Metro Mining (ASX: MMI) Market Cap: $352m
Emerging bauxite miner in prolific bauxite producing region of Cape York with production expected to commence in April 2018. It’s a simple DSO project with low pre-production capex ($36m) as there is little overburden to access ore only 0.5m beneath surface. Operation is established on old Kaolin mine site which meant that it could make use of existing haul road, mining camp and other associated infrastructure.
The investment thesis is underpinned by the following key points;
Off-take position is very strong, as it covers first 2 years production and 90% of planned expanded production in 2020 & 2021.
Long mine life, 17 years, low capex & and healthy operating margin circa $24/t
Expanded production to 6mt after 4 years with additional capex of $37m approx. to be funded through existing debt facility and cash flows
Project NPV after tax @ 10% Discount rate equates A$601m incl. expansion & an IRR 81%
Low strip, DSO & proximity to China gives it a $20/t cost advantage over Lat.Am and African peers
Xinfa Grp is a Chinese off-take partner & 2nd largest importer of bauxite into China – is also represented on the board
Hence, project quality is excellent with high quality ore, multiple binding off-take agreements in place linked to market prices. The macro outlook for high quality bauxite looks equally positive in my view with China’s declining domestic supply in addition to it being of lower quality. Furthermore, China is building more Alumina refineries near the coast bodes well longer term. Seaborn imports into China for 2017 are estimated at ~50-60Mtpa and expected to grow to 130-150Mtpa by 2025. As the project further de-risks with commissioning in April – I would expect the gap between market cap and my company valuation of approx. $530m to continue to close as we move closer to successful commissioning. Commissioning risk in my view is largely mitigated by the simplicity of the DSO project and an accomplished management team led by Simon Finnis who has an excellent track record in developing and commissioning mining projects. The cost advantage due to proximity to China, means they sit low on the cost curve and hence mitigates to some degree against adverse market price movements.
Environmental approvals exist to take production to 10mt, which provides a potentially valuable medium/longer term option.
MMI Price at posting:
29.0¢ Sentiment: Buy Disclosure: Held
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