mlx update from foster stockbroking

Metals X Ltd (MLX.ASX; $0.13/sh; Mkt Cap $215m) – Gold production at bargain prices – TRADING BUY

Yesterday MLX announced the acquisition of Alacer Gold Corp’s (AQG) Australian gold operations on a going concern basis to take economic ownership of AQG’s aussie operating division with working capital adjustments on current assets, liabilities and gold dore as at 30 September 2013. AQG had advised the market formally in June they were disposing of the assets under a formal sale process.

Consideration for the deal looks to be a bargain at just $40m in cash with the only condition being FIRB approval given MLX’s shareholder base. MLX has paid a $10m deposit and expects to have all approvals in place by the end of October. Cash at the June quarter was $83m, so the group retains a healthy balance for growth initiatives across the portfolio.

The two assets in the deal:

Higginsville Gold Operations: Located 125km south of Kalgoorlie; Underground gold operation that produced 137koz in 2012 at a cash cost of ~$1,120oz; 1.2Mt gravity and CIL plant; Total Mineral Resource of 15.9Mt at 3.0g/t for 1.55Moz (including 830Moz gold reserves); and recent exploration success.

South Kalgoorlie Operations: located 30km south of Kalgoorlie; open cut operation produced ~30koz in 2012 at a cash cost of ~$1,300oz; 1.3Mt crush, grind, gravity and CIL plant; Total Mineral Resource of 87.8Mt at 2.0g/t for 5.7Moz (including 670Moz gold reserves); and recent exploration success.

Potential to pay-back 8-10mths: Both mines will continue to operate on a going concern basis and are forecast to produce a combined 180koz at C3 costs of ~$1,140-1,1250/oz using AQG’s market guidance; however with the operational expertise of the MLX board and management re-aligning the operations with a small-cap focus of tighter cost control and operational performance, you could conservatively estimate the two mines producing 180koz in CY14 at improved margins of $300-400/oz to generate significant cash flow to pay-back the purchase consideration in only 8-10mths assuming a realised gold price of A$1,400.
Bargain acquisition based on $/Resource Oz: using a $/oz acquisition metric approach you can value the purchase of a total 7.2Moz Resources across two producing mines at a very competitive $6/oz vs the lower valued producers trading >$50/oz. While the price might reflect a high cost operation, the acquisition price represents a bargain for an operation that will deliver positive operating cash flow from day 1 of ownership and no additional capex required.

Operation strategy late October: We expect management will update the market in further upon closing of the deal, detailing production expectations and operational cost savings. Given the success Peter Cook and the team had with Hill50 in a turn-around story, we see no reason why this acquisition can’t return valuation multiples of the consideration paid given it is already operational.
Transaction elevates gold valuation upside: In recent times we have viewed MLX as a tin stock with significant gold upside from the Central Murchison gold portfolio. However, we view this transaction will transition the company to a material gold producer with increasing operating cash flows and further upside on the Renison tin mine through strengthening tin price and/or realising value through a corporate transaction.

Renison tin operations leveraged to stronger tin price: mining operations at the Renison tin mine (50% MLX) continue to improve now the change in mining contractor is complete and production is expected to ramp back towards the target 1,700t tin metal this quarter. The rising tin price back above US$23,000/t will add additional free cash flow to operations along with the recent 30% increase in mineral resources to 204kt tin metal at 1.76% Sn providing a long life mine high grade mine..

We rate the stock as a TRADING BUY and view the price could easily re-rate ~50% from the current valuation as the market begins to understand what a bargain this deal appears to be.

http://www.fostock.com.au/announcements/metals-x-ltd-mlx-asx