-century )
• Ruby Market 101 ( https://hotcopper.com.au/threads/ruby-market-101.3417606/#.WYbdZdN97Uo )

Make sure you also read the Gemfields JORC:

• https://gem-corporate.s3.amazonaws....MRM_CPR_Mining_Report_Final_V6.pdf?1437738933

Scenario 1 - Cost and Income Model Based on IIR May 2017 Analysis

Core assumptions from the May 2017 analysis by IIR were used to construct a cost and income
model. These have been marked on an extract of Table 3 from the report.



See http://www.mustangresources.com.au/irm/PDF/2335_0/IIRMustangResearchReport24May2017 for the full report.

Other assumptions for the cost and income model were taken from Table 4 of the report.



The original IIR Analysis assumed a 100% clearance rate ( or more correctly assumptions used for clearance rate are not mentioned ).

The IIR Analysis did not consider impact of financing and hence this has not been reconstructed in the model ( although financing is applied to Scenario 2 ).

Calculation of Unrisked Share Price

Risked share price for the Rubies from Table 2 of IIR analysis is $0.133 and this is risked down to 20% of it’s original value.



To remove the risk factor:

Unrisked Share Price = ( $0.133 / 20 ) x 100​

Unrisked Share Price = $0.665​

Price to Earnings Ratio

A price to earnings ratio of 7.18 was calculated from analysis of earnings compared to the unrisked share price ($0.665) calculated from the IIR analysis ( Scenario 1).

Earnings per share is calculated based on undiluted share issue of 577,401,667 ( calculated from Market Cap and current share price sourced from Yahoo finance ).

Net income calculated from the Scenario 1 cost model is $53,462,664.

Earnings per share = $53,462,664 / 577,401,667 = $0.0926

P / E = Unrisked Share Price ( $0.665 ) / Earnings per share ( $0.0926 )
P / E = 7.18

Gemfields current P/E is 16, source: http://shares.telegraph.co.uk/fundamentals/?epic=GEM (although this source may soon become invalid due to the delisting of Gemfields ).



Compared with Gemfields P/E 16, using a P/E less than 50% is a reasonable assumption for MUS. Further derisking, consistency of auction results and a JORC P/E can be assumed to lift beyond this conservative level used . The key activity will be a successful first auction. The analysis has actually shown that Mustang Profit Margins will be better than Gemfields performance in the last few years (this is explained after the full analysis for Mustang below).

Scenario 2 - Core Assumptions for FY 2017/18

• 1st auction x 200,000 carats
• 2nd auction x 150,000 carats ( assume poorer weather impacts the recovery )

Across the 2 auctions a 50% of total inventory recovery via the Artisinal Development Programme (ADP) is assumed. This is to account for the slower than expected progress of getting the plant to full capacity.

For this scenario 175,000 tonnes of ore is processed by the plant across the 2 auctions as an input to calculating mine operating costs.

A clearance rate of 83.6% is used as this is the average clearance rate achieved by Gemfields for 5 Auctions from June 2015 to June 2017.

It’s assumed that Mustang just use the initial $1.7M finance and then pay the termination fee. Total cost of the finance (initial funds and termination fee) is $3.4M and this results in dilution of shares.

Dilution has been calculated using the 30 day VWAP.



Scenario 3 - Core Assumptions for FY 2018/19

Scenario 3 assumes 4 auctions are held per annum with an average of 150,000 carats tendered per auction (for a total of 600,000 carats). Mustang Resources have indicated through investor presentations that they are intending to move towards 4 smaller auctions per year. This is 71.4% increase on year 1 total production.

Assumption is that plant will be at full capacity and 80% of carats tendered will be recovered through processing by the plant and the remaining 20% will be recovered via the Artisinal Development Programme.

At this point, Mustang will have terminated the finance facility so finance is no longer factored into the analysis. Share dilution from termination of the financing in Scenario 2 has been carried over to Scenario 3.

It was identified in the IIR May 2017 that Montepuez Minerals have a call option to access an additional 10% of the 8245L license. Due to the corporate ownership structure, my current interpretation is that this will give Mustang and additional 7.5% ownership in license 8245L if the call option is exercised by Montepuez Mining for USD $1M. The condition is successful completion of bulk sampling and I have assumed this activity will be finished by end of FY 2016/17. I still need confirmation this is effectively 7.5% ownership by Mustang, assuming the call option is still valid. DYOR.



Note - assumed effect is 7.5% ownership. To be confirmed. DYOR.



Results

The scenario results are shown below. Read it left to right as follows:

• Scenario 1 - This uses all the assumptions from the May 2017 IIR report to calculate Net Income. From this and P/E calculated a potential unrisked share price is calculated.
• Scenario 2 - the current financial year of operations and includes estimates covering planned October 2017 and March 2018 auctions.
• Scenario 3 - the second financial year of operations and assumes MUS have moved to 4 auctions per year.

Next up are some charts to analyse Income outcomes.


A small diversion at this point to take a look at Gemfields Profitability (compare with above):




It is quite conceivable that Mustang will be able to achieve profit margins in excess of 25% if they achieve average sales at USD $200/ct ( or 12% at an average USD $100/ct ).

Finally MUS will have oodles of cash ... as shown in one of the charts above, even if healthy dividends are paid there will be respectable retained earnings to drive and fund development of projects. I've assumed a 5% dividend yield.

The impact of finance is minimal as can be seen below. At USD $100/ct MUS will have AUD $5M income.